The CARES Act Added a New $300 Charitable Contribution Deduction for 2020. Here’s What You Should Know

The holidays are a great time to give back to people in need, especially if you are in a position to do so. If you are thinking of giving some money to your favorite charity in time for the holidays, there is good news – you can now get a tax dedication for it.

The CARES Act, which was signed into law this spring, included a “partial above the line deduction” for charitable contributions. This allows people who take the standard deduction — which is $12,400 for single filers and $24,800 for married-filing-jointly in 2020 — to claim a deduction of up to $300 in donations.

You’d claim this tax break when you file your 2020 return next spring. “The only caveat is that the donation must be made directly to charity and it has to be in cash,” rather than stocks or other assets, said Mark Alaimo, CPA and member of the American Institute of CPAs’ personal financial specialist committee.You can also use a credit card or a check to make your donation.

Claiming charitable donations

Fewer people have been claiming tax breaks for charitable giving since the Tax Cuts and Jobs Act went into effect in 2018.

That’s driven by the fact that the tax overhaul also roughly doubled the standard deduction, resulting in fewer taxpayers taking itemized deductions. In the 2018 tax year, roughly 17.5 million returns claimed itemized deductions — write-offs that include charitable donations, mortgage interest and other breaks, the IRS found.

That’s down from 46.9 million returns that itemized deductions during the 2017 tax year.

Accordingly, fewer people also claimed a tax break for donations: 14.8 million returns claimed a charitable deduction in 2018, down from 37.9 million in 2017.

Deductions reduce taxable income based on your federal income tax bracket. This means the higher your bracket, the more you save. Essentially, that means a $300 deduction is only worth $30 to someone in the 10% tax bracket, according to Marc Goldwein senior policy director for the Committee for a Responsible Federal Budget. Meanwhile, a $300 deduction is worth $111 to someone in the 37% bracket.

Keep your records

If you expect to take a write-off for the cash you’re giving to your favorite charity, make sure you retain any acknowledgement letters or receipts you get in return.

Generally, you can write off a donation of $250 or more if you have written acknowledgement from the charity. In an age when people use their credit cards to donate to their favorite charities, the “thank you” email you get from the organization is proof of your donation. Print out that document or save the e-mail. You’ll need it when you file your taxes next spring.

At Sherman Wealth, we are very passionate about giving back to the community and supporting our local charities, especially around the holidays when we are appreciating all we are thankful for. We encourage those who are in a position to give back to find local charities to support and do as much as they can. If you have any questions about charitable contribution deductions or your portfolio, please contact us at info@shermanwealth.com or set up a free 30-minute consultation here

Below are some local charities we are passionate about: 

Nourish Now, No Kid Hungry, Manna Food Center, Jewish Federation of Greater Washington, So What Else, Montgomery County Coalition for the Homeless, JCC, and A Wider Circle 

 

Attention Robinhood Power Users: Most Day Traders Lose Money

It’s easy to get swept up in the rush of day trading and the ability to trade money at the tip of your fingers. And over the course of the last few months, we’ve seen “TikTok” investing and day trading increase in popularity, especially amongst young investors. But according to a CNBC article, despite what some might think, in reality day traders often have terrible track records. While we think investments and long term ownership is a great way to build wealth, we want to raise light to be careful when day trading and understand the tax implications and risk tolerance there. 

Academics who study stock pickers have long observed that the vast majority of professional money managers – about 85% – underperform their benchmarks over a multiyear period.

Now those professionals are turning their sights on retail day traders, warning that the same poor results apply to them as well. 

“I don’t confuse day traders with serious investors,” Princeton professor Burton Malkiel, author of “A Random Walk Down Wall Street.”  “Serious investing involves broad diversification, rebalancing, active tax management, avoiding market timing, staying the course, and the use of investment instruments such as ETFs, with rock bottom fees.  Don’t be misled with false claims of easy profits from day trading.” He also added, “Large increases in Robinhood users are often accompanied by large price spikes and are followed by reliably negative returns.” 

