Delving into the latest impacts of Donald Trump’s impeachment trials on investors around the world, Wael-Al-Nahedh, CEO at Spearvest, gives us a rundown on the influence of global politics and the volatility of investment in 2020.
After three years of failed negotiations, sharp words, a prime ministerial resignation and a Christmas general election, at long last the UK government has a clear majority and the overall decision on the country’s future relationship with the European Union (EU) has been agreed. On top of this, China and the US trade deal tensions seem to be simmering down and global markets can look forward into what we all hope will be an extended period of global market stability. Meanwhile the ongoing stand-off between Iran and the world’s biggest economy appears to have quietened down, at least for the moment.
What’s more, in December 2019 and after months of speculation, the world watched as Donald Trump became only the third president of the United States history to be impeached, only to be swiftly acquitted, as was expected to happen given the Republican majority in the Senate.
However, as recent events in Wuhan, China have proven, major challenges can appear suddenly and without warning. The fast-spreading Coronavirus in Wuhan has already had a substantial impact on the Chinese economy. This crisis has led to fears around international travel and public health emergencies, in turn damaging supply chains and knocking investor confidence just as it was starting to bounce back.
This was a reminder that repercussions from local risks can have a global impact on financial markets. Specifically, what are the current challenges and how can investors navigate these situations?
Financial Markets throughout election year
All eyes will be on the US election this year, and many investors will tread cautiously in the US stock market depending on updates and promises in policy, and polling predictions when it comes to the people’s favourite candidate.
In the short term, the election can affect corporate confidence due to Trump’s business-friendly policies, such as his reform on corporate tax, could be at risk of being replaced by more topical economically viable policy.
In the short term, the election can affect corporate confidence due to Trump’s business-friendly policies, such as his reform on corporate tax, could be at risk of being replaced by more topical economically viable policy.
Alternatively, we might see certain sectors flourish from now until election day, as trade deals are renegotiated or tariffs on foreign goods are imposed or revoked. It was announced this week that China will halve tariffs on some US imports as it moves quickly to implement its ‘phase one’ trade deal.
History dictates that election years often offer prosperity when it comes to the stock market, regardless of who is eventually elected. In fact, when examining the return of the S&P 500 Index for each of the 23 election years since 1928, only four have been negative.
US-Iranian tension
US and Iran haven’t had the best of relations for a few decades now, and US sanctions on Iran’s oil exports last year had already crippled the Iranian economy. And, to see the new year in, tensions flared as a US-led drone strike killed General Qasem Soleimani in Baghdad.
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On January 10th, Trump announced sanctions that went beyond oil and gas and now targeted construction, mining, manufacturing and textile goods. As a result, trade with Iran is flatlining worldwide and investors, companies and lenders should do well to avoid any partnership or investment with Iranian goods or businesses, such as the recently blacklisted, Mahan Air.
On the other hand, market impact hasn’t been as severe as one might have initially expected. Oil prices are still below the level they hit in September 2-19 after the Saudi Aramco oil attack.
The situation in China
The most significant impact on the global economy has emerged as a result of a Global Health Crisis, as a new strain of Coronavirus has all but isolated China from the rest of the world. The true impact on the economy resulting of this terrible human tragedy, is as yet unknown.
Short-term impact on the stock market in China has correlated to the global significance of this devastating virus: stock markets in china saw their biggest fall in five years as traders rushed to sell-off Asian equites amid continued fears about the impact of the Coronavirus on the global economy. Investors should keep a keen eye on the spread of this virus, as we could see it affect international markets quite severely should the number of cases of infection increase dramatically in key markets such as the US or Germany, for example.
The virus has also had a substantial impact on oil markets, with prices declining sharply as demand from China dissipates through diminished air travel, road transportation and manufacturing. Given the fact that China under normal circumstances consumes 13 of every 100 barrels of oil the world produces, we can expect the impact on oil markets to further increase should this global health crisis widen.
If not contained, retail sales and travel could suffer consequently in the next few months, especially as industrial production struggles to recover after last year’s extended slump and the consequences of the US-China trade war, which has already cut Chinese economic growth to its lowest level in 29 years.
How to navigate challenges
Such episodes of global nervousness often - counter-intuitively - represent considerable opportunity for those investors who are willing to buy when others are selling. Attractive opportunities typically arise in times of high volatility, which brings to attention the importance of relying on independent and unbiased advice before deciding to invest at a time of great global economic and political uncertainty.
Some of the highest returns in global markets often happen around periods of high volatility in an unpredictable fashion, and that is why thorough planning and a long time horizon give investors a great advantage. Over 10 years, equities have earned excess returns over cash 95% of the time. The return of a buy-and-hold investor in the S&P 500 over the past 20 years has been more than 220%, versus just 42% for someone who sold at each new all-time high and waited for a 5% pullback to reinvest.
Finally, one should always diversify an investment portfolio adding into low-correlated investments, include income-generating hard assets (like real estate), invest with a long-term horizon, and of course increase the understanding of risks.
With its strong influence on the multilateral trading system, the US is undoubtedly amongst the most powerful countries in the world when it comes to trade. Over the course of his presidency, Trump’s “America First” policy, however, has increasingly been undermining international trade laws. Over the past few years, the US president has been fighting numerous battles with some of America’s trading partners, using tariffs for leverage in negotiations. And although it may look like he’s done a lot, has this led to any progress? Let’s take a look at the main measures that Mr Trump has taken to protect American trade over the past four years.
The US vs. China trade war
The trade war with China which President Trump announced in 2018 is the most prominent trade conflict we’ve witnessed in recent years. The US President has been accusing China of unfair trading practices and intellectual property theft for years, whilst China has long believed that the US is attempting to curb its rise as an economic powerhouse.
The dispute has seen the two countries impose tariffs on hundreds of billions of dollars worth of one another's goods and although they recently signed a preliminary deal[1], some of the most complex issues remain unresolved and most of the tariffs are still in place. The US will maintain levies of up to 25% of approximately $360bn worth of Chinese products, whilst China is anticipated to keep tariffs on over $100bn of US goods.
United States-Mexico-Canada Agreement (USMCA)
Back in 2018, the US, Canada and Mexico signed a successor to The North American Free Trade Agreement (Nafta) which was renamed as the United States-Mexico-Canada Agreement or USMCA. The agreement governs over $1.1 trillion worth of trade between the three North American countries.
Renegotiating Nafta was one of Trump’s key goals for his presidency. "The terrible NAFTA will soon be gone. The USMCA will be fantastic for all!", he tweeted shortly after signing the new deal with America’s neighbouring countries.
However, despite the name change and the claims that the updated agreement would "change the trade landscape forever", a lot of the terms have remained the same[2]. Stronger labour provisions and tougher rules on the sourcing of auto parts were some of the most notable changes, however, analysts believe that their significance remains to be seen.
What’s more, a number of the other updates were discussed during negotiations which took place before Trump took office.
Tariffs on European cheese, wine & aircraft
There hasn’t been a trade deal agreed with the Europan Union as of yet. In 2018, after the US introduced tariffs of 25% on steel and 10% on aluminium imported into the country, the two sides went through a round of tit-for-tat tariffs with the EU announcing retaliatory tariffs on US goods such as bourbon whiskey, motorcycles and orange juice. A few months later, in October, the US imposed a new round of tariffs[3] on $7.5bn of EU goods, including French wine, Italian cheese and Scotch whisky. The US also imposed a 10% levy on EU-made airplanes which could hurt US airlines that have ordered billions of dollars of Airbus aircraft.
President Donald Trump has also repeatedly threatened to impose additional tariffs on European cars and although that hasn’t materialised yet, he has confirmed that he’s serious about it when he recently mentioned his plans again[4] during the World Economic Forum in Davos.
Trade deals with South Korea & Japan
One of Trump’s first moves as President of the US was to withdraw the country from the Trans-Pacific Partnership (TPP) – a proposed trade agreement between 12 countries, which eventually went ahead without America. Since then, Mr Trump has claimed two bilateral agreements with South Korea[5] and Japan[6]. However, the changes were so limited that Congressional researchers concluded that they barely qualified as trade deals.
With Japan, the US agreed on either levy cuts or full elimination on $7bn worth of agricultural goods, which is what it would have received under the Trans-Pacific Partnership too.
The most notable win that came from the agreement with South Korea is the extension of the 25% US tariffs against South Korean light-duty trucks to 2041. Previously, it was scheduled to expire in 2021.
