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Shell GESPP: Why You Must Re-Enroll and Other Changes to Your Benefits Plan

December 23, 2018

An Employee Stock Purchase Plan is a benefit that allows employees to purchase company stock at a discount from fair market value.

 

U.S. tax law allows the discount to be as high as 15%. Shell Oil’s employee stock purchase plan is called the Global Employee Share Purchase Plan (GESPP).

 

What is the Shell General Employee Share Purchase Plan?

The GESPP is offered as part of the effort for Shell to tie its employee’s financial success to the company’s, but what is really valuable is the discount that goes along with the GESPP plan. Over time, being able to consistently purchase stock year after year at a 15% discount can add up to be a lot of money. In addition to the 15% discount, there are tax benefits to GESPP that most employees are not aware of, which I will explore in more detail below. For most, this is a plan you do not want to miss when you include the value of the discount and the tax benefits.

 

Let us dive further into how Shell’s General Employee Share Purchase Plan works, what the benefits may be, and what tax considerations need to be taken into account.

 

How to Re-enroll in the Shell General Employee Share Purchase Plan

Historically, most employees at Shell enrolled once in the GESPP and then they were re-enrolled each and every year—but that’s not the way it’s going to work for 2019. Shell has changed the structure of the GESPP, which means if you want to participate, you must re-enroll.

 

Let me say that one more time. If you want to participate in the GESPP for 2019, even if you have been enrolled previously, you must re-enroll.

 

How soon do you need to re-enroll? Generally you need to re-enroll by the 15th of the month prior to wanting to start contributions. Remember all contributions to the GESPP are deducted from your payroll—similar to how it works for your Provident Fund.

 

To re-enroll (or sign up for the first time) go to ComputerShare. After enrolling for 2019, Shell should automatically re-enroll you for future years…well…as long as they don’t make any other changes to how the GESPP works.

 

What has Changed in the Shell General Employee Share Purchase Plan?

Wait the GESPP changed? How so?

 

The major change is that the contribution period has decreased from 12 months, January to December, to only 11 months, January to November, starting in the 2019 year. Overall, this is not a big deal, but it does require an adjustment to how we think about the tax ramifications of liquidating vested stock from the GESPP going forward. More on that topic below.

 

The other change is the contribution amount, which has historically been adjusted every year. Annual contributions are based on EUR 6,000. The U.S. dollar equivalent is set as of November 1 from the prior year. So, for 2019, EUR 6,000 is worth $6,827 as of November 1st, 2018.

 

Well, guess how that compares to last year…

 

Yup, the dollar has strengthened in value to the Euro compared to last year, which means– for U.S.-based employees– the amount they can contribute to the GESPP for 2019 has declined compared to what they could contribute in 2018.

 

 

 

 

 

 

 

 

The Price Advantage of the Shell General Employee Share Purchase Plan

The GESPP will likely give employees a discount on the purchase price compared to buying Shell stock on the open market. Specifically, the price advantage comes in two forms:

 

1) A discount from fair market value

2) A look-back provision

 

The GESPP offers a discount of 15% from the market price.

 

For example, if the price of Shell stock is $55.22, the GESPP allows for the purchase of shares at $46.94 per share—a 15% discount

 

The other price advantage is the lookback provision.

 

A look-back provision allows Shell to look at two dates, the offer, and the purchase date, and apply the discount to whichever is less.

 

Let us look at 2017 as an example. In 2017, Shell stock was valued at $55.22/share on the first trading day of the plan year (offer date), and $68.04/share on the first trading day after the end of the plan year (purchase date). The 15% discount is applied to the offer date price since it is the lower of the two.

 

Even though Shell stock declined intra-year beneath the $55.22 share price, it never neared the discount price of $46.94. The ability to look back in time and apply the discount to the lower of two price points is huge for participants in value add!

