This week, Victor covers a news story where a computer model made a 4-year error on a buy-sell stock recommendation. Also, there’s a new tax law…have you heard? This week, Part 1 of our overview.

Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.

For more information, visit Medina Law Group or Private Client Capital Group.

Click below to read the full transcript…

Bert:  Welcome to “Make it Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host, Victor Medina, an estate planning and elder law attorney and certified financial planner.

Victor J. Medina:  All right, welcome back to Make it Last. I am your host, Victor Medina. It is a brand‑new year, I am so happy that you have joined us on another episode of Make it Last.

Jeez, I’ve got to start out with an apology because those of you that tuned in live last week got an encore presentation. Yes, that’s right, what we like to call a repeat. I was, quite admittedly, vacationing with my family and did not have an opportunity to record a show.

It was too close to Christmas, the New Year, and everything else going on, so I chose to rerun an old episode. Hopefully, if you missed [laughs] the one from the week before, you got a chance to listen to it, or you didn’t mind listening to another episode of the same show.

We’re back with a fresh new episode. It’s a fresh new year. I am excited for what this new year is going to bring. I do have to admit that, at my age, with the number of children that I have, the time that I spent on New Year’s Eve was trying to keep up with my 14‑ and 11‑year‑old making it to midnight, which I barely did.

My wife was asleep by 10:15 as, by the way, was my four‑year‑old son. He was asleep by 10:15. [laughs] After we had celebrated the New Year, went right to bed because everyone was up the next day, and we just went on with life. No big parties for me. Victor Medina is not a partier. That’s not what we do.

Anyway, I am excited for the New Year, and what the New Year is going to bring in. What we’re going to do in this first show of 2018 is we’re going to talk a little bit about what the new income tax law is going to bring, and how you should be thinking about it, how it’s going to impact you.

I’m going to give you the unvarnished truth on that. I think there are a lot of people trying to get out ahead of the story. You might have caught up with some craziness that happened at the end of the year about whether or not you could have prepaid your taxes, and it was a matter of whether it could be assessed.

I’ll clarify that for you once we get into that segment, but it alerted me that there’s a lot of people that are rushing to understand this as opposed to taking the time to really read the law, understand the way that it works, and then sharing that information. I’m going to take my own advice and we’re actually going to do this a little bit slower.

In this first show I am going to cover what we might call some common questions about the tax law. We’ll first approach it from a top‑level way and then, next week, we’ll actually get into some detail. I think next week I’m going to have some information for you about an upcoming seminar that I’m going to be hosting a workshop in the Mercer County area.

Probably at The College of New Jersey, TCNJ, which is right off of 95. I’ll let you know the details about that. I’m going to charge a small amount of money to attend. Just to cover the cost of the rental of the room. It’s a big, large lecture room that I’m going to have there, but I expect it’s going to be filled. That’s expensive for me to do.

A couple bucks just to make sure that we cover the costs of the facility. Maybe even have some cookies and coffee. The idea is we’re going to give you just some straight education on that. I feel it’s my obligation to do that with my clients, my referral sources, and partners over the years, as well as you, our listeners.

Keep a listen on to next week. Probably have some details for that, including how you’re going to register for that because we are going to host some tickets on it. We’re going to need to lock it off once we hit our maximum number. If there’s an outpouring of requests, maybe we’ll host it again. That will be coming up with details next week on the show for January 13.

In the meantime, though, I do want to cover the stuff as just a top level, surface level review of the new tax law. Get you to answer some basic questions. I expect, for the majority of you, you don’t even have the statements necessary to prepare your taxes until the end of January.

Even if I gave you hard‑nose information about tax rates and things like that, it’s not going to be anything that you can calculate until you get the statements back from whatever custodian, and your wages, or however you’re making your money these days. With that in mind, as I said, I am going to give you an overview. I did want to cover one really interesting news story that came up.

It reminds me of this…We get inundated with so much noise in the financial sector. We get noise from a lot of different places. You get a lot of noise from things that are on social media, and what’s on your Facebook. We’re hit with a lot of that. I like to focus on the stuff that’s financial, tax and legal related because that noise is just overwhelming.

