To Catch an Identity Thief

Who among us hasn't bemoaned the series of security questions on the phone as we try to talk to representatives about our accounts or access them online? Date of birth, the last four digits of our social security number, secret words and answers to seemingly ridiculous questions that can all be recited in our sleep. Is all that necessary?

In a word, yes.

Identity theft continues to be a common type of fraud in the U.S. The rise of social engineering has allowed criminals to become more sophisticated with their methods. But you can help protect yourself by staying aware, and taking extra precautions when verifying your identity.

What is identity theft and how does it happen?
Identity theft occurs when one person uses another person’s identifying information to assume their identity for the purpose of committing fraud or other crimes.

This type of fraud can be executed in person, verbally, or electronically, and can be familial (attempted by a family member) or external (attempted by an unknown party). Electronic channels are the most common paths for identity theft, and fraudsters can use several different methods to steal a victim’s credentials, such as phishing or via malware.

Identity theft falls into two categories:

1. Low-tech methods: These may include posing as a trusted person for the purpose of financial gain, or to access information. For example, the identity thief may contact a call center or call your advisor directly, posing as you, their client.

Other low-tech approaches include taking physical possession of devices, ATM cards, financial statements, and other materials that contain your financial information.

2. High-tech methods: Once identity thieves have the information they need, they may log into your account to gain additional data, intercept verification codes, redirect devices, initiate withdrawals, change account details, and more.

Identity theft is a broad topic, so these examples are not all-inclusive, and may overlap with other methods that also result in a loss or theft of personal information.

Identity theft may be one of the oldest techniques in the fraud book, but it remains prevalent, especially in a world where much more information is shared than in the past. In 2017, the number of identity theft victims in the U.S. reached 16.7 million—an 8% increase from the previous year.

Contrary to what some may believe, not all fraudsters are geniuses who can outsmart advanced technology. Some are more unassuming, but know how to take advantage of people’s natural inclination to trust others. Meanwhile, these criminals are getting more sophisticated in their attacks by using stealthier, more complex schemes.

Recently, brokerage firm Charles Schwab has seen an uptick in impersonation calls, with fraudsters becoming more sophisticated in their attempts to gain access to client accounts through social engineering. Social engineering is the use of deception to manipulate others into divulging personal information or transacting on a client account. Typically, an unauthorized individual assumes the identity of a client, or tricks another person into believing they are a trustworthy source.

Schwab is noticing that criminals are leveraging stolen client information gathered from other companies’ breaches, purchased from the dark web, or gleaned from social media to pose as clients. Impersonators use these details—in combination with other tactics—to appear more legitimate. For example, they may spoof the client’s phone number on caller ID, or use a voice changer to sound like the client. These imposters often are calling to update account information such as email address, password, or phone number, or to initiate or approve money movements.

Social engineering is swiftly becoming a universal threat—one that can have big impacts. It is a clever, often misunderstood, and overlooked form of identity theft because, while it still requires a certain amount of finesse and skill, it doesn’t require the technical expertise necessary to hack into a major bank’s computer network and reroute funds. Think of the con artist on the street whom you never really see.

Social engineering may occur via phone, email, or social media. Often, the scammer will use skills such as charm, friendliness, wit, or urgency to build a sense of trust with the victim. This is intended to convince the victim to either release unauthorized information, or perform actions that benefit the scammer, such as sending money. It is also very common for the scammer to visit social media sites to obtain identifying information to bolster their credibility.

Fraudsters will sometimes rely on human error to obtain additional information. For example, while answering a security question about previous employers, they may rely on a LinkedIn profile. If their first answer is incorrect, the fraudster will guess again and dismiss the incorrect answer by quickly saying something like, “Oh, I only worked there for three months, so I didn’t think that was the correct answer.” Despite receiving an incorrect answer initially, a customer service representative might not press further or ask additional security questions.

Fraudsters will also try empathy, such as pleading, “My daughter, Susan, was celebrating her birthday at the park today and is seriously injured. I’m calling from the doctor’s office, and they are requiring that I pay cash before she can be seen. It’s urgent that I access my account right now, but I locked myself out. Can you please help?”

Additionally, they may employ distraction techniques, such as a crying baby or other background noises, and ask the professional to repeat questions, claiming that they cannot hear or that there’s a poor connection. Usually, they’re hoping that the customer service representative gets frustrated or loses concentration.

9 Tips to Help Prevent Identity Theft

Knowledge and awareness can help you protect yourself against cyber-crimes such as identity theft or social engineering. Here are some best practices:

1. Safeguard your financial information and your personal data with physical locking devices or strong electronic password protection.
2. Limit whom you trust or share your personal information with.
3. Use caution when sharing information and personal details on social media.
4. Consider how you interact with others via email or phone, and be selective about disclosing details.
5. Be aware of your surroundings when talking on the phone. Do not hold conversations regarding your finances in public places, and don't use public WiFi to access financial accounts.
6. Regularly review your account statements for transactions that are outside of your normal spending patterns or places.
7. Employ strict authentication protocols that you follow with every account—no exceptions. For example, you may choose to require a verbal password or security questions for all accounts. Enable two-factor authentication on your e-mail accounts and all other accounts that allow it.
8. Educate and train your family members to ensure that they understand social engineering, so they're not the weak link in your security protocols. Kids should not advertise that their family is on vacation by posting photos or disclosing their location before they return home. That invites burglars to your home.
9. Report your phone as lost or stolen to your cell phone company as soon as you realize it is missing, and ask them to suspend all services immediately to prevent interception of validation codes. Be sure to have an auto-lock password on your phone

Identity theft is often linked to hackers. Not all hackers use their skills for criminal activity though. A growing group of hackers help companies detect flaws in their cybersecurity systems or test employee training. The companies who hire these hackers are often shocked at how quickly their systems can be breached. Watch this video from CNN to see how it works.