 

 

 

 

 

 

 

 

 

Receiving the Shares – Your Fidelity Individual Account

For US-based employees and residents, the vested shares are deposited into a Fidelity Individual account in your name at the end of January. (This is the same account you will receive Shell Performance Shares in if you are eligible.) Taxes are withheld by selling an appropriate amount of shares based on your supplemental tax rate to cover the GESPP discount. For most employees, the supplemental tax rate is 22%. You do not receive the benefit of dividend from the Shell stock prior to vesting (unlike Performance Shares), but you do receive dividends going forward once the shares have vested in your Fidelity account.

 

Once the shares have been deposited into your Fidelity Individual account, you can sell them at any point in time. But before you do, make sure you understand the tax ramifications!      

 

The Tax Advantage of the Shell General Employee Share Purchase Plan – A Qualifying Disposition

When you buy Shell stock through the GESPP, you use the after-tax dollar to make the purchase. So it naturally seems as if when you receive the Shell stock it should be tax-free, right? Wrong. The IRS views the 15% discount that you receive as a form of compensation. So, Shell will withhold taxes on the effective discount in stock from the purchase price.  

 

Upon selling the stock, you may owe taxes on the difference between the purchase price and the sale price. The tax rate you pay may be ordinary income, long-term capital gains, or a combination depending on whether you receive a qualified disposition or disqualifying disposition.

 

To receive preferential tax rates on the sale of proceeds from your GESPP, you must have a qualified disposition. To do so, you must meet the following rules:

 

1) The stock must have been held for at least one year from the original purchase date.

2) The stock must have been held for at least two years from the original offer date.

 

If a person meets these criteria, the discount received will be taxed as ordinary income, and the gain in excess of the discount will be capital gains.

 

For Shell, since the plan year changed from 12 months to 11 months, this now means you must hold the stock for 13 months from when the stock vests (shows up in your Fidelity account) before you can sell it if you want to receive preferential tax rates.

 

What Is a Disqualifying Disposition?

A disqualifying disposition is anything that is not a qualified disposition. All gains from the purchase price on the Shell stock will be taxed as ordinary income as opposed to a portion taxed at preferential long-term capital gains rates.

 

Depending on the size of the gain and your tax bracket, this could be a big tax hit or a small tax hit. To give some perspective the max investment ordinary income rate is 40.8% (including the 3.8% Medicare surtax on investment income) and the max long-term capital gains tax rate is 23.8%. That is a 17% difference!

 

Should Everyone Take Advantage of the GESPP?

We believe that most employees should plan on taking advantage of the GESPP. To some extent the discount and the ability to purchase at the lower of the two prices is similar to a company’s match to a 401(k)–it is like free money. Of course, there are always certain years and situations where the GESPP discount may not work out to due Shell stock movement, but we think that is unlikely.

 

There are situations where it may not make sense for an employee to participate in the GESPP, primarily due to cash flow concerns, but for most, it is a benefit you should plan to take advantage of.

 

If you are taking advantage of the GESPP you should make sure that you do not end up being over-concentrated in Shell stock. This is even more important if you are a recipient of Shell Performance Shares. If you have your job, your investments, your bonus, and your benefits all tied up in the success of one company, you may have a higher concentration of risk than you intended. Make sure you have a tax-efficient company stock diversification plan in place.

 

If you have further questions concerning your Shell GESPP, contact your advisor, or reach out to one of our Shell benefits specialists. 

 


Nick Johnson, CFA®, CFP®

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Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

 

As Vice President and Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.


 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.

4 Tax-Efficient Ways to Gift Money This Holiday Season

December 19, 2018

Few people think about the holidays without thinking about the word “gift.” 

 

Most often, the word “gift” is associated with what you find in your stocking or under a tree after waking up Christmas morning. 

 

I often make the joke that Christmas presents get boring as I grow older because rather than asking for the new gaming console or my favorite player’s jersey, I’m asking for the little things: socks, gift cards to my favorite restaurants around town, etc.

