President Trump unveiled his tax reform proposal two days ago. I must say that it by and large follows the contour of my best guess from six months ago. Here is an updated summary:
- Corporate tax rate will be reduced from 35% to 20%.
- Estate tax will be eliminated.
- The number of tax brackets will be reduced from seven to three, with the top rate going down from 39.6% to 35%.
- The standard deduction will double while personal exemptions and many itemized deductions (with the exception of mortgage interest and charitable donations) will be eliminated.
However, there is one big surprise that will affect many small business owners and maybe even physicians/dentists in private practice.
That is, the tax rate on pass-through earnings will be set at 25%!
I own such a pass-through entity, MZ Capital Management, through which I deliver my wealth management services. The earnings of the firm are not taxed at the firm level, rather they pass through to my tax return as personal income, thereby subject to my personal income tax rate. Since I am in the second highest tax bracket, the marginal tax rate on my pass-through income is currently 35%. (If I had not set up a defined benefit plan for myself, my marginal tax rate would have been 39.6%. This belongs to another article on tax mitigation.)
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Equifax, one of the three credit agencies, had their computer system hacked. As a result, 143 million Americans (and some Canadians and Britons) had their sensitive personal information, such as their name, address, birthday, social security number and credit card information compromised. You should assume you are one of the victims and take the following steps to protect yourself:
Step 1: Sign up for AnnualCreditReport.com
By law, you are entitled to one credit report per year from each credit agency. Since there are three credit agencies (Equifax, Experian and Transunion), you may stagger your requests and get one credit report every four months. AnnualCreditReport.com is a website jointly operated by the three credit agencies that provides a centralized location for requesting your annual free credit reports.
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In December 2016, I wrote about how I came to know a little girl in rural China who suffers from thalassemia and decided to pay for her blood transfusions that cost $150 every 40 days. I called that my best investment in 2016 and I truly felt that way.
Since then, I have sent $150 to them every month and kept in touch with them on WeChat.
Apparently Jia Jia’s homework essay did not touch only me, it also touched many other people. In the end, they received the equivalent of about $50k in donations.
Grandma took her to the best children’s hospital in Tianjin to seek treatment. One week’s stay there set them back more than $3000 and they decided they couldn’t afford that. So they came back to their town to seek treatment in the provincial hospital.
One day I got an essay from Jia Jia talking about how happy her grandma was, more happy than she had ever seen her. It turns out that Jia Jia needed a bone marrow transplant to cure the disease and a donor had been found.
But there was just a little problem. The provincial hospital had only successfully done bone marrow transplants on adults.
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I Did a Terrifying Thing …
Posted on: August 1, 2017
- In: Life
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Spontaneous Broadway is an hour and a half long musical show broken into two 45-minute sections. In the first half, the audience members are asked to write down made-up song titles and put them a basket. Each actor in the cast will draw one from the basket and, based only on the title, make up a song right on the spot. Afterward, the audience will vote for the song they like the best.
In the second half of the show, the cast will create a Broadway musical that contains the song the audience picked along with many other songs, characters and a story. This, again, is done entirely by improvisation.
Just the thought of this terrifies me. That’s why I flew to San Francisco last week to participate in a workshop put on by Bats Improv Theater. The conclusion of the workshop was a public performance this past Sunday.
Oh boy! Did we (the student cast) did an awesome show?
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I am among Investopedia 100
Posted on: July 15, 2017
- In: Life
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Well, two weeks ago I got an email from Investopedia, an encyclopedia website for personal finance and investment. The email told me that I was recognized as one of their “Top 100 Influential Advisors” in their inaugural ranking.
Let me just say I was very skeptical. I’ve gotten emails like that before, sometimes even from reputable magazines, telling me that I had been selected in their top financial advisor rankings. They then would go on to ask me to buy advertising, or make a payment to retain my listing in their top advisor rankings.
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Recently, I shared a true story in which I set up a client’s 401k plan five years ago with periodic (bi-weekly) contributions and equal investments into both a US stock index fund and an international stock index fund. Despite the fact that the US index (fund) has outperformed the international index (fund) by a huge margin: 86% vs 29% over the last five years, my client now has more money in the international fund than in the US fund. What gives? I invited my readers to think about it and give me their explanations. Now it’s time to reveal the answer: it’s dollar cost averaging!
Let me show you a stylized example in a three time-period world. There are two indexes. Index A goes from 100 to 105, then 110. Index B goes from 100 to 80, then 100. It’s clear that index A dominates index B since the total return of index A is 10%, that of index B is 0%. Yet an investor who makes equal $100 periodic investments in both index A and B will have more money in B at the end. Here is the math …
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One day two years ago, I got an email from a client of mine. In a very concise manner, he told me he was in Singapore for a business deal and he needed to wire $500k from his investment account to a bank account in Singapore.
To raise the money, I would need to sell some of his highly appreciated investments. I didn’t want him to be surprised by capital gain taxes, so I replied with an explanation of the tax implications.
After that, I was ready to wire the money, so I sent him a short message: “You know our standard procedure, any time a client wants to move more than $10k, he needs to call me to tell me in his own voice.” I totally expected my phone would ring right away.