Some of the noise happens to come in the form of recommendations of what you should be doing. What you should be doing with your money. You can just spend your entire day watching CNBC, people talking about companies, and “It’s a strong this.” I take the position that it is great entertainment and terrible investment advice.

You should probably never listen to that stuff. All they are is they’re in the business of selling advertising to stay on the air. Whether it’s they’re in print, or they’re on the TV, basically, that’s why they exist, to sell advertising, have something entertaining. They’re not there, actually, in the business of giving you investment recommendations, and you shouldn’t be listening to it.

Sometimes, there are companies that are in the business of giving you these recommendations. There are banks that are telling you what you should buy or sell at any time. Now, what you should know is there are some regulators watching out for this, but the story here is so fantastical it defies belief.

What happened was [laughs] there was what they’re calling a rare glitch that affected Citigroup. Citigroup is the successor company to Salomon Smith Barney. What they did is that the electronic feed gave a rating of buy to something that should have had a rating of sell, or grading a security that it actually didn’t even cover, gave a grade on something that it wasn’t evaluating.

It affected ‑‑ watch this now ‑‑ 1,800 securities and it went on for four years. For four years some customer portfolios that weren’t supposed to contain stocks that had a sell rating kept them anyway because the rating was set as buy even though it was in error. How did we learn about this? Because a bunch of clients sued Citigroup? Nope.

FINRA came in and they slapped Citigroup with a fine, which Citigroup neither admitted nor denied the charges and, basically, self‑reported the issues to the regulator, but because of doing that FINRA slapped them with $11.5 million fine, which, for Citigroup, is nothing.

It’s absolutely no way of measuring what the potential loses or gains were on this. No one’s going to take them off to that. In fact, Citigroup is voluntarily, or as part of the fine, has to pay back $6 million in compensation to its retail customers. This just gets to the issue of these analyst’s ratings.

You have to question those things because, one, you don’t know how they’re being arrived at. We spend tons and tons of time going over the portfolios with our clients when we do investment management because we can explain everything that’s in there ‑‑ who’s managing it and why.

Any recommendations that we have are not based on some computer model off of it. There’s math. Sure, there’s some math, but we’re not relying on the recommendation of these industry leaders. We’ve got an investment committee that allows that to have them arrive on their own. They’re actually dotting Is and crossing Ts.

It’s just a little warning before we get into the first break that, if you are taking your financial investment advice from the people that are sharing it either on TV or where you’re hosting the money and you don’t really know where that’s coming from, buyer beware.

Victor:  You got to understand that before you take action. When we come back from the break, I’m going to give you that overview on the new tax law. I’m going to answer some questions on that. Then we’re going to set up next week, when we’re going to talk in more detail about the actual tax laws.

This is a two‑parter. It’s going to have a little cliffhanger at the end. You’re going to have to stay tuned in order to catch all the information. We will be right back on Make It Last.

Victor:  All right, welcome back to Make It Last. We are covering the new income tax bill, which seems to be the only thing anyone’s talking about. I spent the holidays with family from both sides. My wife’s side and my side and, all around the table, all anyone could talk [laughs] about was this new tax bill.

How it helped them. How it hurt them. Whether or not it was good for them. What did it mean? Did I know yet? I was [laughs] playing host to all kinds of questions on that. I thought we should start this show with just a basic overview. Then what we’ll do is we’ll take next show and dive in in a little bit more detail on it.

One of the first questions because we do investment management for people, and probably a lot of the holdings that we have are taxed on capital gains rates. We’re holding them for a period of time and we liquidate them. It’s typically long‑term capital gains.

The question was, ‑‑ because I’m managing a lot of the money for my family ‑‑ “Was it going to affect how capital gains are taxed?” The answer generally is no, for the most part. The tax brackets for capital gains aren’t changing at all. What it meant is that you are going to be able to rely on the zero, 15, and 20 percent tax brackets, actually 23.8 because of the net investment income.

You’re going to able to rely on those for how to calculate it. That doesn’t really change. One of the things that does change that’s related to that are the thresholds on which you get into the highest tax brackets.