 

However, I’ve also found myself asking for one big thing every year. That big thing being a little bit of money to invest, with the intention that I can one day use it to put a down payment on a house, buy my significant other a wedding ring (who, don’t get your hopes up, is not in the picture yet), or help pay for living expenses so that I can contribute additional money to my 401(K). This life transition is something I think we can all relate to as we grow older.

 

We see many of our clients gift in ways that can help provide for future generations and act as a short-term strategy that supplements their long-term estate planning goals. So, let’s take a look at some things you should be thinking about if you have additional money you would like to gift at the end of the year.

 

Gifting if You Are Over Age 70 ½ – Qualified Charitable Donations

If you’re over 70 ½, giving to charity directly from your IRA is one of the most tax-advantaged ways to meet charitable goals as it both counts toward your required distribution for the year and does not show up as income on your tax return. Rules You Need to Know to do an IRA Qualified Charitable Distribution

 

Tax-Efficient Gifting Strategies

Gifting if You Are Under Age 70 ½ – Bundled Deductions and Donor Advised Funds

Though not as tax advantageous, people under 70 ½ who feel charitably inclined should consider bundling deductions through a Donor Advised Fund, especially since the standard deduction is now quite a bit higher.  Bundling Deductions and Tax Savings: How to Take Advantage of Your Deduction Options

 

Gifting to Help Financially Support Future Generations

More often than not, people want to take care of the next generation and one day, the generation after that. Let us assume your loved one has children in the first few years of their career. It is likely that they are using most, if not all of their take-home pay for rent and living expenses, and are likely not maxing out their savings for retirement. You may consider talking to them about how they can use the money you gift as a proxy for their salary to fund the aforementioned living expenses and defer an amount close or equal to the sum of the gift toward their employer retirement plan. Maximizing the next generation’s ability to save in tax-deferred accounts like 401(k)s, Roths, and IRAs can be one of the best estate planning tools available.

 

Many years later, these individuals will most likely have stabilized financially and hopefully have the ability to fund their retirement and more.  Around that same time, they are probably looking to have children (meaning grandchildren for you). One of the ways to best assist with the new parents’ cash flow is by opening and contributing to a 529 plan for one’s grandchildren. The earlier, the better, as 529s act like a Roth in that they grow tax-free. Thus, your annual gift has reduced the burden of one generation’s cash flow while simultaneously afforded the next generation a greater chance of going to college and graduating with little to no student loan debt.

 

5 Questions You Should Consider When Using 529 Plans for Education

 

Did You Know You Can Now Use a 529 Savings Plan for Private School Education Costs (K-12)?

 

 

As we always tell our clients, it’s your money, and you choose how you want to spend it or gift it. If you want to gift your children the cost to cover a kitchen renovation or a new car, there is nothing wrong with doing so. This article serves not a guide on how you should make generational or charitable gifts, but an outline of how you can make these gifts in a way that is most tax beneficial. For more information regarding tax-efficient gifting strategies, contact your advisor, or reach out to the Willis Johnson & Associates team.

 


This image has an empty alt attribute; its file name is person1.jpgRobert (Bobby) Cope, M.S.

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Robert (Bobby) Cope joined Willis Johnson & Associates as a financial paraplanner in May of 2017. For Bobby, entering the financial planning profession allows him to not only assist the associate wealth managers of the firm in daily operations but more importantly assisting client’s in many other facets of their lives. Bobby graduated Summa Cum Laude from the University of Alabama Honors College in May of 2017.

 

He completed a dual degree program that awarded him an M.S. in Human Environmental Sciences, with a concentration in Family Financial Planning and Counseling, as well as a B.S. in Human Environmental Sciences, with a concentration in Consumer Sciences. At Alabama, Bobby was a member of Delta Kappa Epsilon social fraternity, as well as many other groups and honor societies on campus.
 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions. 
 
 

Shell Employees Can Save MORE in the Shell Provident Fund 401(k) in 2019

December 14, 2018

The IRS recently released the 2019 retirement plan contribution limits.

For super-savers at Shell, things are looking up. Here are a few of the most noteworthy changes:

 

–> