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May 2017 - In This Issue:
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HOME OFFICE DEDUCTIONS: THE EASY WAY AND THE HARD WAY
EMOTIONAL INVESTING
LIVING TRUSTS AND FINANCIAL PRIVACY
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If you have a disabled child or family member, meeting his or her needs is a top priority. You provide physical and emotional support, arrange for care, and coordinate essential benefits. Providing trustee services for those with special needs is a core competency at Garden State Trust Company. We fully understand what a special needs trust requires and are committed to providing quality, caring and responsive services.
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Siobhan Connolly, Vice President and Trust Officer, recently wrote for a publication, “I have found my passion focusing on Special Needs Trusts which often require navigating the dilemmas faced by special needs clients and their families. I am honored to work with these families and take pride in helping them provide the best life possible for their loved one”.
Because of our commitment to the Special Needs Planning area, we are extremely proud to announce we have been added as a financial resource to The Special Needs Alliance, www.specialneedsalliance.org, a national, non-profit organization committed to helping individuals with disabilities, their families and the professionals who serve them.
Looking forward to a sustained stretch of warmer weather!
Sincerely,
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HOME OFFICE DEDUCTIONS: THE EASY WAY AND THE HARD WAY
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Beginning in the 2013 tax year, the IRS gave taxpayers a choice when it comes to the home office deduction. To avoid the necessity of detailed recordkeeping, a new “safe harbor” deduction was created for home offices. The simplified deduction was set at $5 per square foot of the home office space, up to a limit of $1,500 (300 square feet).
The existence of the new safe harbor and relief from recordkeeping does not change the other requirements for taking the home office deduction. The office must be used regularly and exclusively for business. The office should either be the principal place of business or used for administrative or management activities when the taxpayer has no other office for handling those chores. An office kept for the convenience of the employer, such as a salesman who lives away from company headquarters might have, also will qualify.
In many cases, the actual expenses for the home office will be greater than the safe harbor. These may include, for example, a share of utilities and insurance costs. For example, the IRS reported that for the 2010 tax year, the average home office deduction was $2,600, so many people will find the safe harbor limit too low. The taxpayer may choose the traditional route of actual expenses instead of the safe harbor. What’s more, that choice may be made for each tax year, without regard to the choices made in earlier years. Thus, the taxpayer may alternate between methods, choosing the one most favorable each year.
THE SOMEWHAT HARDER WAY
With the traditional method of calculating the deduction, a proportionate depreciation deduction is permitted for the office space. The amount of the depreciation is recaptured and taxed as income when the house is later sold.
The safe harbor alternative does not generate depreciation recapture.
The deduction for the home office may not exceed the net income of the business. If the business is showing a loss for the year, the loss may be carried forward when the traditional method of calculating the deduction is used. However, the carryover is not permitted with the safe harbor approach. What’s more, any carryover loss created from the actual home office expense calculations may not be deducted in years in which the safe harbor is elected.
Although the simplified deduction was intended to make life easier for taxpayers, the reality is that many taxpayers will have to figure the deduction both ways to decide which is the better way to go.
The IRS reports that the number of taxpayers claiming the home office deduction has held steady over the last six years, at roughly 3.4 million. The aggregate value of the deductions claimed has dipped, falling from nearly $11 billion in 2010 to $9.5 billion in 2014 (most recent available data). Most of the reduction in deductions occurred in 2013 and 2014, suggesting that there was in fact a significant shift to the easier way of claiming the home office deduction. The IRS does not break out those figures.
(May 2017)
© 2017 M.A. Co. All rights reserved.
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We like to think that since the advent of modern portfolio management practices, investing in stocks and bonds has become a cerebral, analytical process with no room for emotion. The truth is that most investors, even institutional investors, are buffeted by emotional turbulence from time to time, and that truth is reflected in the volatility of the financial markets.
But if a little emotionalism when it comes to investments is unavoidable, too much emotion can be hazardous to your wealth. Here are four symptoms of problem emotions, financial behavior that is inconsistent with sound investment practice.
Fear of loss. Investors are generally motivated by fear or by greed. Behavioral scientists have learned that, for many people, the pain of loss is larger than the sense of satisfaction from a gain of the same size. Similarly, some investors will accept larger risks in order to avoid a loss than they will in seeking a gain.
Taken to an extreme, fear of loss leads to investment paralysis. An excessively risk-averse investor may park funds in ultra-safe, low-yielding bank deposits or short-term Treasury securities until a decision is made, accepting long periods of low returns. Or winning investments may be sold off too quickly in an attempt to lock in gains, while losing investments manage to stay in the portfolio indefinitely.