The new tax brackets starts to top out at, I don’t know, $500,000, I think, for single people, and $600,000 for people married jointly. That’s basically how the capital gains are going to be structured. Short‑term capital gains are still taxed as ordinary income. You probably are going to be in a different rate because those percentages are different.

For people that are going to be looking at potentially having to pay the 3.8 percent net investment income tax, which is still in place, that’s going to apply to high earners. It’s exactly the same with exactly the same thresholds, the old tax brackets. For the most part, capital gains aren’t going to change much at all.

Next question is, “Is this permanent? Is this going to be changed? Can it be lowered by a different congress?” The answer is yes. You might have heard that it’s deemed to be permanent. What it really means is that the tax laws on the individual side are set to expire at 2025. The ones in the corporate side have no expiration date.

The reason for the difference between that is really because of budgetary calculations. You had to fall in line with certain procedural rules, which meant that the cost of the bill had to remain under $1.5 trillion. The way that they did that is they sunsetted the individual tax changes in the year 2025 and they reverted them to other things. They’re not permanent the way the corporate one is.

None of that really matters because, if you had a Congress that changed and wanted to pass a new tax law, they can, essentially at any time. It doesn’t benefit you to think about these as permanent in individual, they’re just there for right now, and really be driven by whatever the tax laws are changing.

We had tax laws that were in place that were permanent before this new tax law. We had one before. Now that’s going to be a little bit different. The next question was around whether or not people [laughs] should move. They were asking whether or not they should leave the state of New Jersey, which seems to be a pretty common question, anybody’s ready to move.

That’s an interesting question because one of the impacts of this new tax law is there’s a cap on the amount of deduction that people can take for their state and local income taxes, basically what are called SALT taxes. Those would be state, local, sales, property taxes.

You used to be able to deduct all of those off of your return if you were able to itemize your deductions. Now, there’s a cap of $10,000 on those deductions.

That really begs the question because, for people who live in high‑income states like New York, New Jersey, California, they may want to think about relocating since none of that money is deductible off of their federal income taxes. It’s going to go ahead and increase your taxes because you can’t deduct them.

What do you look for? There are seven states that have absolutely no individual income taxes. These are the retirement states, if you’re interested in them. Some of them you know, right? Florida, yeah, for sure. Texas, got a lot of play in the news over the years about not having any state income tax. The other ones are not as well known.

One of them is Nevada. You can go gambling with the extra money that you save. [laughs] Here is Washington State, South Dakota, Wyoming, and Alaska. If you want to live there, you can take the extra money that you saved and buy North Face jackets full of down, fleece, and Gore‑Tex, and all that kind of stuff.

Those are the states that have no income taxes. There are a couple of states that tax different types of things. Tennessee taxes capital gains and interest. New Hampshire doesn’t tax wages, but it does tax five percent on interest and dividend income. There are a couple of taxes on there, not purely zero.

There are some states that don’t have any sales tax, which can help ‑‑ Alaska, Delaware, Montana, New Hampshire, and Oregon. Those are the ones with no sales tax. That makes it a little bit easier for you to get by on the income that you have.

Those are things to think about, to relocate. I do tell people, “Those taxes, whether they’re four, five, six percent amount of your income that’s being taxed, that’s largely manageable, especially for quality of life. You might want to enjoy the time that you have and not quickly run and relocate.”

You got to be careful with this stuff. If you’re letting the tax tail wag the dog on where you’re going to live, you could be saving money, but be miserable. Who wants to be miserable in retirement?

The whole concept of retirement for most people is they work their entire lives waiting to get to this point in time where they could enjoy what they had. Here they are living in a place that’s miserable for them. For many people, Florida can become miserable even though it’s the place that most retirees run to when they get an opportunity to get some place warmer.

I will tell you a quick funny story before we break, which is that my parents first retired as school teachers. They relocated down to Florida. They were there for a number of years. It ran its course. What they did is they moved a little bit further north. They moved to South Carolina. South is in the name.