Tariffs on steel and aluminium from Brazil and Argentina
In December last year, Mr Trump surprisingly announced on Twitter that he’s ‘restoring’ tariffs on steel and aluminium imports from Brazil and Argentina.
The two South American nations have been exempted from higher duty on both metals, but according to President Trump, both countries had been devaluating their currencies which he believes is ‘not good’ for American farmers.
There hasn’t been much progress since the initial announcement, but Brazil’s President Jair Bolsonaro said he had been assured by Trump that the tariffs won’t materialise.
[1] https://www.bbc.co.uk/news/business-51114425
[2] https://markets.businessinsider.com/news/stocks/us-canada-mexico-trade-deal-usmca-nafta-details-dairy-auto-dispute-resolution-2018-10-1027579947
[3] https://www.independent.co.uk/news/business/news/us-tariffs-trump-eu-goods-airbus-subsidies-wto-a9132001.html
[4] https://www.marketwatch.com/story/trump-doubles-down-on-threats-to-impose-tariffs-on-european-cars-at-davos-2020-01-21
[5] https://www.cnbc.com/2018/09/24/trump-signs-revised-trade-deal-with-south-korea.html
[6]https://www.bbc.co.uk/news/business-49834705
Gold now moves at its highest price since almost seven years ago, while global equities slid among recent political tension involving Iran and the US. The price of Gold shot up as much as 2.3% this week to $1,580 a troy ounce, its highest level since April 2013.
This subsequently boosted shares for manufacturing firms, as Newmont Goldcorp scaled 1.1% and Polyus International advanced 2.3%.
Natasha Kaneva, commodities analyst at JPMorgan, said: “Markets tend to overreact to geopolitics when trading is thin, as it has been during the post-holiday period, but investors are right to fret about what is happening in the Middle East.”
Aditya Pethe, director of Waman Hari Pethe, also remarked however that: “Demand could slow down because of the sudden jump in price, but once it stabilises, people will resume buying.”
Goldman analysts currently believe that Gold may in fact be a better bet than oil at the moment, but it all depends on what happens next in regard to the political situation between Iran and the US.
Nigel Green, the chief executive and founder of deVere Group, explains that as Tehran threatens “revenge” on the US over the killing of Qassem Soleimani, the commander of Iran’s elite Quds Force, who was in charge of the country’s regional security strategy.
It remains uncertain how, when, or if Iran will respond, but any retaliation is unlikely until after the end of three days of mourning.
Last week we saw the price of oil jump as a result of political tension. This week, Bitcoin, the world’s largest cryptocurrency by market capitalisation, jumped 5% as news of the strikes broke around the world on Friday. Simultaneously, the price of gold – known as the ultimate safe-haven asset - also moved higher.
We’ve seen Bitcoin price surges before during times of heightened geopolitical tensions. For instance, in August it jumped as global stocks were rocked by the devaluation of China’s yuan during the trade war with the US.
According to Nigel Green, this latest Bitcoin price increase underscores a mounting consensus that Bitcoin is becoming a flight-to-safety asset.
“Bitcoin is living up to its reputation as ‘digital gold’. Bitcoin - which shares gold’s characteristics of being a store of value and scarcity and of being perceived as being resistant to inflation – could potentially dethrone gold in the future as the world becomes increasingly digitalised.”
He continues: “With an escalation in geopolitical turbulence, which typically unsettles traditional markets, it can be expected that a growing number of investors will decide to increase their exposure to decentralised, non-sovereign, secure currencies, such as Bitcoin, to help protect them from the turmoil.
“The serious concerns created by geopolitical issues, such as the US - Iran issue will likely prompt an increasing number of institutional and retail investors to diversify their portfolios and hedge against those risks by investing in crypto assets.
"This will push the price of Bitcoin higher. In turn, due to the market influence of Bitcoin, other major digital currencies will receive a price boost.”
The deVere CEO concludes: “Bitcoin was one of the best-performing assets of 2019 and we can expect to see its investment appeal further strengthen as it becomes known as a safe-haven asset during periods of heightened geopolitical tensions.”
At least that is according to CompTIA, one of the world’s leading tech associations. Below, Jessie Dean of Oakmount Partners Ltd, an investment consultancy firm from the UK, discusses the complex tech-scape in the US.
