Economy

TARIFFS and DUMPING: What You Need To Know

posted by Charley Mills - 3.07.18

Will Trump’s proposed changes to tariffs and dumping impact you? In the short run, it will not. Besides scary headlines and threatening words from pundits, politicians, and leaders all over the world about a “trade war,” nothing is going to happen tomorrow. I tend to be a free trade guy, meaning I believe everyone in the world should be able to produce the goods they want and sell them across all borders at the best price possible. This sounds good when everyone is playing by the same rules. If you have one producer getting subsidized to help them produce the good cheaper, then the playing field is no longer fair.

This is what has allegedly been happening with China and others when discussing steel and aluminum imports. It has made it impossible for our domestic manufacturers to compete. The tariffs will bring the cost in line with reality and help our domestic production.

Tarrff Infographic

Infographic by Henssler.com

The long-term issue—the fact that steel and aluminum are going to cost more—means the input cost to make a beer can or car is going to go up. That means either the producer of those products will have to eat the additional costs thereby lowering their profits or pass along the cost to you the consumer, which means less money for you to spend on other things. Additionally, if a trade war breaks out then it will be bad for everyone as costs will increase across the board. I do not see that happening at this point, but one can never know.

What is the President thinking? To be honest, unless you are one of his family members or close personal friends, I doubt very seriously that anyone knows what he is thinking on any issue. I am hoping he is using this opportunity as a negotiating tactic to cut a better deal on NAFTA (North American Free Trade Agreement), to start pushing back on China and their trade practices, which in a lot of ways hurts manufacturing at home, and lastly to make sure our national security is protected. The United States cannot rely on other countries to produce essential items, such as steel and aluminum, during times of conflict. We must protect ourselves.

I will end on this note: The President is doing exactly what he said would during the campaign. Right or wrong, we elected him, and he is doing what he said he would do on tariffs.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a Certified Financial Planner™ professional.

MAGA: Tax Changes That Affect the Kiddos

posted by Charley Mills - 2.06.18

While most individuals are taxed on their earned income at their own individual tax rates, unearned income is a very different beast—especially when it comes to a child’s unearned income. The Tax Cuts and Jobs Act made some significant changes in the way a child’s income is taxed.

Taxpayers often receive unearned income in the form of dividends or interest on investments, royalties, rents, and inheritances. In general, the IRS does not want parents to shift income-producing assets to a child under the age of 19 (or a full-time student under the age of 24), who is in a lower tax bracket. Enter the Kiddie Tax, where until Dec. 31, 2017, part of a child’s investment income was subject to tax at the parents’ top marginal income tax rate.

With the new tax laws, the first $2,100 is income tax-free because of the standard deduction

When a child, who can be claimed as a dependent by another taxpayer, only has unearned income, his or her standard deduction is $1,050. However, when a child also has earned income, the blended standard deduction becomes the greater of $1,050 or earned income plus $350, not to exceed the full standard deduction for an individual.

With the Tax Cuts and Jobs Act, a child’s unearned income in excess of $2,100 will be taxed at the rates that apply to trusts and estates—the parents’ top marginal tax rate won’t matter anymore. The first $2,550 is taxed at 10 percent, then investment earnings between $2,550 and $9,150 are taxed at 24 percent. The third bracket is from $9,150 to $12,500 and has a marginal rate of 35 percent. Anything above $12,500 will be taxed at 37 percent.

Now to put this in perspective, let’s say you have a custodial account for your child, holding McDonald’s stock, which pays about a 2.27 percent dividend yield. For your child’s unearned income to be taxed at 37%, the account would need to be more than $550,000! At McDonald’s current price, that’s well over 3,000 shares. For wealthy families, this change isn’t going to have a big impact. Chances are if your dependent child has more than half a million in invested assets it’s quite possible you too are in the 35 percent or 37 percent tax brackets, and you’re accustomed to having your child’s income taxed at your top rate.

Confused by the new tax laws?  You’re not alone.  Learn how Henssler can help

The new Kiddie Tax rates can affect middle-income families. Let’s say you and your spouse have taxable income of $135,000. Your child’s grandfather passes away and your child inherits a stock portfolio that generates around $5,500 in dividends a year. Under the 2017 rules, the first $1,050 of this was income tax-free. The next $1,050 was taxed at the child’s tax rate of 10 percent. That left $3,400 that was taxed at the parents’ top marginal rate of 25% for a total tax of $955 (($1,050 x 10%) + ($3,400 x 25%)).