Why did that happen? The authors noted that most Robinhood investors are inexperienced, so they tend to chase performance. The layout of the app, which draws attention to the most active stocks, also causes traders to buy stocks “more aggressively than other retail investors.”

Finally, the ease of use of the site, and the fact that it is commission-free, may also encourage trading. “As evidenced by turnover rates many times higher than at other brokerage firms, Robinhood users are more likely to be trading speculatively and less likely to be trading for reasons such as investing their retirement savings, liquidity demands, tax-loss selling, and rebalancing.”

As young and inexperienced individuals begin day trading more and more, it’s important to spread the message about behavioral and investment biases that are present in investment management and financial planning, and oftentimes persuade one’s decisions about when and what to purchase and sell. Day trading may or may not have a piece in your portfolio, but if it does make sure to understand the whole picture and take your risk tolerance into consideration. Long term stock ownership and appreciation is a great way to build wealth but it’s important to be aware of the biases that are hidden within day trading. In our previous blog, we discussed ways to identify these biases and use that knowledge to make the best decisions on behalf of your investments. If you would like to discuss this day trading trend or behavioral biases that pertain to your portfolio, please reach out to us at info@shermanwealth.com and schedule a free 30-minute consultation here

 

Sitting on Cash? Here’s What To Do with It:

In our previous blog, we wrote about how a great deal of American’s households ‘ finances are in surprisingly good shape eight months into the pandemic. While this certainly is not the case for all households, we wanted to discuss options for those who may be sitting on an abundance of cash or have too much money in their checking accounts. 

It’s important to note that if you have more than you need to pay your bills in your checking account, you should consider putting away some of the cash in taxable investment accounts or savings accounts that accrue compounding interest. When choosing a savings account, consider banks that have higher interest rates than your standard bank, which currently have interest rates close to zero. Utilize FDIC-insured accounts such as Max My Interest or Capital One 360. With these record-low interest rates, it’s crucial to get your money into accounts that are maximizing and compounding your dollars overtime. 

Additionally, as the end of the year is just around the corner, think about checking off your financial planning to-do list, which may consist of funding your HSA and/or maxing out your 401(k) and IRA’s for the year. As mentioned earlier, if you have additional cash laying around, make sure to direct those funds into a taxable account.  If you are saving for your children or grandchildren’s college tuition, make sure to contribute to your 529 plans and inquire about all of your options there. Also, if you are considering end of the year charitable giving, make sure to contribute those funds as well. If you have any questions about your financial portfolio or end of the year planning, please contact us at info@shermanwealth.com and we are happy to set up a free 30-minute consultation with you. Lastly, check out our other blogs for more resources.  

 

The American Consumer Is Flush With Cash After Paying Down Debt

Eight months into the pandemic, many Americans’ household finances are in the best shape in decades.  This may seem like a surprising statistic given the current climate and after the widespread business lockdowns earlier in the year which coincided with a surge in unemployment. While this certainly doesn’t apply to all families equally and we know this has been an economic low point for many, it points to just how strong the U.S. economy was going into the virus outbreak, and how powerful the combined monetary and fiscal response was from the Federal Reserve, Congress and the Trump administration.

During this time we saw record-low mortgage rates, reflecting the ultra-easy Fed policy that has prompted a steady wave of refinancing and allowed homeowners to reduce monthly payments or tap equity. Americans are also holding more cash, helped in part by stimulus from the government.

Households’ debt service burdens have eased considerably, too, a complete departure from the 2007-2009 financial crisis that required years to mend. That in turn bodes well for consumer spending and its ability to power the economic recovery through a period marred by a violent spike in virus cases.

Despite the surge in Covid-19 cases, economists project a 4% annualized rate of U.S. economic growth this quarter, unchanged from the October forecast — though down from the prior period’s record gain, according to a Bloomberg survey. While the pandemic has financially been harder on working-class families than the wealthy ones who have been stockpiling much of the cash, data shows that they too have more money in the bank now. That’s important because they are much more likely to spend that money — and give the economy an added jolt — than the rich are.