True, San Francisco in California and the wider Silicon Valley area still provide the greatest number of vacancies and opportunities for Brits looking for career opportunities in the US, but it is North Carolina who CompTIA seems to think is serving expats with the best options. More specifically, the cities of Raleigh and Charlotte — both of which are part of the ‘Research Triangle Region’, an area known for its excellent tech and scholarly institutions.
Great plains instead of great beaches
California is the land of dreams. It’s everywhere, thanks to the success of Hollywood, in popular culture and imagination. Long stretches of golden coast; redwoods a thousand years old, and great cities packed with our favourite celebrities. North Carolina is different. If the average Brit was asked to conjure up images of North Carolina, it would probably represent something like a large red barn, isolated in an expanse of large overgrown agricultural fields.
So what is attracting the attention of CompTIA, and of British tech expats?
The shift back east is largely due to the quality of life that North Carolina can provide, and the greater disposable income that it provides.
True, San Francisco, Silicon Valley (that includes San Jose, Santa Clara, and Sunnyvale) still pay the best wages. The median salary for an IT worker in San Jose is over $122,000 per annum. But the cost of living in this area is a whopping 43 per cent higher than the national average.
The same IT worker might stand to make somewhere between $83,000 and $88,000 in the Research Triangle, but the cost of living in North Carolina is actually below the national US average — for now. What this means is, even with the pay cut, a job in North Carolina will land you more money in your pocket at the end of the month to spend on whatever you want.
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Big Tech and finance investment is soaring in North Carolina
The shift to North Carolina isn’t all about walking away with more money. Big Tech itself is investing in new areas, including IBM, Cisco Systems and even possible Amazon and Apple. There is also an increasing number of companies who are expanding their operations into North Carolina from the finance and consultancy sector. Including a number of big and increasingly digitised firms such as Wells Fargo, Accenture and Bank of America. The allure comes from tax breaks and other regional benefits — such as the wealth of talented students from the increasingly influential universities: powerhouses such as UNC Chapel Hill and Duke University. North Carolina is also a grand place to acquire local cost-conscious start-ups.
Is California’s time in the sun at an end?
San Francisco is one of the most expensive cities in the world. Living space is extremely limited — with the City located on a small peninsula out into San Francisco Bay. The local government won’t even build upwards, in the form of skyscrapers, as they do not want the views to be spoiled by the City’s less lofty residents. It is becoming hard to ignore that many of the positive factors about living in California — the weather, the good colleges — are now counting against it.
Then there is also the massive problem of homelessness. In some of the City’s poorer boroughs, such as Tenderloin, huge gangs of homeless openly inject with needles in broad daylight; take hallucinogens, and make some roads impassable at night. All of these factors, above and more may account for the fact that, according to CompTIA, more residents left San Francisco than any other city in the last quarter of 2017.
The current shift of power also has echoes in the not-too-distant past of America’s history. Boston was once a the ‘traditional tech centre’, and is now the 17th most desirable destination for tech expats, despite the City being within the commuter belt of Harvard, MIT, and other world-famous and prestigious institutions. A typical salary in tech for a Boston employee is a much lower $94,000 than in Silicon Valley, but the costs of living are still 35 per cent above the national average. Other ghosts of the past include Washington DC and Baltimore.
Though it is worth remembering that San Francisco still has plenty of vacancies for engineers willing to pay the high costs of living. So California’s role to play in tech is far from over. The balance will not shift overnight, and it was always inevitable that some other location would come to challenge it in time. For now, it is still wise for British expats to heed the old advice, to “Go west, young man”. Just not as far west as was typically expected.
The comments from Nigel Green, chief executive of deVere Group, come after China fuelled hopes that a deal can be reached to end its trade war with the US after agreeing with Washington to roll back on some tariffs.
The deal to reduce trade tensions could encourage the International Monetary Fund (IMF) to revise up global growth forecasts next year.
Mr Green notes: “There has been an argument that in regard to the trade war, China was holding out, playing the long game and waiting for President Trump to leave office, before dealing with another administration.
“Whilst this argument might have held water before, I now believe this is not the case – and it is what is fueling recent developments in the trade war negotiations.”
He continues: “It is likely that China is currently fueling hopes to reach a phased agreement in the trade dispute with the U.S. and cancel tariffs as soon as possible because it will help President Trump’s re-election.
“His re-election would suit them for two major reasons.
“First, because they will assume that reaching a deal with Trump to end the damaging trade war will probably be easier than with some others. These include Elizabeth Warren, the potential Democratic rival, who could, say many supporters, win next year’s presidential election.
“Ms Warren can be expected to be even tougher with China than Trump, and not only on trade, but on other difficult issues, including climate change and human and labor rights.
“And second, despite the trade war, Trump’s policies and rhetoric have proven to be strategically helpful to China in achieving its longer-term goals.
“In many respects, President Trump has undermined Washington’s global credibility, international governance bodies and key alliances, and has been indifferent if not antagonistic towards major trading agreements.
“This all compromises America’s standing as the world’s primary superpower and it provides China with openings and opportunities it has previously never had in terms of global influence and setting international trade conventions.”
The deVere CEO concludes: “The positive signs coming from Beijing and Washington on the trade talks between the world’s two largest economies have been welcomed by stock markets – some reaching all-time highs this week.
“Investors’ exuberance will grow further still should the deal be cemented, and also should Trump be re-elected.
“However, US investors should perhaps also question whether Mr Trump’s administration has, in fact, handed China a great strategic opportunity that could damage America’s preeminent superpower status in the longer-term and, therefore, its economic dominance.”
Activity was particularly subdued in the difficult to interpret third quarter of the year, when USD 622.2bn worth of deals were struck globally, down 21.2% on 3Q18 (USD 789.7bn) and with 1,164 fewer deals than last year.
The US market, which had so far seemed immune to the global downward trend at play since the middle of last year, is starting to be impacted. At USD 262.9bn in 3Q19, US M&A is down 32.1% on 3Q18 (USD 387.1bn). Worth USD 1.25tn YTD, US M&A is still marginally up on the same period last year (USD 1.23tn), just about retaining a 50% share of global M&A activity, down from 52.5% in 1H19. Marred by the trade and tech war between Washington and Beijing and persistent political instability in Hong Kong, YTD M&A activity in Asia is down 26.5% over last year to USD 417.2bn.
Despite a small recovery over the summer, European M&A remains 29.4% lower compared to the same period last year, as a weakening European economy and geopolitical tensions continue to dampen activity. However, London Stock Exchange’s USD 27bn acquisition of US-based financial data provider Refinitiv, the largest deal globally in 3Q19, exemplifies the strength of European outbound M&A, which at USD 187.1bn is up more than 20% on last year and at its highest YTD level since 2016.
Beranger Guille, Global Editorial Analytics Director at Mergermarket commented: “Whether they are motivated by the desire to get more growth, or a way to secure future survival, deals are getting larger. On the back of the longest equity bull market in history, and amid persistently low interest rates, corporates have ample cash reserves and appealing debt financing options at their disposal to pursue M&A. This context and the growing feeling that it will not last forever are pushing valuations up.”
That possibility has pushed many government bond yields to new lows in recent weeks, while global equity prices have been volatile. Below Rhys Herbert, Senior Economist, Lloyds Bank Commercial Banking looks at the evidence.
And while some economic data might be confusing, I think there is a clear message.
First, that global economic growth has slowed and may slow further, and second, that there is a pronounced difference between weak or even falling activity in the manufacturing sector and still relatively buoyant service sector.
So, what might be causing this?
Manufacturing v services
It seems probable that the manufacturing sector is being hurt by the ongoing trade dispute between the US and China. Indeed, the US manufacturing sector is now in decline for the first time in a decade.
And the Bank of England (BOE) flagged last week that, because the trade war between the US and China had intensified over the summer, the outlook for global growth has weakened.
The Bank’s Monetary Policy Committee added that the trade war was having a material negative impact on global business investment too.
The main impact is on confidence - or more accurately lack of confidence – which is holding manufacturers back from investing. As a result, we’ve seen a slowdown in world trade and in demand for manufactured goods.
In contrast, demand for services is being supported by relatively buoyant consumer spending. Yes, consumers are probably reluctant to splash out on big ticket items like cars right now, but overall, they are still willing to spend.
Consumers are probably reluctant to splash out on big ticket items like cars right now, but overall, they are still willing to spend.
The central conundrum
The key question going forward is whether it is more likely that manufacturing rebounds or that service weaken from here?
That is the conundrum that central banks need to weigh up in setting policy.