As an investment advisory firm, our guard is constantly up for hucksters attempting to trick us into revealing information about our clients, or worse, initiating unauthorized transfers from their accounts. Insist that your own advisor verbally approve any non-conventional transfer request (especially wire transfers) that come via e-mail or other means that are not normal for him or her.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Believe it Or Not

A longtime favorite line that I like to use when people ask me what the market or economy are going to do in the near future, is to say "Sorry, my crystal ball is in the shop."  Or I'll repeat what famed baseball manager Yogi Berra once said: "It's tough to make predictions, especially about the future."

That doesn't stop others from trying to be a broken clock by predicting early and often. And so we’re into that exciting time of year when all sorts of market predictions are made by people who are mostly claiming that they knew the future and have accurately predicted it over a great track record.  But if you’re smart, you’ll turn off the TV/radio or move on to the next article.

The truth is that none of us can accurately predict the movements of the markets.  If we could, then we would always make trades ahead of market moves, and it wouldn’t take long before that amazing prognosticator with the working crystal ball would have amassed billions off of his or her stock market trades.  Have you read about anybody doing that lately?

Most of these people are employed at think tanks or sell their predictions to credulous investors.  Would they need that paycheck or your hard-earned subscription dollars if they had the ability to make billions just by checking the ‘ole crystal ball a couple of times a day?

A recent article by frequent blogger and wealth manager Barry Ritholtz offers some rather amazing data on people in the prediction business.  You may know that the cryptocurrency known as “bitcoin” is now worth about $3,500—way WAY down from the start of 2018.  So how well did the people in the prediction business foresee that downturn?

Not well.  In his article, Ritholtz noted that Pantera Capital predicted that Bitcoin would be selling for $20,000 by the end of 2018.  Tom Lee of Fundstrat was more bullish, forecasting that bitcoin would breach $25,000 by then.  Prognostications by Anthony Pompliano, of Morgan Creek Digital Partners, were still more bullish, predicting bitcoins would be worth $50,000 by the end of last year.  John Pfeffer, who describes himself online as “an entrepreneur and investor,” anticipated $75,000 bitcoins by now, and Kay Van-Petersen, Global Macro-Strategist at Saxo Bank, one-upped everybody with his prediction that bitcoins would be worth $100,000 by December 31st of last year.

Ritholtz offers other examples, like radio personality Peter Schiff telling listeners since 2010 that the price of gold has been heading toward $5,000 an ounce.  (It’s riding around $1,300 currently.). Jim Rickards, former general counsel at Long-Term Capital Management, is more ambitious, telling his followers that he has a $10,000 price target for an ounce of gold.

If you happen to follow former Reagan White House Budget Director David Stockman, you have been told that stocks are going to crash in 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2019.  Someday he’s going to be right, and will no doubt be touting his amazing prediction abilities (that broken clock is right twice a day).

When you read about a prediction, instead of reaching for the phone to call your financial advisor, try writing the prediction down on a calendar or reminder program like the app followupthen.com, and come back to it a year later.  Chances are you’ll be less impressed then than you might be now.

The three things that work best for investors: time in the market, portfolio diversification, and risk management. Soothsayers need not apply.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Source:

https://ritholtz.com/2018/12/fun-with-forecasting-2018-edition/

What's Going on in the Markets: December 22, 2018

Paraphrasing a popular novelty Christmas song by Elmo and Patsy ... "Santa got run over by a rein-bear, walking out to Wall Street on Christmas Eve..."

Unless you've been on an island somewhere and blissfully disconnected, you probably already know that the stock market had one of its worst weeks since 2011. The S&P 500 index lost about 7% in one week, while the NASDAQ and Russell 2000 indexes lost over 8%. With the exception of bear market funds, government treasury bonds and cash, there was virtually nowhere to hide. It's the worst December to date since 1931.

The proximate "cause" of the market angina this week was the federal reserve's (the "fed") 1/4 point rate hike amid signs of growth slowing around the world. While odds heavily favored the well telegraphed December rate hike, it's puzzling why Wall Street traders often act surprised when it actually happens. Perhaps it was the fed chairman's steadfast insistence on two more possible rate hikes next year, and continued monetary tightening via $50B of bond sales per month.

Before the actual announcement at 2 PM ET on Wednesday, we could almost see glimmers of Santa's sleigh in the distance, as the market was starting to finally bounce after several days of selling pressure. Alas, that sleigh did a prompt U-turn as Federal Reserve Chairman Jerome Powell struck a hawkish tone during his press conference following the rate hike announcement. Powell may turn out to be the Grinch who stole the 2018 Santa Claus rally.

Raising interest rates is the fed's way of preventing an economy from overheating and leading to high inflation. Higher interest rates tend to slow the rate of corporate/company hiring and purchasing of capital goods and equipment. But many corporate executives were already complaining about trade wars, the political rancor in Washington, and of course, the end of lower interest rates.

In reality, the economy is showing some signs of growth slowing, but not contracting (i.e., negative growth). It's contraction in the economy that translates to a recession, something that the weight of evidence still points to no recession on the horizon. Of course, that could change at any time.

Regardless of the cause, the market has been on a great run (bull market) since March 2009, more than quadrupling since the 2009 bottom. With the average bull market usually lasting about 4-5 years, this one certainly deserves some rest in the form of a healthy pullback. Unfortunately, it always feels bad when it happens, no matter how prepared we are.

There are negatives and positives in our economy to push/pull on the markets:

Negatives:

1. The S&P 500 Price to Earnings ratio (P/E), a measure of stock valuation, was at a historically overvalued extreme earlier this year, which warranted caution. While overvaluation alone does not end a bull market, it does dramatically increase the downside risk in stocks. The recent market pullback has caused P/E valuations to come down, but at 19.9 they remain above the long-term average. At this juncture, it's too early to say if valuations will continue to subside as prices move lower, or if a drop off in earnings will keep them at high levels.
2.  Housing prices had/have risen too high, and these elevated prices were/are going to be incredibly hard to maintain if interest rates continue to increase. It’s too early to officially declare that U.S. housing is, or was, in a bubble. However, real estate is starting to unwind both in terms of prices and activity – with some of the highest-growth areas feeling the most pain. Housing is incredibly important to the health of the U.S. economy. If housing metrics continue to decline, this will have negative implications for the economy and the markets.
3. In the past, the combination of a declining growth outlook and a rising rate environment (called tightening) has generally had dire consequences. Out of the past 11 tightening cycles, nine have resulted in a recession, while only two led to an economic soft landing. Based on history, the current investment landscape is tilted towards a negative risk/return relationship as stock prices remain susceptible to future downward pressure.

Positives:

1. Consumer Confidence has rarely been more ebullient, with recent Conference Board survey results at the most positive level in 18 years. Although this indicator is
   considered to be leading, and usually rolls over before a recession, it’s interesting to note that past stock market peaks have frequently coincided with excessive levels of consumer optimism. Consumer confidence is essential to economic health, because a confident consumer isn't afraid to spend or invest in new ventures to keep the economy growing.
2. The Institute for Supply Management (ISM), which conducts surveys of business activity,  has also been persistently strong this year, and remains near the highest levels of this 9-year expansion. The Business Activity Index for the Service Sector, which accounts for about two-thirds of the U.S. economy, is back at the highest level since 2004. In manufacturing, the ISM Purchasing Managers Index is also hovering near its post-recession highs. Neither of these indexes are currently showing any signs of distress or hints of an impending recession. Whether the current steady outlook will continue to support this economy in the coming months is a critical question for 2019.
3. Jobless claims and the unemployment rate are both low by historical standards. Monthly job creation is strong, limited only by the number of available qualified candidates for many jobs. If there's one item that pressures the fed to raise interest rates the most, it's wage inflation, which we are starting to see as the demand for workers outstrips supply.
4.  The fed's steadfast insistence on raising interest rates, in the face of clear evidence that growth is slowing, is perhaps a sign that they see this as a temporary economic condition that can withstand further rate hikes. Why would the Federal Reserve still be tightening (with the 9th rate hike of this economic cycle made this week) if there could be major trouble on the horizon?
5. Signs of cooperation are emerging between the U.S. and China to end the trade wars and end the tit-for-tat tariff jabs. Both countries' markets would celebrate at least some resolution to this tiff.

Now What?

So what's one to do now that the market has taken a big tumble from new highs reached just this past September? The decline has been swift, brutal and almost immune to bounce attempts. In an algorithmic driven and high-speed trading market, risk happens faster than any time before. If you haven't lightened up on your holdings yet, it's probably too late to sell, but consider taking some chips off the table if Santa does come to call on Wall Street and rally after all. After more than a 9 year bull run, it's prudent to not give all your profits back and wait for the next bull market to get back to even. This is not investment advice, as I don't know your financial goals, your time-frame or your risk tolerance. But please feel free contact us to see if we can help you.

For our clients, we came into the market sell-off with lots of cash and hedges in the form of inverse funds and options. We have continued to add to our hedges as this market attempts to find a bottom, while also nibbling on some new positions that we expect to hold for the long term. So far, we have not been profitable on those nibbles, but we aren't buying them for the next week or next month. Buying a little at a time on the way down is the way it should be done for long term investors. Remember the old stock market saying: buy low, sell high.

What's Next?

My crystal ball continues to be in the shop, so it's tough to say what comes next. We are severely oversold, so a wicked and lasting bounce/rally could arrive at any moment. But while investor sentiment is awful, which is usually a contrary indicator to support the start of a market rally, so far there has been no price action evidence to support one.

Many hedge funds have had abysmal performance this year, and are forced to return billions of dollars to clients this quarter.  They are either closing and/or answering to client redemption requests that have to be met by year-end, so that could continue to pressure the market if their activities aren't done yet.

A lot of technical damage has been done to the markets, so I don't expect the next rally to be the one to ramp to new highs. Far from it.  Don't be the proverbial mouse to rush into the first market rally trap. Patience is essential--be the second mouse to actually grab the cheese. Any durable rally will last for weeks, if not months, you won't miss out.

Unless the next rally shows signs of a longer term durable bottom, I may be using any strength during the coming weeks to further lighten up positions and add more hedges in anticipation of a sub-par 1st quarter earnings season, and as all the people who didn't want to sell for tax reasons in 2018, decide to dump their shares in January.

That said, I'm starting to see some small signs of the potential emergence of a new bull market, sometime after the 1st or 2nd quarter of 2019. Any one spark could ignite this market to the upside (e.g., China trade agreement, signs of an interest rate pause, government shutdown resolved). So I wouldn't be cashing out of this market given that you could miss the big rebound that could start at any time. This is all speculation on my part, one that you shouldn't rely on for your own investment decisions. My outlook could be wrong, changes often, and could be different, even before the Christmas tree comes down.

Markets Got you Down?

If you're scared or stressed about the markets, here's some advice from Jim O'Shaughnessy, author of several books on investing, including the best seller, What Works on Wall Street:

"Take a deep breath, sit down, and write down how you feel about what is happening in the market. Be free-form, and be honest. If you feel a pit in your stomach, write about it. If you feel jittery, write about it. If you think this is the next financial crisis, write about it. If you feel like selling out and going to cash, note that too. Write about every worry, frustration and uncertainty you are currently experiencing. Then date it, and put it away.

Chances are very good that when you read it again 12-18 months from now, you'll be shocked you felt this way. Your brain will do somersaults to try to convince you that you *really* didn't feel everything you wrote, because things will have calmed down.

Corrections and bear markets are a feature, not a bug of the stock market. Without them, there would be no equity risk premium. Look back at EVERY OTHER market decline and remember, people were feeling like that was the end too. It wasn't then, it isn't now. This is actually a healthy, if painful in the short-term, action. Most important, remember, this too shall pass."

I couldn't have said it better myself. And as I often quote, Peter Lynch, legendary manager of the Fidelity Magellan fund said that "The stock market is a great place to make money, as long as you don't get scared out of them."

I'd like to take this opportunity to wish you very happy holidays and a grand New Year. I appreciate my readers very much.

"You can say there's no such thing as Santa, but as for me and the bulls, we believe."

Merry Christmas!

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

What's Going on in the Markets: November 25, 2018

Here's hoping your Thanksgiving holiday and weekend spent with loved ones were reasons to be thankful for the past year of blessings. Certainly, the markets didn't give us much to be thankful or joyful for as all major market indexes dropped between 2.5% and 4.4% last week. Normally, Thanksgiving week can be counted on for an upside bias, but instead we got the worst Thanksgiving week since 2011 as the correction that began in early October rolls on.

As bad as the week was, we could be setting up for a pretty good rally into year end, if we could just get a positive spark of some sort this week. Some possible good news could be forthcoming on the trade war front from the G20 Summit, scheduled for November 30 and December 1, where President Donald Trump and China President Xi Jinping are scheduled to meet and have a discussion. This may bring hope for some type of agreement on the tit-for-tat tariffs imposed.

To be clear, the price action in the markets to-date has shown no evidence of a robust bounce coming, but there are some signs that a market reversal (upward) is brewing.

Market corrections, defined as a decline from the top of 10% or more, are always gut-wrenching and difficult to "watch".  In fact, this past week, the S&P 500 index finally closed 10.1% below the all-time high made in September.  Under the surface, some stocks, specifically the technology and infamous FAANG stocks (Facebook, Apple, Amazon, Netflix and Google), have been hit hard with declines of up to 40% from their highs seen earlier this year. I could list a ton of stocks and market sectors that are in their own bear markets (20% below their recent highs), but you already know them because you probably own them.

Why the Long Face Mr. Market?

So what has the market in such a tizzy, seemingly all of a sudden, especially after a great 3rd quarter performance and record quarterly corporate earnings reported? A few things actually:

1. Trade Wars & Tariffs: Initially thought to be immune to the trade wars, the markets have succumbed to the thought that the current trade war may be drawn out, not just for months, but for years. While a minority of companies that reported earnings this past quarter pointed to tariffs as a concern, the ones that did, were very vocal about how a dragged out tariff war will significantly drag on future earnings. Needless to say, China features prominently in this picture, so a resolution next week would give Wall Street a reason to cheer.
2. Interest rates: There's nothing like cheap money to keep the money flowing and the stock market buoyant, as companies issue bonds (debt) to buy back their shares in the open market and finance capital expansion plans. Home buying obviously works better with lower rates. So higher interest rates curb the debt appetite by companies and potential homeowners. In addition, investors, with the availability of lower risk and higher interest rate government bonds, will cash in their stocks for the safety of Uncle Sam's treasury notes and bills. Why take all the stock market risk for an extra potential 1%-2% returns?
3. Economic Data Slowing: While gross domestic product, employment, consumer confidence and housing data have been near their highest levels, there are emerging signs of growth slowing in many areas of the economy. For example, home builder confidence dropped 8 points in November – now confirming the message that the housing market is slowing. The Conference Board’s Leading Economic Index barely eked out a gain of 0.1pts, which suggests that next month could see the first decline in over 29 months. Finally, durable goods (e.g., appliances, aircraft, machinery and equipment) orders for October came in worse than expected. While none of the data signifies an imminent recession, a slowdown in growth looks to continue, hardly surprising given the long slow economic recovery we've been in for almost ten years.
4. Oil Prices Crashing: Oil prices have lost over 35% from their highs in the first week in October. While lower oil prices mean more money in consumers' pockets and higher profits for oil consumers such as airlines, the swift decline in prices unnerves investors and traders. Questions arise as to the robustness of the economy and worldwide demand for oil if the price can lose 1/3rd of its value in a period of less than two months.

When you consider that stock markets trade on future company profit expectations, all of the above worries weigh on prices investors are willing to pay for those future earnings. Companies may start to alert Wall Street that their initially published profit expectations may not be met. So, as a forward looking mechanism, the market starts to price in those worries 6-12 months before companies actually start to report those earnings.

Will Santa Claus Visit Wall Street This Year?

As mentioned above, there are some "green shoots" of hope that a rally may be near:

1. Investor Sentiment has been decimated in this correction. Any number of investor surveys, professional or retail (that's you or me), has shown them to be despondent and sure this bull market is done and over with. In this business, excessive investor pessimism or optimism tends to act as a contrary indicator (when so many are sure the market will do one thing, the market tends to do another).
2.  The markets are oversold in the short-term. When the selling has been as persistent as it has, without much in the way of a rally, the markets tend to reverse and rally up, if only for a day, a week, a month, or two.
3. Seasonality favors a rally. The period from mid-November through the following May tend to be very positive from a market standpoint. I should be clear in mentioning that seasonality has not worked very well at all in 2018 (e.g., August and September are usually down months but were up big this year).
4. We haven't made a new market low in this correction since October 29. With the exception of some technology and NASDAQ stocks/indexes, the overall market has not made any new lows. While this could change when the markets open on Monday morning, the fact that the market didn't push to new lows last week when it had the chance, means that we may be running out of sellers. In addition, some positive technical signs, one in the form of small capitalization stock strength on Friday, bode well for a potential near-term rally.
5. Although an interest rate increase of 0.25% is a 78% certainty in December, it's possible that the federal reserve, when it meets in mid-December will signal a willingness to pull back on it's plan for three interest rate hikes in 2019, given the apparent slow-down in economic growth.
6. Announced today (Sunday), the European Union and the United Kingdom have reached an agreement on Brexit. The removal of that uncertainty can help spark a rally.

So What Do We Do Now?

The weight of the evidence at the moment gives the benefit of doubt to the bears and the evident short-term downtrend. Therefore, caution is still warranted, even if a short-term rally emerges.  Although the odds of a recession over the next 6-9 months remain very low, things can change in a hurry if the global slowdown continues or accelerates downward.

If you haven't sold or trimmed any positions to-date, and you're losing sleep over the market action, then you should take advantage of any rally to reduce your exposure to the markets to the "sleeping point" or add some hedges.  It may be too late to sell right now, or into any further decline, but you should have your own plan for your investments that matches your risk tolerance, investment goals and time-frame. If you're not a client, then I cannot possibly advise you, so this should not be construed as investment advice. Of course, if you would like to become a client, we'd love to talk to you.

For our clients, we lightened up on positions, raised cash and increased our hedges over the past several months as short-term signs pointed towards a bit of over-exuberance to the upside. We have tried dipping our toes lightly into a few positions during this correction, but mostly the market told us we were too early.  Of course, stocks become more attractive as their prices decline, so dipping your toes into this decline is not a bad idea; just be sure you know your time-frame for holding, and be sure to keep it light until the trend changes upward, and the overall market acts as a tailwind rather than a headwind.

While markets are acting bearishly at this time, we remain alert to a switch in trend and hopeful that Santa comes to Wall Street, bringing a robust rally. Remember that a rally always comes around, so if your portfolio is down, there will be better days ahead if you want to buy or sell. Until then, remember that investing in stocks is great...as long as you don't get scared out of them.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

2018 Year-End Tax Planning Tips

Yep, it's that time of year again. While the stock markets were busy correcting in October, making for a very volatile month, our thoughts turn to year-end tax planning.

Now is the time to take steps to cut your 2018 tax bill. Here are some relatively foolproof year-end tax planning strategies to consider, taking into account changes included in the Tax Cuts and Jobs Act (TCJA).

Year-end Planning Moves for Individuals

Game the Increased Standard Deduction Allowances. The TCJA almost doubled the standard deduction amounts. For 2018, the amounts are $12,000 for singles and those who use married filing separate status (up from $6,350 for 2017), $24,000 for married joint filing couples (up from $12,700), and $18,000 for heads of household (up from $9,350). If your total annual itemizable deductions for 2018 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction. That will lower this year’s tax bill. Next year, you can claim the standard deduction, which will be increased a bit to account for inflation.

The easiest deductible expense to accelerate is your home mortgage payment due on January 1. Accelerating that payment into this year will give you 13 months’ worth of interest deductions in 2018. Although the TCJA put new limits on itemized deductions for home mortgage interest, you are most likely unaffected (mostly affects some interest on home equity loans and lines of credit).

Also, consider state and local income and property taxes that are due early next year. Prepaying those bills before year-end can decrease your 2018 federal income tax bill because your itemized deductions will be that much higher. However, the TCJA decreased the maximum annual amount you can deduct for state and local taxes to $10,000 ($5,000 if you use married filing separate status). So, beware of this new limitation, and don't be in a hurry to pre-pay property taxes by year-end if there's a better chance that you might be able to deduct them in 2019.

Accelerating other expenditures could cause your itemized deductions to exceed your standard deduction in 2018. For example, consider making bigger charitable donations this year and smaller contributions next year to compensate. Be sure to ask us about a donor advised fund, which can accelerate donation deductions this year, while taking your time (perhaps years) to "grant" amounts to your favorite charities. Also, consider accelerating elective medical procedures, dental work, and vision care. For 2018, medical expenses are deductible to the extent they exceed 7.5% of Adjusted Gross Income (AGI), assuming you itemize.

Warning: The state and local tax prepayment drill can be a bad idea if you owe Alternative Minimum Tax (AMT) for this year. That’s because write-offs for state and local income and property taxes are completely disallowed under the AMT rules. Therefore, prepaying those expenses may do little or no good if you are an AMT victim. While changes in the tax law reduced the number of people subject to the AMT, you may want to contact us if you are unsure about your exposure to the AMT.

Carefully Manage Investment Gains and Losses in Taxable Accounts. If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The maximum federal income tax rate on long-term capital gains recognized in 2018 is only 15% for most folks, although it can reach a maximum of 20% at higher income levels. The 3.8% Net Investment Income Tax (NIIT) also can apply at higher income levels.

To the extent that you have capital losses that were recognized earlier this year, or capital loss carryovers from pre-2018 years, selling winners this year will not result in any tax hit. In particular, sheltering net short-term capital gains with capital losses is a sweet deal because net short-term gains would otherwise be taxed at higher ordinary income rates.

What if you have some loser investments that you would like to unload? Biting the bullet and taking the resulting capital losses this year would shelter capital gains, including high-taxed short-term gains, from other sales this year.

If selling a bunch of losers would cause your capital losses to exceed your capital gains, the result would be what's known as a net capital loss for the year. No problem! That net capital loss can be used to shelter up to $3,000 of 2018 ordinary income from salaries, bonuses, self-employment income, interest income, royalties, and whatever else ($1,500 if you use married filing separate status). Any excess net capital loss from this year is carried forward to next year and beyond.

In fact, having a capital loss carryover into next year could turn out to be a pretty good deal. The carryover can be used to shelter both short-term and long-term gains recognized next year and beyond. This can give you extra investing flexibility in those years because you won’t have to hold appreciated securities for over a year to get a preferential tax rate. Since the top two federal rates on net short-term capital gains recognized in 2019 and beyond are 35% and 37% (plus the 3.8% NIIT, if applicable), having a capital loss carryover into next year to shelter short-term gains recognized next year and beyond could be a very good thing.

One thing to keep in mind when either "harvesting" losses or holding on to winners to avoid capital gains: don't let the tax "tail" wag the investment "dog". Selling a loser for the sake of recognizing tax losses may not be prudent if the investment is temporarily undervalued. Conversely, holding onto an investment just to avoid capital gains taxes or to enjoy long term capital gains treatment may cost you more in lost gains than the taxes you'll save. Be smart about it.

Take Advantage of 0% Tax Rate on Investment Income. The TCJA retained the 0%, 15%, and 20% rates on Long-term Capital Gains (LTCGs) and qualified dividends recognized by individual taxpayers. However, for 2018–2025, these rates have their own brackets that are not tied to the ordinary income brackets. Here are the brackets for 2018:

Note: The 3.8% NIIT can hit LTCGs and dividends recognized by higher-income individuals. This means that many folks will actually pay 18.8% (15% + 3.8% for the NIIT) and 23.8% (20% + 3.8%) on their 2018 LTCGs and dividends.

While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who will be in the 0% bracket. If you're planning to give them cash, alternatively consider giving them appreciated stock or mutual fund shares that they can sell and pay 0% tax on the resulting long-term gains. Gains will be long-term as long as your ownership period plus the gift recipient’s ownership period (before the sale) equals at least a year and a day.

Giving away stocks that pay dividends is another tax-smart idea. As long as the dividends fall within the gift recipient’s 0% rate bracket, they will be federal-income-tax-free.

Warning: If you give securities to someone who is under age 24, the Kiddie Tax rules could potentially cause some of the resulting capital gains and dividends to be taxed at the higher rates that apply to trusts and estates. That would defeat the purpose. Please contact us if you have questions about the Kiddie Tax and refer to our post on the topic: Is Tax Simplification Just A Kiddie’s Play?

Also, one can be doing pretty well income-wise and still be within the 0% rate bracket for LTCGs and qualified dividends. Consider the following examples:

·       Your married adult daughter files jointly and claims the $24,000 standard deduction for 2018. She could have up to $101,200 of AGI (including LTCGs and dividends) and still be within the 0% rate bracket. Her taxable income would be $77,200, which is the top of the 0% bracket for joint filers.

·       Your divorced son uses head of household filing status and claims the $18,000 standard deduction for 2018. He could have up to $69,700 of AGI (including LTCGs and dividends) and still be within the 0% rate bracket. His taxable income would be $51,700, which is the top of the 0% bracket for heads of household.