Instead, I got another email: “I am in Singapore, I don’t have a phone with me, take this email as my authorization to wire the money.”
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After the Comey firing and the dropping of a few other shoes, there is enough talk about the similarity to Watergate that piques my interest to study the stock market’s reaction during the Watergate period.
The Watergate period started with the arrest of five burglars breaking into the DNC offices located in the Watergate Hotel on 6/17/1972 and ended with Nixon’s resignation on 8/8/1974. I split that time period into three different stages.
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The early stage: from 6/17/1972 to Nixon winning re-election on 11/11/1972.
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The middle stage: from 11/11/1972 to 10/20/1973 when Nixon fired Archibald Cox and abolished the office of the special prosecutor. Attorney General Richardson and Deputy Attorney General William D. Ruckelshaus resigned. The day’s events are commonly known as the Saturday Night Massacre.
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The final stage: from 10/20/1973 to 8/8/1974 when Nixon resigned.
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Beware of Financial Advisor Awards
Posted on: May 3, 2017
- In: Life
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Am I super excited about this recognition?
Hardly!
This is not the first time I’ve gotten this type of email. In the past, I have received similar emails from both strangers and people claiming to represent well-recognized publications like Barron’s and Forbes. They all told me that they wanted to recognize me as the best wealth manager/financial advisor/financial planner in the country, or in my state, or in my city, or ever born. Read the rest of this entry »
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When the PE10 is over 29 …
Posted on: April 5, 2017
The US market ended the month of March with the PE10 at 29.02. The PE10 is a stock market measurement devised by Nobel Prize winner Robert Shiller to measure the extent of market over-valuation or under-valuation. The long-term mean of the PE10 is 17, so the current level is nearly twice the long-term mean.
There have been only two other instances in history when the PE10 was this high, one in July, 1929 and one in February, 1997. It’s very interesting to study these two instances to frame our expectations of future market returns.
In the 1929 instance, the market peaked two months later while in the 1997 instance, Read the rest of this entry »
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I’ve done a lot of second opinion financial reviews over the years and these fees are broadly consistent with what I’ve seen in portfolios managed by Wall Street brokerages like Merrill Lynch, Morgan Stanley, Ameriprise etc.
In comparison, my fees are 1% for the first million, 0.7% for amounts up to $5mm and 0.4% for amounts over $5mm. Most independent RIAs (registered investment advisers) are like me – our fees are about a third of those by major brokerages.
Everything else being equal, if you are paying 1.5% more a year in fees, a back-of-the-envelope calculation will tell you that in 20 years you will be 30% poorer because of those higher fees. In 30 years, you will be 45% poorer.
But everything else is not equal. There are two other major distinctions between brokers and RIAs: Read the rest of this entry »
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Is the Market Over-Valued?
Posted on: February 21, 2017
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An Update on Trump’s Tax Plan
Posted on: February 1, 2017
t week I attended a tax seminar organized by McLean Estate Planning Council. The keynote speaker was a CPA and lobbyist for the AICPA on Capitol Hill. He is privy to Trump’s tax reform plan and a number of other Republican tax reform plans. These plans have a long way to go to become law, but the contour is taking shape so I thought I would share what I learned with you in a few bullet points. Note that I bolded the parts that may be disadvantageous to taxpayers.-
The number of tax brackets will be reduced from seven to three, and the top marginal income tax rate will be reduced from 39.6% to 33%.
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Personal exemptions will be eliminated.
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Standard deduction for married filing jointly will rise from $12,600 to $30,000.
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Itemized deductions will be capped at $200,000 per household.
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Mortgage interest deduction will be eliminated.
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Tax rate will be reduced from 35% to 25%.
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Don’t Panic If This Happens
Posted on: January 16, 2017
Since the election, the US stock market has been breaking new highs, encouraged by the prospect of lower taxes and higher growth. However I believe investors have not paid sufficient attention to the prospect of a trade war.To a large extent, the election of Donald Trump is a repudiation of globalization by a large segment of the US electorate. Even though the country as a whole has benefited tremendously from globalization, those benefits have by and large bypassed working-class folks.
Before 2000, Apple made all of its computers in the US and its market cap never rose about 10 billion dollars. Since then, Apple has subcontracted all of its production overseas and only kept design and marketing in US soil. The result?
Apple has become the most valuable company in the world with a market cap of over $600 billion even though they only have 66,000 employees in the US.
At the same time, Apple’s contract manufacturer Foxconn directly employs over 1 million workers in China. The supply chain to Foxconn employs another two million people. Read the rest of this entry »
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- In: Life
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- I went to San Francisco to study improvised musical theater and performed at the Bay Front Theater for a 45 minute set of musical story entirely improvised on stage.
- Against all odds, I kept Storyfest Short Slam, a short storytelling contest, alive and strong at the Bethesda Writer’s Center.
- I visited my English teacher whom I had lost touch with for 30 years. I couldn’t have accomplished this much in the US without him. I went to say thank you to him personally. I went to Guangzhou for my high school reunion and took pictures with my female classmates for the first time. (Back then we didn’t hang out with the opposite sex.)
- At Leadership Montgomery homecoming, I acted out Michael Jackson. Read the rest of this entry »
The Investment Scientist 