​On October 3rd, 1913, President Woodrow Wilson signed into law the Underwood-Simmons Act, creating what would be the first modern U.S. income tax.
 
The tax legislation was only 16 pages and imposed a base tax rate of just 1%. The actual tax code and regulations were just 400 pages in total.  The highest tax rate was set at just 7% for individuals earning more than $500,000 or about $12.6 million in today’s dollars.
 
At that time, the tax was not meant to be permanent but was to pay for the costs of World War I.  In fact, the tax rates were cut some four times during the 1920s. 
 
Today, tax code and regulations are more than 70,000 pages in length! It has so many rules and code sections you would need a tax program just to remember them all. In fact, most CPAs today rely a great deal on such software to navigate the ever-increasing code.

Washington just doesn’t seem to have the will to actually simplify our tax system and code.  It is obvious to most that special interest groups and corporate lobbyists control a large portion of our elected officials and thus what does or does not happen to our tax code.
 
Obviously, the only thing one can do is fight fire with fire!
 
That is dig into this mammoth tax code and find the advantages that allow you to prosper while less savvy persons pay more than they probably need to or should!
 
This is something we help our clients do every day.  In fact, I issued a Tax Planning Alert just a few days ago to our affluent clients on a couple of simple suggestions that struck us about the recently passed House and Senate bills.
 
When these House and Senate bills are reconciled and signed into law, I believe there will even be more opportunities to save valuable tax dollars just by arranging your business or investment affairs in such a way as to minimize future tax drag.
 
As famed author Robert Kiyosaki likes to say, “it’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
 
We can help you keep more, make it work harder for you and preserve it for multiple generations!  Schedule your free consultation today!

This one is our number one idea just because it is time sensitive.  You need to take those losses now in the last few days of 2016 to realize the ability to offset any gains that may be taxed at higher rates for the year.

In 2017, our hope is that President Elect Trump will get his tax rate reductions through Congress and deferred gains taken in the new year will be potentially taxed at lower rates, thereby making 2017 a better year to take any gains, especially short-term, from the sale of assets.  At least that is the plan!

Likewise our next planning idea for 2017 is tax driven.  If President Elect Trump can lower rates, the investor in me says what are the odds that such rates can go lower?  

With rising national debt levels at just about $20 trillion and the Tax Policy Center predicting Mr. Trump's proposed policies will raise the national debt by another $7.2 trillion, what are the odds that somewhere along the line the next administration will have to raise taxes to cover the debt service on the rising national debt?

My guess is pretty good!

We know for certain it will be hard for Washington to stop spending our hard earned tax dollars.  So barring the "unbelievable" growth that Mr. Trump promises, at some point taxes will have to go back up.

That could make this point in history, post Trump's tax reforms, the likely low point for tax rates.  With that the case, it may be the best tiime to convert taxable IRAs to Roth IRAs that defer tax free if held for 5 years and to age 59 1/2 or more.

The key here is Mr. Trump's tax reform proposals must be come law first before you go this route.

If you have a bond portfolio, you may have already noticed that something is up in bond land.  The thing that is up is rates.

As you can see in the chart below, the 30+ year bull market in 10 year bond yields is up. Remember lower bond yields equal higher bond prices and vice versa. 

Notice how recent rate increases have broken the dotted red downtrend lines to the upside?

The trend is now up for bond yields!

Don't panic however, this trend is just beginning and, just like the road down for rates, the path up will be filled with ups and downs.

In fact, I believe rates could retrace some of the recent rise before they make another move higher in 2017.  However, the buy and hold game with bonds is probably over unless you are holding to absolute maturity!

It is important that you find an advisor that understands how to manage bonds or bond alternatives in a rising rate environment.  May we suggest that if your advisor seems clueless, it's time to change advisors.

FYI - this likely also applies to high income securities like utilities, REITs and other income generators that will be in someway affected by rising rates. 

Ok, I know this seems a bit self serving, but it is not.  So many folks have shifted to the passive side of the boat that we believe it is likely time for active investments to shine (see Is the Market for Passive Strategies Really Just Load Shifting?"). They certainly have been out of favor the longest period of time I have ever seen!

The rational here is that the Federal Reserve is attempting to raise rates in a period of tepped growth so they have ammunition to fight the next economic downtown.  In our opinion, they are a day late and a dollar short!

In other words, their actions will bring about the next possible recession here in the U.S. When recession comes, markets will fall and this is typically when active managers outperform.

When the recession ends, we believe Central Banks will have once again eased into the recession and will have very little impact on the following up cycle.  This will likewise be good for active managers as Central Bank intervention has been the bane of such strategies since in 2009 lows.

Our suggestion is that you diversify with both passive (buy and hold) and active strategies in your porfolios.  We don't know the exact timing obvously, but 2017-2018 will likely see a move back toward active manager outperformance and you will be prepared for such a move.

Remember that both active and passive managers have been around for hundreds of years and it is not uncommon for one or the other to have periods of outperformance and then periods of underperformance!

Here is another idea that is totally Trump dependent.  Make sure you are capturing as much of your income via corporate entities as possible.

President Elect Trump has proposed lowering the corporate tax rates for all types of entities including S-Corporations, partnerships and C-Corporations to 15% tax rates.  For many this would mean their corporate tax rate could be lower than than there personal tax rate.

So now may be the time to rearrange your affairs to take advantage of this possible windfall for corporate entities and their partners, members or shareholders.

Just like #2 above, our best advice is to wait until it's clear Congress is going to pass this proposed tax measure.  However, if they do, there could be a clear path to lower tax rates.

I recently started binge watching AMC's Mad Men on Netflix after finishing all of season four of House of Cards in less than a week.  Mad Men is set around the late 1950s and early 1960s and follows the rather torrid, high pressure lives of Madison Avenue advertising firms.

The shows main character, Don Draper, in season one received a raise from his firm from $30,000 per year to $45,000.

​Now being the boring financial type, my mind immediately wondered how inflation, or the increase in price levels, had affected Don's salary and what that would equate to in today's dollars.  Fortunately, I did the math for you. 

The actual average inflation rate from 1960 - 2015 was 3.85% per annum according to the Bureau of Labor Statistics (BLS).  If we assume his raise occurred in 1960, Mr. Draper's salary would be almost $360,000 in today's dollars.  Now I have been to Manhattan many times and I can tell you that $360,000 does not go very far there now.

However, my point is that inflation robs us of our purchasing power and governments love inflation and not so much its ugly cousin, deflation.  

Since governments love inflation, we must keep an eye on inflation.  Fixed income or bond investors are the most at risk as their income stream is usually discounted by inflation to determine the value of today's money in the future.

Inflation is what motivates equity investors to take risk in hope of higher returns.  Where the bond investor is mostly just trying to protect capital and stay up with inflation after taxes, the equity investor is hoping that additional risk taking translates into additional returns up and above inflation and taxes.  Of course as we have seen over the past decade or more there is no guarantee that this goal is achievable.

So the bottom line here is that although Mr. Draper's theoretical salary may have risen, I would guess that Mr. Draper would tell you his salary today just "does not buy what it used too."  

As investors, we must realize that inflation can have a very real effect on our financial dreams and goals.  We must work hard to position ourselves and our portfolios to at least stay up with the change in inflation.  

For those not yet in retirement, we must also realize that saving (or adding to our portfolios) tilts our chances of achieving those goals and dreams in our favor as depending on investment returns alone to outstrip inflation and taxes is not a game that everyone wins!

By the way, April 15th is fast approaching!  There is still time to add to your retirement savings and lower your 2015 taxes ahead of the April filing deadline.  Let us know if we can help. 
​

In case you missed it, Congress in late December permanently extended the exclusion from income of up to $100,000 per person per annum of Individual Retirement Account (IRA) distributions given directly to qualfied 501(c)3 charities for those already over the age of 70 1/2.

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​This popular exclusion lets a taxpayer give to charity directly from their IRA, treat the distribution as part of their Required Minimum Distribution for the year and avoid tax on that distribution.

The downside is you don’t get an itemized deduction for the charitable gift and you cannot receive anything in return for the gift from the charity as quid pro quo for your contribution. 

There are a few other restrictions such as the gift cannot go to a donor advised fund, private foundation or supporting organization.  Also you cannot make the gift from a Simplified Employee Plan (SEP) or a Savings Incentive Match Plan for Employees (SIMPLE plan) if an employer contribution was made that year.

Who is this be best for? 

Anyone who wants to give cash to a charity. 

What would possibly work better?

The only one we could think of was a gift of appreciated property whereby you avoided the capital gain on the gift to charity.
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For more information, check out this article on Forbes/Personal Finance.