·       Your single daughter claims the $12,000 standard deduction for 2018. She could have up to $50,600 of AGI (including LTCGs and dividends) and still be within the 0% rate bracket. Her taxable income would be $38,600, which is the top of the 0% bracket for singles.

Give Away Winning Shares, or Sell Losing Shares and Give Away the Resulting Cash. If you want to make gifts to some favorite relatives and/or charities, they can be made in conjunction with an overall revamping of your taxable (non-IRA) stock and equity mutual fund portfolios. Gifts should be made according to the following tax-smart principles.

Gifts to Relatives. Don’t give away losing shares (currently worth less than what you paid for them). Instead, you should sell the shares and book the resulting tax-saving capital loss. Then, you can give the sales proceeds to your relative.

On the other hand, you should give away winning shares to relatives. It's somewhat likely they will pay lower tax rates than you would pay if you sold the same shares. As explained earlier, relatives in the 0% federal income tax bracket for LTCGs and qualified dividends will pay a 0% federal tax rate on gains from shares that were held for over a year before being sold. (For purposes of meeting the more-than-one-year rule for gifted shares, you can count your ownership period plus the gift recipient’s ownership period.) Even if the winning shares have been held for a year or less before being sold, your relative will probably pay a much lower tax rate on the gain than you would.

Gifts to Charities. The principles for tax-smart gifts to relatives also apply to donations to IRS-approved charities. You should sell losing shares and benefit from the resulting tax-saving capital losses. Then, you can give the sales proceeds to favored charities and claim the resulting tax-saving charitable deductions (assuming you itemize). Following this strategy delivers a double tax benefit: tax-saving capital losses plus tax-saving charitable donation deductions.

On the other hand, you should donate winning shares instead of giving away cash. Why? Because donations of publicly traded shares that you have owned for over a year result in charitable deductions equal to the full current market value of the shares at the time of the gift (assuming you itemize). Plus, when you donate winning shares, you escape any capital gains taxes on those shares. This makes this idea another double tax-saver: you avoid capital gains taxes, while getting a tax-saving donation deduction (assuming you itemize). Meanwhile, the tax-exempt charitable organization can sell the donated shares without owing anything to the IRS.

Finally, if you're over age 70-1/2, you are subject to annual required minimum distributions (RMD) on your traditional IRA accounts. Consider making a direct contribution from your IRA to your favorite charity for any amount and it applies towards your annual RMD obligation. That way, the income is never taxed, and reduces your overall AGI, which can benefit you in many ways (e.g., possibly lower medicare premiums, less taxation of social security benefits, less exposure to deduction phaseouts that are based on your AGI).

Convert Traditional IRAs into Roth Accounts. The best profile for the Roth conversion strategy is when you expect to be in the same or higher tax bracket during your retirement years. The current tax hit from a conversion done this year may turn out to be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s earnings.

A few years ago, the Roth conversion privilege was a restricted deal. It was only available if your modified AGI was $100,000 or less. That restriction is gone. Even billionaires can now do Roth conversions! If you have a lower than normal maximum tax bracket, you may want to consider a Roth conversion before year end.

Take Advantage of Principal Residence Gain Exclusion Break. Home prices are on the upswing in many areas. More good news: Gains of up to $500,000 on the sale of a principal residence are completely federal-income-tax-free for qualifying married couples who file joint returns. $250,000 is the gain exclusion limit for qualifying unmarried individuals and married individuals who file separate returns. To qualify for the gain exclusion break, you normally must have owned and used the home as your principal residence for a total of at least two years during the five-year period ending on the sale date. You’ll definitely want to take these rules into consideration if you’re planning on selling your home in today’s improving real estate environment.

Watch out for the AMT. The TCJA significantly reduced the odds that you will owe AMT for 2018 by significantly increasing the AMT exemption amounts and the income levels at which those exemptions are phased out. Even if you still owe AMT, you will probably owe considerably less than under prior law. Nevertheless, it’s still critical to evaluate year-end tax planning strategies in light of the AMT rules. Because the AMT rules are complicated, you may want some assistance. We can help.

Don’t Overlook Estate Planning. The unified federal estate and gift tax exemption for 2018 is a historically huge $11.18 million, or effectively $22.36 million for married couples. Even though these big exemptions may mean you are not currently exposed to the federal estate tax, your estate plan may need updating to reflect the current tax rules. Also, you may need to make some changes for reasons that have nothing to do with taxes, especially if your estate plan is more than a few years old. Don't put off this very important life planning task.

Year-end Planning Moves for Small Businesses

Establish a Tax-favored Retirement Plan. If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. For example, if you are self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $55,000 for 2018. If you are employed by your own corporation, up to 25% of your salary can be contributed with a maximum contribution of $55,000.

Other small business retirement plan options include the 401(k) plan (which can be set up for just one person), the defined benefit pension plan, and the SIMPLE-IRA. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.

The deadline for setting up a SEP-IRA for a sole proprietorship, and making the initial deductible contribution for the 2018 tax year, is 10/15/2019 if you extend your 2018 return to that date. Other types of plans generally must be established by 12/31/2018 if you want to make a deductible contribution for the 2018 tax year, but the deadline for the contribution itself is the extended due date of your 2018 return. However, to make a SIMPLE-IRA contribution for 2018, you must have set up the plan by October 1. So, you might have to wait until next year if the SIMPLE-IRA option is appealing.

