Fall is a good time to do some tax planning

Being a retired senior, reducing income taxes is key when living on a fixed income. I usually joke with my friends that I fix my own income each year. I do my best to minimize my quarterly installment payments to the tax department.

With holiday season coming soon, you are going to be busy visiting with family & friends and Christmas shopping. You will be glad during tax filing season that you planned ahead! You could reduce your tax bill or generate a bigger tax refund.

Tip 1 – Add up your medical bills from this year and compare them to last year. If you have spent less, you may want to reschedule your dentist appointment from early January to December. Do you need new eyeglasses or hearing aids then buy them now. Planning a winter vacation that requires medical shots, get them ahead of time.

Tip 2 – Add up your charitable donations and compare them to last year. If you have donated less or nothing at all, now would be a good time to be generous. Wealthy people donate stocks, ETFs and mutual funds that have a capital gain instead of money. They don’t have to pay any tax on the gain and the full amount is tax-deductible creating a bigger tax deduction.

Tip 3 – Get out your lasts year’s tax return and see if this year’s income will be higher than last year. Will you be in a higher tax bracket? If yes, an extra contribution to your tax-deductible retirement account could generate a bigger tax saving. (Plus stock market returns have been known to be higher from November to April) If you are retired and your income is lower than last year, consider withdrawing a little extra from your retirement account and put it into a tax-free account.

Tip 4 – Have you sold any investments in 2019 that will generate a taxable capital gain?  Do some tax loss selling of investments that are underwater to offset the capital gains? In Canada, a capital gain loss can be carried back three taxation years to offset capital gains incurred in that year. You can always buy them back later. (You will have to wait 31 days to re-buy to avoid “superficial loss rules”)

Tip 5 – Postpone selling your investment winners in non-registered accounts until January to avoid paying tax in April. If you have losses, consider selling some winners and buy them back again to increase your cost base.

Tip 6 – Look for ways to legally split income by transferring income producing assets to family members that are in a lower tax bracket. For example, in Canada you can contribute to your spouses’ retirement fund and claim the deduction.

Tip 7 – Top up education savings plans for your children or grandchildren to ensure your plan gets any eligible government grants. (Canadian grants stop the year in which the child turns 18)

Tip 8 – Getting a big year-end bonus? It may be better to postpone getting it to January or have your employer deposit the bonus directly into your retirement account!

Tip 9 – Check to see if there are any changes to tax laws that could affect your tax return for 2019 & 2020. There could be some new tax deductions or some deductions that could be eliminated.

Tip 10 – Small business owners should go over their account receivables and make a list of potential bad debts. Consider writing off any bad debts that are more than 120 days overdue before tax season ends.

The tax man is happy to pick your pockets for more money. It is up to you to legally avoid paying them too much. Remember, rich people stay wealthy because they can afford the best tax specialist to reduce the amount of tax that they pay.

Do you have any year-end tax planning tips?

 

 

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Reality Check on Trump’s tax cuts and trade deals

Image result for april fools with Trump

Let me start with Larry Kudlow, the Director of the National Economic Council, who said back in April of 2018 that he believes the U.S. tax cuts could generate GDP growth of 5 percent annually for a short time. The U.S. economy did manage a 4.2% GDP growth in the second quarter of 2018 but the annual rate was only 3.1 percent. Sorry, forever Trumpers but Obama had 2.9% GDP growth in 2015 without the tax cuts.

GDP growth projections even fooled the Federal Reserve which signaled three rate hikes for 2019 but the slow down in world economic growth has forced the Fed to put any more rate hikes on hold. Market watchers believe there is a strong possibility that the Fed may have to cut rates if U.S. growth continues to slow down.

April fools : Tax cuts will for pay themselves

  • The budget deficit grew 77 percent in the first four months of fiscal 2019 compared with the same period in 2018, the U.S. Treasury reported earlier this month. The total deficit was $310 billion up from $176 billion over the same four-month period a year earlier. The cause of the massive increase, according to Treasury officials: tax revenues fell dramatically and government spending increased significantly. Even worse news is that the budget deficit is projected to exceed $1 trillion in 2020.
  • The national debt, which has exceeded $21 trillion, will soar to more than $33 trillion in 2028, according to the non-partisan Congressional Budget Office (CBO). By then, debt held by the public will almost match the size of the nation’s economy, reaching 96 percent of gross domestic product, a higher level than any point since just after World War II and well past the level that economists say could court a crisis.

Trump campaigned on a promise to shrink the country’s trade deficit, arguing loudly during campaign stops before and after taking office that bad trade deals have allowed other countries to take advantage of the United States. Trump imposed tariffs as a way to reduce the trade deficit with America’s trading partners.