So far, the majority have decided that they are sufficiently concerned about the downside risks to take out some insurance and adopt policies designed to support economic growth.
Back in July, the US Federal Reserve did something it had not done for over a decade. It reduced interest rates – by a quarter point to 2.25% (upper bound).
It was widely seen as an insurance move against increasing global economic headwinds, emanating mainly from the US-China trade dispute.
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It repeated the move last month, lowering the target range for its key interest rate by 25 points to between 1.75% and 2%. The accompanying statement repeated July’s message that, while economic conditions are probably sound, a bit of insurance against downside risk was advisable.
Meanwhile, in his penultimate meeting in September, this month, European Central Bank President Mario Draghi announced a package of stimulus measures including a reduction in its deposit rate to a record low of -0.5% and the introduction of a two-tier system to exempt part of banks’ excess liquidity from negative rates.
He also announced a resumption of the bond-buying programme at €20bn a month from November and, importantly, signalled no end date to purchases.
Draghi can argue that the weak Eurozone PMI suggests the economy is stagnating, supporting this action.
But the UK has not followed this strategy.
On the sidelines
The BOE is still wary enough about potential inflationary pressures from a tight labour market and rising wage growth to talk about the possibility of interest rates needing to go up.
But last month, the BOE concluded that the longer that uncertainty goes on, the more likely it is that growth will slow, especially given the weak global economy.
We will see if the message changes, but the likelihood is that BOE rate setters will want to continue to remain on the sidelines and keep rates unchanged at 0.75%, not least because the Brexit outcome remains unsettled.
The government’s official preferred Brexit position is for a deal and that assumption in the Bank’s forecast points to interest rates rising “at a gradual pace and to a limited extent”.
But the BOE also noted growing concerns about risks to growth, joining the US Federal Reserve and the European Central Bank, which both seem to have decided that risks are skewed to the downside.
But, while escalating tariff wars, slowing growth in the US and China and Brexit uncertainty mean there are credible reasons to worry that 10 years of steady expansion could be coming to an end, it is still far from certain that the current slowdown means a recession is looming.
Celine Hartmanshenn, Global Head of Credit from Stenn Group, an international provider of trade finance, provides her thoughts on the deficit fall.
The trade gap between China and the US is shrinking, reflecting the overall softening of global trade volumes and hinting at the movement of supply chains out of China.
US macro indicators are mixed. Unemployment remains low and prices are in check. But consumer and business spending has cooled, manufacturing output is at its lowest level in a decade, and the services sector – which accounts for 80% of economic activity – is slowing down. The lingering uncertainty stemming from the trade war and sagging global economy has caused the outlook for 2020 to dim, with the expectation of the US limping along at 1-2% GDP growth. It’s not an outright recession, but it’s certainly not a boom either.
There’s no denying that the US-China trade war is a drag on the US economy. The disruption to supply chains is expensive for businesses, the tariffs now cover a wide range of goods, and because financial markets can’t quickly adjust, they are more volatile.
So, what’s the solution? Certainly not a tariff war with the EU. The US will implement its first tariffs on aircraft and agricultural goods in 2 weeks. The EU is likely to retaliate. The aftershocks could easily tip the US into recession.
The world will be watching this month as China and the US go back to the negotiating table. Whether they like it or not, these two economies are interconnected. China is dealing with massive overcapacity, high debt levels and a need for US dollars. And the US relies on China pumping these dollars back into the US to fund its debt.
Here Chris Heerlein, author of Money Won’t Buy Happiness – But Time to Find It, and Investment Adviser Representative and partner at REAP Financial LLC, provides expertise on the little known tax breaks you could be making the most of.
The Tax Cuts and Jobs Act of 2017 gives us a lot to think about when crafting a financial framework. With the legislation scheduled to run through 2025, you want to be aware of certain provisions and exceptions in the tax-reform law and how you can take advantage of them.
State taxes
The tax-reform changes impose a $10,000 limitation on the deduction of state taxes. The IRS says that maximum does not apply to property taxes imposed on business property. For those of you with home offices, to the extent that you can allocate real estate taxes on your home to that office, understand that’s deductible outside or above the $10,000 limit.