Mostly because my brother lives there, works there, and is starting a family there, but also because that was going to be their winter location. Well, fast forward and we’re getting around for Christmas and hanging out. They told [laughs] me that it got cold there. I said, “What do you mean cold? I mean it’s cold up here. It’s 11 degrees.”

They said, “No, no. It was like 30 degrees over there. Not only is it 30 degrees, but it’s set to snow and we have no snow clothes. All the clothes that we had in South Carolina were the clothes that we had in Florida.”

Victor:  My father swore that, if he flew back in January and there was snow on the ground, he was going to put a for sale sign on the house as soon as he arrived [laughs] because that’s not what he thought of when he thought of his retirement south place, the place that he was going to go into the winter for his snowbirding.

When we come back, I’ll continue on the overview on the Tax Cuts and Jobs Act, that is the official name of it. We will set things up for the next show also, which we’re going to go into a lot more detail on brackets, planning, and stuff like that. Stick with us, we’ll be right back on Make It Last.

Victor:  All right, welcome back. On Make It Last we are talking about an overview of the new tax law. The one that is just signed in to law at the end of December, taking effect January 1st. It is the law of the land and will be unless it gets changed by a different Congress. It has provisions that start now, in 2018, and continue through 2025, specifically with respect to the income tax rates.

There were changes to the corporate tax rates, which moved that down to 20 percent. Also changes to the income tax rates, but the income tax rates do sunset, or change, expire in 2025. One of the leading think tanks for retirees is the AARP. AARP essentially is there to help think through for retired persons any of these tax law changes.

They are there lobbying. They’re largely apolitical, except with respect to retirees. If there are retirees that lean one political way or if their interests lean one particular way, maybe that’s some of the way that the AARP leans. They did get an opportunity to review this, and this fits into our overview of the tax law changes.

The majority of the Make It Last listeners, those of you that are listening online and in the radio, or Spotify, or anywhere else, they’re retirees. They’re thinking about making it last. That’s the biggest cut of the people that we talk to on this show, and even in the practices that I have. They’re looking to see how that law impacts them.

Within the overview of how it impacts retirees, one of the biggest concerns that the AARP has is how the new tax plan might put Medicare and Medicaid into jeopardy. If you think about it…Let’s walk through it. There are provisions in there that are basically there to appease people who continue to be wage earners.

The people that are getting investment income through real estate investments and things like that, they’re going to get passed through income and they’re going to benefit from the corporate income tax. They got a couple of plans they’re going to be planning around that, but for everyone else that are individuals, they don’t have the same benefits. They’re not lined up to benefit in the same way.

One of the concerns has to do with math that’s involved here. The math that makes this work for procedural rules takes into effect a changing inflation index. They’ve changed the inflation index and that has the potential of pushing people into higher income brackets faster and slowing the increase in the standard deduction as the inflation changes.

I realize that’s probably a little bit hard to follow, so to break that down, if you change the inflation index, what happens is that people are going to have to withdraw more money out of their retirement account to continue to live. That will push them into higher brackets.

By the same token, the standard deduction is going to not increase as quickly based on the rate of inflation and therefore it chases after that. That’s one of the impacts of the math that is being suggested in the law.

The third thing is that the changes in the health care premiums is a threat. The reason why that exists is the bill gets rid of the Affordable Care Act’s individual mandate. To realize why, in theory, that impacts everything about this bill, you have to understand the way the insurance works.

Insurance works, generally, by pooling risk together. The only way that you get a lower cost of insurance is to accept premiums from people that are not going to receive benefits, or at least not receive them commensurate to the money that they’re paying in. That’s the whole concept behind insurance. Insurance is essentially a risk shifting exercise.

What you do is you take money together and say, “Look, the cost of the loss here is so great that I’m willing to share in the risk of that happening with other people, and the chances are that it’s not going to happen to me, but if it does, I’ll be covered by this insurance because I can’t bear to have that expense all on my own.”

One of the reasons why the Affordable Care Act worked, just on philosophy or strategy, is, by requiring everybody to participate in health insurance ‑‑ that’s what we call the individual mandate ‑‑ it meant that healthy and sick people had to participate in the insurance.

