People’s Opinions Matter

The talking heads on CNBC and some of the other more neutral media outlets are talking about the signs we are already seeing of increasing confidence in the economy from the tax cut. This is the highest level since November of 2000. People are starting to see a little more in their paychecks this week, which brings a nice warm feeling this time of year.   For many working Americans, even $30/paycheck can be the difference between eating out, buying a new shirt…or doing nothing!  We seem to have been fighting off a stock market correction since the lows of Feb 9^th.  Many analysts believe that businesses have more money to feed the economy and resist the correction. Others are concerned about the possibility of up to 4 more increases in the Fed Rate.

The reason that we taxpayers need to do a self-check on the happiness scale is that the bad news has been so bad for so long that it doesn’t seem to get the attention it deserves these days. Things are getting better in the tax code, but if this doesn’t work….

What do we mean?

These tax cuts are a “bet” that we as a country are making.  The “bet” is that since we can’t seem to curb our spending at the federal level, we will be able to grow our way out of all of our government obligations through a larger tax base. The tax cut was $1.5 trillion.  At an average tax of 20%, we need to grow the economy $7.5 trillion to break even on the cut. The 2016 GDP was $18.624 trillion, meaning we need to grow the economy by 40.27% to break even. Ahh, the magic of numbers!  Only a politician can make those numbers meet.

However, we have other issues to compound this problem. We have 20+ trillion dollars in federal debt. Add the promised nearly 13 trillion dollars (some say more some say less) out in future Social Security obligations. Now, factor in another 25-40 trillion (again, some say more, some say less) in unfunded expected health care obligations through Medicare and Medicaid.   How much more do you think we will need to grow our income to cover all of this?

Does anyone else see a problem here?

What if you and your spouse maxed out all of your credit cards, applied for more credit cards and maxed those out as well? Then to fix this, borrowed money on your house with a balloon mortgage note, then borrowed money from your parents. Then you solve the problem by saying “We’ll reduce our revenue and hope for the best!”

Don’t misunderstand, stimulating the economy is a very good thing! Putting more spendable dollars in the hands of Americans will do just that.  The best solution would be to spend less at the same time we are achieving more growth, but that’s not looking possible with today’s political process.

Toss in the towel?

Should we all just toss in the towel and give up?  No, not at all.  Just look down the road to the finish line in 2025, when the tax cuts are expected to expire.  If we have paid down enough debt to solve these problems, or at least make them more manageable, we will all be happy!  However, if instead, we are still in the same spot or worse, it will be time to cut the leg off the patient to save his life.  What will that look like?  Possibly a drastic reduction in all welfare programs. Remember, Social Security, Medicare and Medicaid are essentially welfare. We could see increasing the Social Security retirement age to 70, 75, or 80?  End Medicare as we know it, move the enrollment age back 3-4 years, or make premiums 40% of income for everyone over 65?   No one believes these things would be allowed to happen.

I certainly do not believe politicians are capable of making hard decisions.

It will likely be more likely this. All 401K, IRA, 403B…any retirement plan or retirement savings will need to be taxed at the same rate they were when you deferred them with a minimum rate of, let’s say 20%.  This means no 0% tax, no 10% tax, and no 12% tax.  Those are all set to expire at finish line 2025 and go back to 2017 rates.

So, what should YOU do?

Granted, it’s all opinion.  One possible goal will be developing a plan to expose all of your pretax accounts to taxation in a strategic manner over the next several years and before the finish line is reached in 2025.  Then, when the next sweeping tax changes happen, you would have no pretax dollars left. You could have only “tax-free” dollars that have already been taxed by the government, and cannot be taxed again!  If you don’t get yourself to “no pretax money” before 2025, some guess that the US government will do it for you.

Go see a tax planner, today!

“Plan Early and Plan Often!”™

Tax Rule Changes

With regards to your tax, mortgage interest deduction is always claimed on schedule A of your federal return. So, the first observation is that many people will simply no longer get any value from their mortgage interest because the new standard deduction is twice as much as before.  In 2018, the new tax rule dictates that second mortgages and Home Equity Lines of Credit (HELOC) are no longer deductible.  When “HELOC” interest became deductible they were not so common and had smaller balances but over the last several years they have become a popular way to fund the giant college spending needs for many, and for others, they have become a popular way to finance vacation homes and even investment property.

So, what can you do to fix this problem?

First, relax! The changes are not necessarily going to mean an increase in taxes at all.  In fact, many people may see a lower tax bill because of the increased standard deduction.   However, anyone with a large amount of HELOC debt should sit down with a tax planner and look at alternatives.  People who used HELOCs to pay for college or are currently using it because they felt they would not qualify for student loans may now want to find a college planner and really try hard to find that kind of loan. Educational loans are still deductible on a part of the tax return that is not connected to schedule A. So you might still enjoy that deduction as well as the big increase in the standard deduction.  People who used it for investment property might go and seek out a commercial mortgage to replace the HELOC. Even with generally higher rates and closing costs it could be beneficial.  Moving the interest to a line expense on your Schedule E (investment property schedule) and off your Schedule A might more than make up for the cost associated with getting the new loan.

There are also many lesser-known but very smart bank products out there to replace both a traditional mortgage and HELOC and wrapping them into an “All in One Loan”. This is a primary mortgage and still fully deductible but also leaves HELOC like access to equity.  That access could be used for either investment, for college funding, or whatever you fancy.  More importantly, it applies payments to principle first, before interest, helping people to pay off a home potentially much faster than a traditional mortgage without making larger payments.   See http://www.aiosim.com/Simulator/GetStarted for additional information.

Lastly, the mortgage interest deduction is now limited to the first $750,000 in principal loan amount (it was previously a $1,000,000 limit).  That’s not a problem for people who had already established their mortgage before December of 2017. They are “grandfathered”.  Going forward, it is simply “buyer beware” that $750,000 is the new deduction limit.  If you can afford a million dollar plus home then you are likely smart enough to find a creative way to buy the mortgage down to $750,000 loan.  You could also take out two loans, one for $750,000 and another for the balance. The tax law does not prevent you from buying a 1.5 million dollar home. You simply cannot get a tax deduction for any mortgage above $750,000.

As I write this I can hear the wheels turning. UNDER NO CIRCUMSTANCES would it ever make sense to take money from pre-tax accounts like 401(k)s to pay down mortgages or fund refinances or purchases. The lack of a deduction would be a small penalty in comparison to the financial suicide of taking retirement money out while working.

So, what is the summary of the information dump above?  Go see a Tax Planner!

“Plan Early and Plan Often!”™