Following the herd. It’s difficult to be a contrarian, to find value that everyone else has overlooked. Many people find it easier to go with the crowd, to own the current hot stock or hot mutual fund. At least that way, if the investment does poorly, one has plenty of fellow sufferers with whom to commiserate.
But when “crowd” is defined as one’s family and friends, the crowd’s investment goals may be very different from one’s own.
Hair-trigger reflexes. Markets move on news. In many cases, the first market response is an overreaction, either to the up side or to the down. Sometimes “news” is only new to the general public, and it’s already been reflected in the share price through trading by those with greater knowledge. The true importance of any news event can only be discerned over the longer-term.
Generally, it’s better to watch the market react to news than to be a part of the reaction. Remember that market dips may present the best buying opportunities but they’re also the toughest times, emotionally, for making a commitment to an investment.
Betting only on winners. Some 85% of the new money going into domestic equity mutual funds goes to funds with MorningStar ratings of four or five stars, according to one estimate. This may be one reason that the government requires this disclosure for investment products: Past performance is no guarantee of future results. The disclosure is required because it is true. High returns are usually accompanied by high risks; ultimately, those risks may undermine performance.
Abnormal returns, whether they are high or low, tend to return to the average in the long run. Investing on the basis of the very highest recent returns runs a significant risk of getting in at the top of the price cycle, with a strong chance for disappointment.
THE ALTERNATIVE APPROACH
To avoid impulsive decisions that may be tainted with emotion, one needs an investment plan. The best way to moderate the impact of stock and bond volatility in difficult markets is to own some of each. Assets do not move up down in lockstep. When stocks rise, bonds may fall. Or at other times, bonds also may rise when stocks do. The movements of each asset class can be mathematically correlated to the movements of the other classes. Portfolio optimization involves the application of these relationships to the investor’s holdings.
Expected returns need to be linked to the investor’s time horizon. Longer time horizons give the investor more time to recover from bad years, more chances to be in the market for good years.
© 2017 M.A. Co. All rights reserved.
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LIVING TRUSTS AND FINANCIAL PRIVACY
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Remember when “hidden treasure” resided in chests buried by pirates? Today’s precious assets may be invisible to the naked eye until retrieved from a hard drive.
Case in point, Pirate Latitudes, an adventure yarn set in Jamaica in the 1600s, found in computer files left by author Michael Crichton.
Although Crichton is best remembered for Jurassic Park and other techno-thrillers, in 1975 he wrote another historical adventure, The Great Train Robbery. HarperCollins published Pirate Latitudes in November 2009, more than a year after the author’s death.
Crichton died in 2008 of throat cancer. Five times married, he left a pre-nup and a living trust. Here is what is known at this date about the John Michael Crichton Trust:
It was a revocable living trust created in May 1998.
It has been amended three times.
That’s all.
We have no indication of the size of the trust or the identities of the beneficiaries.
Crichton’s will was filed with the probate court, but one lawyer observed: “The main significance of this probate is really to nominate who’s going to be in charge. There are really no assets in this estate; it’s all in the trust.”
Among the many reasons for having a living trust, financial privacy is likely the one most important for celebrities such as Crichton. However, there are more advantages to be considered.
YOU REMAIN IN CHARGE
When our clients place investable assets in flexible trusts, they give us their instructions in an attorney-drawn trust agreement. Under the terms of that agreement, they retain the right to cancel the trust or change their instructions. Nothing’s tied up.
From a practical standpoint, then, our trust clients maintain exactly as much investment control as they wish, just like the clients who have their personal investment accounts or IRAs with us.
Typically, we provide professional management or guidance tailored to each trust client’s needs and preferences.
Always, our role as trustee is to do exactly what our trust clients have instructed us to do. There’s no doubt whatsoever about who’s in control. If any client ceases to be satisfied with our services, he or she is perfectly free to terminate the trust or employ another trustee.
PUT OUR EXPERIENCE TO WORK FOR YOU AND YOUR FAMILY
If you would like to learn more about our personal trust services and how they might help you do more with your financial assets, we invite you to meet with us in person.
We look forward to discussing your goals and requirements.
(May 2015)
© 2015 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2015, are not reflected in this article.
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Toms River, NJ
Lebanon, N
Cherry Hill, NJ
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732-255-5000
908-287-7188
856-251-1300
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Because of the rapidly changing nature of tax, legal or accounting rules and our reliance on outside sources, Garden State Trust Company makes no warranty or guarantee of the accuracy or reliability of information contained herein nor do we take responsibility for any decision made or action taken by you in reliance upon information provided here or at other sites to which we link. ©2016. All rights reserved.
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