With the new tax laws, the first $2,100 is income tax free because of the standard deduction. The next $2,550 will be taxed at 10 percent and the remaining $850 will be taxed at 24 percent for a total tax of $681 (($2,550 x 10%) + ($1,900 x 24%)).

In most cases, the Tax Cuts and Jobs Act’s Kiddie Tax rules will result in lower taxes; however, lower income parents who have children with substantial unearned income could see their child paying a higher tax rate because of the compressed trust and estate brackets.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a Certified Financial Planner™ professional.

Loss of Tax Deductions, Gains of Tax Credits

posted by Charley Mills - 1.16.18

We were promised simpler taxes! Remember the “you’ll be able to file taxes on a postcard-sized form?” Despite what you may have read about the Tax Cuts and Jobs Act, the new laws did simplify taxes for many in the middle class. In simplistic terms, the law doubled the standard deduction and eliminated several tax deductions.

Ideally, fewer people will itemize; however, many may pay less in taxes.

While there are still seven marginal tax brackets, only the lowest bracket remains unchanged. The other income brackets have lower marginal rates attached, meaning most Americans should see more take-home pay in February when withholding tables are modified. Next, the standard deduction has nearly doubled from $12,700 to $24,000 for married filing jointly and from $6,350 to $12,000 for single filers.

Tax credits are dollar for dollar against your tax liability, making them more powerful than deductions

Personal exemptions being eliminated seems to be the biggest blow—the deduction you could take per taxpayer and dependent. Essentially, this was rolled into the larger standard deduction. The child tax credit doubled from $1,000 to $2,000, and the phase-out level for this credit increased to $400,000 for married couples. Before, this credit began phasing out at $110,000 for married filing jointly. Tax credits are dollar for dollar against your tax liability, making them more powerful than deductions. While some families may see an increase in their tax liability, the higher take-home pay may still feel beneficial as monthly cash flow can be very meaningful.

Let’s look at a family that files married filing jointly and has three children. Their adjusted gross income is $130,000. Under the old tax laws, they itemized, taking deductions for state and local taxes of $6,300, mortgage interest of $12,300, and property tax of $2,127. As a family of five, they had personal exemptions of $20,250. Their taxable income was $89,023, and they owed $13,733 in income tax. They received no benefit from child tax credits since their AGI was above the phaseout. Under the Tax Cuts and Jobs Act, their standard deduction is $24,000—$3,273 more than their itemized deductions. Without the personal exemptions, their taxable income is $106,000. With the 22% marginal tax bracket, they would owe $15,199 in taxes. However, with the child tax credit of $6,000 for their three children, their net federal tax liability is reduced to $9,199 – a tax savings of $4,534. Note, married couples in the same financial situation with no children will save $1,572 under the new law.

The most popular itemized deduction, according to The Tax Foundation, are state and local taxes, which are now combined with property taxes and capped at $10,000. This limitation affects those who live in high tax states most. While mortgage interest is still deductible, it is only deductible on the first $750,000 in principal value. With the median price of homes in the United States around $259,000, this limitation seems to affect the wealthy. All taxpayers are losing the deduction for home equity loan interest after Dec. 31, 2017.

If you’re moving for work, reimbursements from your employer for moving expenses will now be included in your gross income for tax purposes. Unreimbursed moving expense deductions are eliminated. Additionally, job expenses and certain miscellaneous itemized deductions were also eliminated through 2025. Before, you could deduct certain miscellaneous itemized deductions to the extent they exceeded 2% of your adjusted gross income. These included unreimbursed employee expenses, investment expenses, and tax preparation fees.

While this seems like a lot of deductions to lose, the Tax Cuts and Jobs Act is meant to stimulate economic growth. The most significant tax cuts are for corporations, which should result in more corporate spending. More specifically, it could also result in corporations paying higher wages and bonuses, incurring more capital expenditures, and hiring more people. Ideally, this growth drives the economy. While some wealthier taxpayers may be hurt by the loss of tax deductions, they may be able to make it up in potential market gains.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a Certified Financial Planner™ professional.

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