April Fools: Imposing tariffs will reduce the U.S. trade deficit

The U.S. trade deficit hit a 10-year high in 2018, growing by $69 billion, according to figures released March 6 by the Census Bureau. Trump’s constant verbal blasts and a number of arm-twisting PR stunts focused on efforts to revive American manufacturing and reduce dependence on imported goods such as steel and other materials failed to produce any meaningful results.

Trump promised to scuttle all those bad trade deals and replace them with pacts that would re-energize our country’s manufacturing sector. Very little has happened on any of those items during the past two years.

Yes, Trump pulled the United States out of the Trans-Pacific Partnership and renegotiated the North American Free Trade Agreement, both of which he called some of the “worst” deals”, and he’s currently pursuing separate deals with China and the European Union.

It’s important to note, however, that Trump has signed just one new trade deal, with South Korea. The NAFTA replacement, known as the US-Mexico-Canada Agreement, still needs to be approved by Congress and lawmakers on both sides of the aisle have raised concerns. Canada and Mexico will not ratify the new agreement unless the U.S. remove the tariffs on steel and aluminium

So far, engaging in trade wars with just about any country America does business with has not delivered promised results of more jobs for U.S. workers. Companies are not relocating manufacturing plants back to America.

 

Image result for no joke

 

Blame Yellen and Trump for rapid raising U.S. interest rates

  

I believe that the former head of the Federal Reserve, Janet Yellen, is partly responsible for rapid raising U.S. interest rates. Although, GDP growth wasn’t overheating during her term, she could have started to unwind the Fed’s balance sheet which had 4 trillion dollars’ worth of treasuries. Instead she bought more treasuries after they matured and expanded the balance sheet by buying more treasuries with the interest earned.

This kept long term interest rate extremely low and allowed corporations to borrow money at low rates to buy back their shares. The Fed’s lack of action has help fuel the longest bull market in history.

Sorry Trump supporters but your man is also to blame. His policies are inflationary!

  1. The trump’s administration decision to pull out of the Iran deal has cause oil prices to rise. One million barrels of oil a day is being taken off the market.
  2. Trump’s tariff war with China and other trading partners will force corporations to increase prices because their costs are going up. Costs could go up even higher if Trump increases tariffs on imports from China from 10% to 25% in January 2019
  3. The corporate tax cuts and government spending has juiced the economy causing unemployment to fall to the lowest level in nearly fifty years sparking fears of raising wage growth.

The Trump’s administration spin that the tax cuts will pay for themselves is simply not true. Both the Reagan and Bush tax cuts added to the fiscal deficit.

The new Fed chairman, Jerome Powell has a difficult job of unwinding the Fed’s balance sheet by buying less treasuries just as the federal government is issuing more debt to cover the Trump’s tax cuts. Trump will add another trillion dollars to the deficit. More supply of treasuries plus less buyers equals raising interest rates.

Trump blaming Powell for the massive drop in the stock market last week is ridiculous. No one knows for sure what caused investors to hit the sell button. Was it fear of raising interest rates, a forecast of slower global growth by the IMF, fear of an escalating trade war with China or fear of runaway inflation.

My guess is all or none of the above. Maybe the stock market was just due for a correction.

 

 

 

 

Sorry America, Canada is imposing retaliatory tariffs on U.S. goods

We have been good neighbours for 151 years and we share the longest unsecured international border in the whole world.  We have fought and died together in too many wars to even count. However, Canada’s foreign minister announced Friday that Ottawa plans to impose about $12.6 billion worth of retaliatory tariffs on U.S. goods on July 1, joining other major U.S. allies striking back in the escalating trade dispute.

Canada’s plan taking effect next week will include imports of U.S. products such as yogurt, caffeinated roasted coffee, toilet paper and sleeping bags. Canada’s announcement is part of larger fallout from U.S. President Trump’s tariffs on steel and aluminum imposed on Canada, the EU and other nations. As a result, some of the U.S.’ biggest trading partners have retaliated with counter-tariffs.

 “We will not escalate, and we will not back down,” Freeland said.

Mexico’s tariffs took effect June 5 on U.S. products such as pork, cheese, cranberries, whiskey and apples. The EU enacted tariffs Friday on more than $3 billion worth of U.S. goods including bourbon, yachts and motorcycles.

The White House’s stated goal in implementing tariffs is protecting U.S. jobs, but the initial business response suggests that U.S. companies are taking a hit. Companies are coping with the tit-for-tat tariffs by increasing prices or making business changes to cope with higher costs.

Harley-Davidson, an American Icon, is an example why Trumps’s protectionist agenda may not work.