That meant we were collecting premiums from people that weren’t going to be receiving benefits at the same rate that they were contributing these premiums. Who decides on the individual mandate not to take insurance? It’s the healthy people.

If you’re sick or you think that you’re going to be sick, and you’re right about if you’re going to be sick, then you are going to participate in health insurance because that health insurance is going to pay you more benefit that you get, but if you think that you’re healthy, if you’re young, you won’t participate in it because you don’t see the benefit.

It’s easier for you to step out. By the way, you’re not going to pay the penalty for that, too, because likely you are going to stay healthy. You didn’t even pay a realized penalty for not participating because you probably will stay healthy.

What it means is that the entire pool of people that are participating in health insurance will start to skew to the people that need the services. It’s a high risk pool. When it’s a high risk pool, that means that the cost of insurance is higher because you’re going to be paying a lot more in benefits because these people are going to use the services.

Step aside for a second any politics about whether or not you think that that’s right. My Christian upbringing says, “Yeah, it’s OK to take some money from me to help other people. I get why I’m obligated to help my fellow man on that.”

But, one of the things that you need to realize is that when it comes in just the way the math is going to work, we are at risk for the health insurance Affordable Care Act really increasing both in cost or increase in the number of uninsured people because of the logistics of losing the low risk people.

How great will that be? I don’t really know, but it’s there. It’s there as we remove the one thing that says, “Well, here’s how everybody participates and how we lower the insurance cost.” Related to that, it has to do with Medicare and Medicaid, a big part of a retiree’s calculations.

While the bill doesn’t touch them directly, what it does do is build in $1.3 million of deficit over the course of the next decade. The only way that these rules worked is if they didn’t increase the deficit by more than $1.5 trillion. It doesn’t, $1.46 trillion. The increase then triggers automatic spending cuts to entitlement programs unless Congress votes to stop them. You got to go over that again.

Although the tax bill does not change anything about Medicare and Medicaid, doesn’t change the qualification standards, doesn’t change the law, doesn’t change the premiums, doesn’t do anything that wasn’t there already, because it adds $1.5 trillion to the deficit, it triggers automatic spending cuts to entitlement programs, which Medicare and Medicaid are, which then jeopardizes those programs.

Again, the lawmakers can vote to stop them, but it requires affirmative acts on that, so it does threaten it. By some calculations it threatens it to almost a $25 billion cut for Medicare. Those are things to worry about. Now as I check on my time, I’m running out for this show, so I have to stop here.

I promise, next week we are going to get into more detail about the tax law, talk about percentages, talk about an upcoming seminar. Hopefully, that will be solidified at that time, so we can give you the details on it. It will be for a little bit of money. Won’t be a lot of money, but it’ll be enough to cover the cost.

If you’re interested in that, earmark listening next week so you can get the details for that upcoming seminar. You can join us and learn a little bit more about that program. That’s it. Hey, listen. Welcome back to 2018. I’m so happy that you have decided to continue to join us on the Make It Last program.

This is one of the things I love doing for the community, and love the opportunity to talk to you about that, and get more time in front of you to teach about all of this stuff that I think is important. If you have any feedback, you can email us at feedback@makeitlastradio.com.

If you liked the show, please, please, please share it with a friend of yours. They can listen live at WCTC on Saturday mornings at 7:30, or they can subscribe on iTunes, Android, Spotify. They can listen wherever they want and get caught up to this show and every show, all the past ones and the ones coming forward, if they’re interested in doing that because it is available as a podcast.

Victor:  We will catch you next Saturday, talk to you more about this tax law. This has been Make It Last, helping you keep your legal ducks in a row and your financial nest egg secure. Catch you next week.

Bert:  The foregoing content reflects the opinions of Medina Law Group, LLC and Private Client Capital Group, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment or legal advice, or a recommendation regarding the purchase or sale of any security, or to follow any legal strategy.

There is no guarantee that the strategies, statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.

All investing involves risk, including the potential for loss of principle. There’s no guarantee that any investment plan or strategy will be successful. We recommend that you consult with a professional dedicated to your needs.

 

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