Contact us for more information on small business retirement plan alternatives, and be aware that if your business has employees, you may have to cover them too.

Take Advantage of Liberalized Depreciation Tax Breaks. Thanks to the TCJA, 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar year 2018. That means your business might be able to write off the entire cost of some or all of your 2018 asset additions on this year’s return. So, consider making additional acquisitions between now and year-end. Contact us for details on the 100% bonus depreciation break and what types of assets qualify.

Claim 100% Bonus Depreciation for Heavy SUVs, Pickups, or Vans. The 100% bonus depreciation provision can have a hugely beneficial impact on first-year depreciation deductions for new and used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment that qualifies for 100% bonus depreciation. However, 100% bonus depreciation is only available when the SUV, pickup, or van has a manufacturer’s Gross Vehicle Weight Rating (GVWR) above 6,000 pounds. The GVWR of a vehicle can be verified by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame. If you are considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a juicy write-off on this year’s return.

Claim Bigger First-year Depreciation Deductions for Cars, Light Trucks, and Light Vans. For both new and used passenger vehicles (meaning cars and light trucks and vans) that are acquired and placed in service in 2018 and used over 50% for business, the TCJA dramatically increased the so-called luxury auto depreciation limitations. For passenger vehicles that are acquired and placed in service in 2018, the luxury auto depreciation limits are as follows:

· $18,000 for Year 1 if bonus depreciation is claimed.
· $16,000 for Year 2.
· $9,600 for Year 3.
· $5,760 for Year 4 and thereafter until the vehicle is fully depreciated.

These allowances are much more generous than under prior law. Note that the $18,000 first-year luxury auto depreciation limit only applies to vehicles that cost $58,000 or more. Vehicles that cost less are depreciated over six tax years using depreciation percentages based on their cost. Contact us for details.

Cash in on More Generous Section 179 Deduction Rules. For qualifying property placed in service in tax years beginning in 2018, the TCJA increased the maximum Section 179 deduction to $1 million (up from $510,000 for tax years beginning in 2017). The Section 179 deduction phase-out threshold amount was increased to $2.5 million (up from $2.03 million). The following additional beneficial changes were also made by the TCJA.

Property Used for Lodging. For property placed in service in tax years beginning in 2018 and beyond, the TCJA removed the prior-law provision that disallowed Section 179 deductions for personal property used predominately to furnish lodging or in connection with the furnishing of lodging. Examples of such property would apparently include furniture, kitchen appliances, lawn mowers, and other equipment used in the living quarters of a lodging facility or in connection with a lodging facility such as a hotel, motel, apartment house, dormitory, or other facility where sleeping accommodations are provided and rented out.

Qualifying Real Property. As under prior law, Section 179 deductions can be claimed for qualifying real property expenditures, up to the maximum annual Section 179 deduction allowance ($1 million for tax years beginning in 2018). There is no separate limit for qualifying real property expenditures, so Section 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar. Qualifying real property means any improvement to an interior portion of a nonresidential building that is placed in service after the date the building is first placed in service, except for expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework.

For tax years beginning in 2018 and beyond, the TCJA expanded the definition of real property eligible for the Section 179 deduction to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. To qualify, these items must be placed in service in tax years beginning after 2017 and after the nonresidential building has been placed in service.

Time Business Income and Deductions for Tax Savings. If you conduct your business using a pass-through entity (sole proprietorship, S corporation, LLC, or partnership), your shares of the business’s income and deductions are passed through to you and taxed at your personal rates. Assuming the current tax rules will still apply in 2019, next year’s individual federal income tax rate brackets will be the same as this year’s (with modest bumps for inflation). In that case, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2018 until 2019.

On the other hand, if you expect to be in a higher tax bracket in 2019, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2019. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate. Contact us for more information on timing strategies.

Maximize the New Deduction for Pass-through Business Income. The new deduction based on Qualified Business Income (QBI) from pass-through entities was a key element of the TCJA. For tax years beginning in 2018–2025, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income. The QBI deduction also can be claimed for up to 20% of income from qualified REIT dividends and 20% of qualified income from publicly-traded partnerships.

For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes, and S corporations. The QBI deduction is only available to non-corporate taxpayers (individuals, trusts, and estates).

Because of the various limitations on the QBI deduction, tax planning moves (or non-moves) can have the side effect of increasing or decreasing your allowable QBI deduction. So, individuals who can benefit from the deduction must be really careful at year-end tax planning time. We can help you put together strategies that give you the best overall tax results for the year.

Claim 100% Gain Exclusion for Qualified Small Business Stock. There is a 100% federal income tax gain exclusion privilege for eligible sales of Qualified Small Business Corporation (QSBC) stock that was acquired after 9/27/10. QSBC shares must be held for more than five years to be eligible for the gain exclusion break. Contact us if you think you own stock that could qualify.

Conclusion

This post only covers some of the year-end tax planning moves that could potentially benefit you and your business. Please contact us if you have questions, want more information, or would like us to help in designing a year-end planning package that delivers the best tax results for your particular circumstances.