In May 2017, Harley said it planned to build a plant in Thailand. Harley’s CEO, Matt Levatich, said the decision was made as part of a “Plan B” when Trump dropped out of the Trans-Pacific Partnership. The plant would allow Harley to avoid Thailand’s tariffs on imported motorcycles and help the company obtain tax breaks when exporting to neighbouring countries.

In January Harley announced plans to close its Kansas City plant, leaving 800 workers without jobs. It will shift operations to another plant in York, Pennsylvania, and hire some workers there, but ultimately there will be a net loss of 350 jobs. Days later it said it would spend nearly $700 million on stock buybacks that would benefit shareholders.

The company also announced on Monday it will shift the production of its Europe-bound motorcycles overseas as a result of the EU’s retaliatory tariffs. It’s not exactly clear which factories will take on the excess production for Harley. However, Harley’s Street-model bikes are made in India for Italy, Spain, and Portugal. More American jobs could be effected.

Harley-Davidson took its tax cut, closed a plant, and bought back stock.

The chart below is Harley-Davidson’s stock price from Trump being elected President to Friday’s closing prices. Is it safe to assume that both shareholders and workers are not benefiting from Trump’s protectionist agenda?

The automotive industry is Trump’s next target for imposing tariffs. Trump’s Commerce Secretary Wilbur Ross plans two days of public hearings on July 19-20 aimed to wrap up the probe into whether imported vehicles represent a national security threat by late July or August.

Two major auto trade groups warned imposing 25 percent tariffs on imported vehicles would cost hundreds of thousands of auto jobs, dramatically hike prices on vehicles and threaten industry spending on self-driving cars.

Lets hope that this trade war with our American neighbours will not accelerate! Wishing them a Happy 4th of July!

 

 

 

 

 

 

Trump Tariffs are all about politics and not national security

 

Canada and Brazil are likely to bear the brunt of any tariffs on steel imposed by President Donald Trump. According to the department’s International Trade Administration, Canadian and Brazilian steel comprised 16 percent and 13 percent of U.S. steel imports as of September 2017. China is not one of the top 10 importers of steel to the U.S. (take a good look at the above pie chart)

Top foreign sources of aluminum included Canada (56 percent), Russia (8 percent) and the United Arab Emirates (7 percent) between 2013 and 2016, according to the United States Geological Survey.

In my humble opinion, there is little justification on applying a 25% tariff on steel and a 10% on aluminium based on national security. The majority of steel and aluminium that the U.S. imports comes from military allies.

Now, the timing on this tariffs are somewhat suspect with a congressional election in the 18th district of Pennsylvanian next week. In case you didn’t know, Pennsylvania manufactures a lot of steel. This is Trump country, he carried this district by 20% in the 2016 election. The race is so tight that Trump had a rally in Pennsylvania supporting Rick Saccone.

“Do me a favor,” he said to the large crowd gathered in a hangar at the Pittsburgh airport. “Get out on Tuesday, vote for Rick Saccone, and we can leave right now.”

Trump also using tariffs as a bargaining chip in NAFTA negotiations

Canada and Mexico received a temporary exemption from the tariffs. It will depend on whether the changes that are made to NAFTA will satisfy Trump.  The seventh round of talks in Mexico produced very little process. The final round of NAFTA talks are schedule in Washington sometime in April. The Trump tariffs will put extra pressure on Canada and Mexico to give Trump a deal that will help him get republicans elected this November.

President Trump’s decision to impose tariffs on foreign steel and aluminum likely precedes an exit from NAFTA, according to Goldman Sachs.

Stock Markets don’t like tariff wars

Tariffs will artificially boost input costs and increase the cost of imported finished products. The fear is an increase of inflation, leading to raising interest rates which would dampen economic growth. The other fear is that corporations will be unable to pass on an increase in input prices which could lead to job cuts.

I expect more tough talk on trade from President Trump because many American voters think that the wealthy will benefit the most from tax cuts. I believe that stock market volatility will intensify over the next few months.

 

It may be a good time to raise some cash and pick up some bargains.

 

Are tax cuts already priced in U.S. stocks?

Many stock market pundits have conflicting opinions as to how much of the tax cuts are baked into current stock prices. Some experts believe that a selloff in the stock market will occur in January as money managers rotate out of technology and into other sectors that will benefit the most from tax reform.

Their rational is tech companies were in a low tax environment before tax reform was passed and it is better to take profits when lower personal tax rates take effect in 2018.

In comparison, sectors like transportation, telecom, retailing and banking have high tax rates. In addition, the new tax bill also offers substantial write offs for new capital expenditures. Industrials, energy as well as telecom companies require large capital expenditures in order to grow their businesses. However, it is difficult to predict if and when these expenditures will occur.