Checkable deposits were also improving for several quarters leading up to the pandemic and even before the government actions to provide financial assistance for the unemployed. However, the virus resurgence means “people can’t spend until it’s safe to go back out again.”

To be sure, another reason savings remain elevated is that people are uneasy about their jobs and the outlook, particularly in industries such as travel, food services and leisure, where business activity is more at risk.

While “cash buffers” of those who benefited from fiscal stimulus are starting to weaken, their financial positions remain elevated compared with pre-pandemic levels, JPMorgan’s Lake said. “I think there’s enough juice to get people to year-end.”

For its part, residential real estate has played a huge role in driving both the recovery and improvement in household finances. Cheaper borrowing costs have not only sparked a flurry of demand for homes, mortgage refinancing has strengthened. While cash-out refinancing only makes up a little more than a third of all activity, a larger share of rate-term refinancing means lower monthly mortgage payments. With these lower payments due to refinancing, it assumes us to believe people will continue to spend more money relatively. 

In conclusion, it seems as though a great deal of consumers entered this pandemic in a strong position, with a great deal of cash, which helped some who were hit hard by the virus. Its interesting to see how even after 8 months of lock-downs and regulations, the household finances are still stronger than they have been in a long time. It’s important to take advantage of situations listed above, especially refinancing, to help lower payments and in turn pile up your cash account. If you have any questions or want to discuss your portfolio or finances, please reach out to us at info@shermanwealth.com or schedule a complimentary 30-minute meeting here.

How to Recognize Behavioral Finance Biases

Over the last few months, we’ve faced a great deal of economic turmoil and uncertainty, which has a great impact on the finances and mindsets of many all across the world.  Through these hardships, we’ve seen individuals face and struggle with a great deal of biases in respect to their portfolios and investments. We want to bring light to these behavioral finance biases that are only natural in human behavior and stress the importance of maintaining long term goals.

This past week has been stuffed with an overwhelming amount of news – the drawn out 2020 presidential election, the Pfizer vaccine announcing 90% accuracy and the coronavirus pandemic making a second wave with over 10 million cases.  As Americans are grappling with all this news, so is the market.

 Prior to the presidential election, we saw people selling out of their 401(k)’s or loading it up depending on which side of the political aisle they stood. Additionally, we spoke with individuals who were waiting to buy back in the market when the coronavirus cases diminished, even though the cases are the highest they’ve been since March and we are seeing the strongest market in a long time. Those who said “we won’t invest until the news settles down” back in April are still waiting as we still see a great abundance of news and a raving market. These biases prove the importance of sticking with a long-term goal and not being persuaded by beliefs and expectations.

 As we proceed into what seems like could be another coronavirus pandemic lockdown alongside a strong market, it’s interesting to look back at the data and hindsight biases and see how individuals may alter their investment approach a second time around.  These last nine months have been a wild ride and crazy for the market to digest. However, the market has proven many wrong these last few months, showing the power of its resilience and strength. If you have any questions specific to your portfolio and investment decisions, please reach out to us at info@shermanwealth.com and schedule a free 30-minute consultation here.   

 

Americans Were Given the Coronavirus Option to Raid Their 401(k). Most Didn’t.

Despite the financial toll of the coronavirus pandemic, few American households have raided their 401(k) retirement accounts to make ends meet. Faced with the prospect of surging unemployment and a declining economy, Congress in March passed a law that temporarily allows Americans to use their retirement money today. However, unlike expectations, so far, there hasn’t been a rush of funds out of accounts. 

Research reported by the Wall Street Journal revealed that of those eligible to take money out of their accounts, many did not proceed to pull funds from their 401(k)s for various reasons. The withdrawal rates were much lower than anticipated back in April which raises an interesting topic regarding the state of the market over the last few months. 

Given the wild ride we’ve had the last 6 months with the coronavirus pandemic, the election, and now positive vaccine news, the markets have seen a great deal of volatility. It’s been interesting to see how these events have either helped or hurt people as they’ve been trying to gauge the market and in turn buy or sell off parts of their portfolio. While the coronavirus began to surge as the election played out, many may have panicked and sold off a great deal of their stocks even though after-the-fact stocks are the highest they’ve been following a presidential election in many years.   

Although this new law passed by Congress has allowed for the potential to pull funds from 401(k)’s, it’s been interesting to see the result and the fact that many have refrained, which could mean that some have had sufficient emergency funds to help them navigate these bumpy waters. It’s important to note that building an emergency fund is very crucial and comes in handy during unprecedented times. As explained above, it’s also incredibly difficult to measure the projection of the markets, which is why it’s important to stay calm and see your investments through the long term. If you have any questions regarding your 401(k) or other concerns about your finances, please reach out to us at info@shermanwealth.com or schedule a free 30-minute consultation here.

Brad Sherman Named to Investopedia Most Influential Advisors

One of the core reasons I started the company was because financial literacy and empowerment was lacking in the US education system and big firms made you believe unless you had a lot of investable assets, finding conflict-free financial advice was impossible. Investopedia is a fantastic website full of educational resources and we are honored to be included in their top 100 list of financial advisors who are breaking barriers and pushing the ball forward in terms of financial literacy and empowerment of financial education. Honored to be on the list among other great advisors, peers, and friends.

The Investopedia 100 celebrates financial advisors who are making significant contributions to critical conversations about financial literacy, investing strategies, life-stage planning and wealth management. With more than 100,000 independent financial advisors in the U.S., the Investopedia 100 spotlights the country’s most engaged, influential, and educational advisors. Brad Sherman has been named to this list for the third year in a row.

About Investopedia

Investopedia is the world’s leading source of financial content on the web. They help investors understand financial concepts, improve investing skills, and learn how to manage their money.

Disclaimers

Investopedia’s proprietary methodology focuses on awarding financial advisors who have demonstrated a top-of-the-industry ability to reach the largest and most diverse financial and investing audience. That reach is measured by the impact and quality of the advisor’s published work, public appearances, online following, and commitment to financial literacy across diverse communities. The 2020 Investopedia 100 also heavily weighed peer-to-peer nominations, highlighting the most influential advisors who were recommended by their peers. We receive no compensation from placing advisors on our list, nor does an advisor’s appearance on our list constitute an individual endorsement by Investopedia of such advisor. 

Awards, third-party rankings and other recognitions are not indicative of future performance. Awards and other recognitions should not be interpreted as a guarantee or suggestion that a client or prospective client will experience a certain level of results if our firm is engaged, or continues to be engaged, to provide investment advisory services, or as an endorsement of our firm by any past or present client. Neither Investopedia nor any of its associates are affiliated with Plancorp, none of the awards or other recognitions are based on client evaluations of our firm, and we have not made any payments for or in anticipation of any award or other recognition. 

How A Presidential Election Affects the Stock Market

During every major election period, there is always talk about the impact that the person winning the White House will have on the stock market. As Americans prepare to elect a president in the coming week, many investors attempt to figure out what the outcome will mean for your portfolio. However, it’s not just as simple as which party wins.  

A look back at history shows that presidential election cycles do correlate with stock market returns, but there are a few things to consider in election years. Bear markets, recessions and wars tend to start in the first two years of a president’s term, says The Stock Trader’s Almanac; bull markets and prosperous times mark the latter half. But over the past century, the stock market has mostly run briskly across most of the presidential cycle before losing momentum during election years.

Democrat or Republican?

Even though you might feel strongly about one party or the other when it comes to your politics, when it relates to your portfolio, it doesn’t matter much which party wins the White House.

According to Bespoke Research, the Dow Jones Industrial Average has gained 4.8% annually since 1900. There are many who would suggest that Republicans, who are supposedly more business-friendly than the Democrats, would be more beneficial for your stock holdings, but that’s not entirely the case. In actuality, the average Republican administration saw gains of 3.5% per year, while the Democrats saw gains of almost twice as much, at 6.7% per year.