Home equity lines of credit
If you take out a home equity line and use the proceeds to reinvest in your home, such as a new kitchen or a new wing in your bedroom, the interest remains deductible. But if you use those proceeds to, say, pay off college tuition or credit cards, there’s no allowable deduction. We see families borrowing money on their home to use for repairs, improvements, and sometimes even to cover retirement income and keep their tax bracket under control. Borrowing home equity can be good, but you need to keep track of what you’re doing with the proceeds because if they’re invested in the home, you can still take a deduction.
Charitable contributions
These are deductible, as they always were, but the reason to be concerned about this category is the doubling of the standard deduction. Prior to the new tax law, only about a third of people in the United States actually itemized deductions. And after this increase in the standard deduction, guess what? It goes down to less than 10% of Americans.
Think about that: 90% of people will claim a standard deduction. Now, why does that affect charitable contributions? Well, as you may know, you can claim a deduction for a charitable contribution only if you itemize. If you don’t itemize and take the standard deduction, you get no tax benefit for charitable contributions. But here are some workarounds:
For people over the age of 70 ½ — the age when you have required minimum distributions on your IRAs and 401(k)s — there’s something called a qualified charitable distribution (QCD), and you can take up to $100,000 out of your IRA each year and basically have it sent directly to a qualified charity. This is a wonderful strategy for families that give small amounts and large amounts. And you avoid all tax on that distribution that ends up at the qualified charity. You can claim the standard deduction and still avoid tax on the IRA required distributions, but remember, the first dollars you give to charity should be money out of your IRA.
What about those of you younger than 70½? Here’s what you might want to do. This is a little outside the box but it’s a powerful strategy. Bundle several years or so of contributions to your qualified charity. Let’s pull five years out as an example. You can actually bundle these contributions into a single year so that you will go over the standard deduction in that one year and claim a deduction for the excess contributions. A Donor Advised Fund (DAF) is when families put money into the fund, they get the full tax deduction for whatever goes into the fund that year, plus they can distribute that money over time, at their direction. I recommend this a lot of times to clients, especially those taking the standard deduction.
Entertainment and meal expenses
There are some big changes when it comes to entertainment expenses and meal expenses. The new tax law disallows any deduction for entertainment expenses period. Meals — an integral part of business dealings, of course — are a bit different. The IRS says you can still deduct the meal expense as long as you have a separate receipt. Going forward, make sure that your food costs for clients are separately stated on those invoices and receipts. That’s a big one and can add up fast.
Then there’s the very important SSA-44 Form. Let’s say you’re a high-wage earner and you are going to work half the year when you retire at 65. You get off the employer health care plan and go on Medicare. Well, the government dictates your Medicare premiums by how much income you report. If you go over these thresholds, you are going to get a letter in the mail that says, “You’re Medicare premiums are going up.” And I’m talking perhaps $500-plus per person more for the same coverage your neighbor is getting. The SSA-44 Form is something you would file with your tax return in a year that you retired and were over these income limits, and they’ll give you a once-in-a-lifetime exception around those limits.
Nigel Green, the chief executive of deVere Group, which has $12bn under advisement, is speaking out after Beijing announced on Friday it will impose new tariffs on $75 billion worth of US goods and resume duties on American autos.
The Chinese State Council said it will slap tariffs ranging from 5 to 10% in two batches. The first on 1 September and the second on 15 December.
Mr Green notes: “China and the US are playing a dangerous game of brinkmanship which will inevitably dent global growth at a time when the global economy is headed for a serious downturn.
“Both sides are getting hurt by the ongoing tit-for-tat trade war and given that they’re the world’s two largest economies its negative impact is far-reaching and intensifying. There’s some serious collateral damage.
“It is likely that there will be further retaliations in the form of tariffs, punitive sanctions on each other’s nation’s firms and, possibly, currency devaluations.”
He continues: “The already volatile markets have been rattled again by today’s news. Investors are getting spooked.
“However, the trade war will likely prove a blip for long-term investors.
“Indeed, investors should embrace some volatility as important buying opportunities.
“Fluctuations can cause panic-selling and mis-pricing. Sought-after stocks can then become cheaper, meaning investors can top up their portfolios and/or take advantage of lower entry points. This all typically results in better returns.
“A good fund manager will help investors seek out the opportunities that turbulence creates and mitigate potential risks as and when they are presented.
The deVere CEO concludes: “Many savvy investors will be using the fall-out of the US-China trade war to generate and build their wealth.”