“In a special report to clients, Barclays Capital analyst Maneesh Deshpande and team calculate that the benefit is less than it appears: While the statutory corporate tax rate is set to fall from 35 percent to 21 percent, the effective rate for S&P 500 companies (the rate companies actually pay after all the accounting trickery) is set to fall from 26 percent to 20.7 percent.”

On the other hand, some market watchers believe that tech companies should still be in your portfolio. There is still room to run higher because they have an opportunity to take advantage of the repatriation tax holiday which reduces the tax rate from 35% to 15.5%. The top 5 U.S. tech companies that have cash overseas:

  1. Apple – 230 billion
  2. Microsoft – 113 billion
  3. Cisco – 62 billion
  4. Oracle – 52 billion
  5. Google – 49 billion

Although, the last repatriation tax holiday was at a much lower tax rate. The money was mostly given back to shareholders in the form of higher dividend payments and share buybacks.  Should you invest hoping for history to repeat itself?

Secretary of the Treasury, Steven Mnuchin said:

“There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done.”

I tend to agree that a large portion of tax cuts are already priced in most U.S. stocks. For example: Charles Schwab (SCHW, $52.04) has had enough of the tax man. The online stock broker and banker has paid out a stunning 37% of its income in taxes over the course of the past five years, versus a rate in the mid-20% range for most other American companies. It was trading around $45.00 in Nov and it is up $7.00 or 15.5% in just a few short weeks.

The chart below contains the one year return for tech (xlk), financials (xlf), industtials (xli) and energy (xle):

Three of those sectors have already had above average returns for 2017. The energy sector has lagged but tax reform alone will not be enough to propel the energy sector higher. The price of oil is still the main factor in increasing the value of oil stocks.

Another factor to consider is the labor market is extremely tight and the post-recession surplus of economic potential may have run out. The tax reform bill may end up boosting inflation by more than it lifts economic growth encouraging the Fed to be more aggressive with interest rate hikes in 2018.

I am cautious optimistic that U.S. stock market returns will be positive in 2018. I believe that volatility will come back next year and offer some good buying opportunities. It could turn out to be a stock pickers market.

Are you buying the dips or selling the rallies?

 

 

 

 

 

 

Home bias adds sector risks for investors

 

 

 

 

 

 

 

Legendary investor Warren Buffett, among others, is notorious for telling investors to buy what they know. Basically, Buffett and his enthusiastic followers suggest investing in companies that you really understand or at least know enough about them to be able to explain how they make money.

That is fairly good advice if you are an American since the S&P 500 generates nearly half of its revenue from outside of the United States. However, there is still a lot of risk in the form of sector concentration. For example, the tech sector accounts for nearly 21% within the S&P 500.  Do you remember the bursting of the dot com bubble?

Home bias for Canadian investors is really risky. Seventy–five percent of the Toronto stock market is dominated by three sectors, energy, materials and financials. There are only a handful of companies in other sectors that are available to further diversify your portfolio. Year to date, the Toronto stock exchange is only up 5% compared to the S&P 500 which is up 18.5%, see chart below:

The Canadian market has under-performed when compared to the U.S. markets for the past five years. The main reason is the decline in oil prices which has effected many non-energy sector companies which still rely energy prices in determining their revenue growth. For instance, Canadian banks may rely on loans to energy companies to drive their growth rates. See the 5 year performance chart below:

Why home bias exists

Vanguard’s Investment Strategy Group identified a range of reasons why investors might not embrace global diversification, including concerns about currency risk and an expectation that their home country will deliver out sized returns.

One factor we identified—preference for the familiar—seems particularly relevant. With so much global uncertainty about geopolitics, monetary policy, and the economic outlook, it’s understandable why investors may not want to stray too far from home.

Why Canadian markets may continue to under perform the U.S.

  • Oil and gas exports are land locked and selling at a huge discount!
  • The housing market is slowing down due to a 15% foreign buyers tax, tightening mortgage rules and higher mortgage rates.
  • Tariffs on softwood lumber and airplanes from our largest trading partner (U.S.) has put the success of re-negotiating NAFTA questionable.
  • Passing of the U.S. tax reform legislation will make investing in Canada less attractive (plus we have a carbon tax and high electricity rates).
  • Canadian consumers are carrying high levels of debt which will slow down spending.

Exchange traded funds are a low cost way to diversify your portfolio outside of North America. Many providers offer the ability to hedge fluctuations in foreign currencies. 

The markets are due for a correction, I would recommend slowly increasing your exposure to the U.S. stock market.