Divided vs. United Government:

Another myth is that markets do better when the government is divided. This theory derives from the idea that divided power saves both parties from their worst instincts. With neither party in control, government is somewhat neutral, leaving markets free to flourish. However, this hasn’t always been the case either.  

Y Charts has looked at stock returns going back to 1930 under three separate scenarios. When one party controls the White House and both houses of Congress, the Dow averages 10.7% annual returns. When there’s a split Congress, stocks average 9.1% returns. But when the president is in the party opposite of both the House and Senate, stocks deliver a mere 7% average annual return. Consider this breakdown of scenario by party, using S&P 500 data from RBC CapitalMarkets data going back to 1933:

It is important to remember that all of this information is looking at the performance of the broader stock market. Presidential elections can and will continue to have more specific consequences for the market, depending on each party’s agenda and how much of Washington they control.

Predicting the Future:

It turns out that the stock market has a remarkable ability to predict who will likely win the White House. If the stock market is up in the three months leading up to the election, the incumbent party is more often the winner. Losses over those three months tend to elect the opposing party.

With the final stretch of the election upon us, it’s still nearly impossible to guess how the stock market will react to next week’s vote. Our firm recommends that no one should make investment decisions based on the outcome of an election. Regardless of who wins the election, expect a continued economic rebound that will support future equity gains. In similarly polarizing elections in 2008 and 2016, investors who maintained their stock allocations were rewarded with future gains, so it’s best to avoid making any major moves with your portfolio over the next few months. If you have any questions relating to the stock market and your financial goals, please contact us and we would be happy to help you set up your portfolio respectively. 

 

Why Now May Be a Good Time to Consider a Roth IRA Conversion

The coronavirus pandemic and the upcoming election has created a great deal of uncertainty for investors. Income tax, furloughs, and job loss are lingering over the heads of many. As people are navigating these unprecedented times, they are becoming more and more unsure about where to and how much to invest. But it’s important to keep in mind that regardless of uncertainty in the market, it’s always a good time to invest for your future. 

The recent stock market meltdown may have dented Americans’ retirement savings, but there’s a silver lining: The downturn made one common retirement strategy less costly for investors.

The strategy, known as a Roth IRA conversion, involves changing a traditional, pre-tax retirement account — such as a 401(k) plan or a qualified individual retirement account — to an after-tax Roth fund. This strategy has some unique benefits when compared with its traditional cousin.

To do the conversion, savers would opt to pay income tax now, while markets are down and tax rates are lower under the Tax Cuts and Jobs Act. Investors who own traditional accounts defer income tax on their savings until withdrawing the money in retirement. Roth savers pay tax up front and don’t pay later. Having at least some Roth funds is beneficial for a few reasons, according to financial advisors. Retirees don’t have to take mandatory withdrawals from Roth accounts, unlike traditional IRA investors, who have to beginning at age 72. Taking Roth distributions could also decrease Social Security taxes and Medicare premiums, which are pegged to one’s taxable income.

In addition, there’s the benefit of tax diversification. Like the concept of investment diversification, tax diversification is important because it reduces the risk associated with unknown future tax rates, advisors said. Data suggest investors aren’t greatly diversifying their retirement accounts from a tax standpoint.

Traditional IRAs held around $7.5 trillion at the end of 2018 — almost 10 times as much as Roth accounts, which had $800 billion, according to the Investment Company Institute. Ultimately, investors should peg a conversion primarily to tax rates — if savers believe their tax rate is lower now than it will be in retirement, a conversion makes sense because it will cost less in the long run, according to tax experts. And, contrary to popular opinion, one’s tax rate doesn’t always fall in retirement, they said.

Tax rates are currently low by historical standards and are likely to increase (rather than fall further) in the future, experts said, given the eventual need to raise federal revenue to reduce the U.S. budget deficit, which is larger as a share of its economy than most other developed countries.

If you are considering a Roth IRA Conversion, please consult with your financial advisor  and your EA/CPA or tax preparer to ensure that this decision is the best for your financial situation. If you would like to discuss the potential of a Roth Conversion, please reach out to us and schedule a free 30-minute consultation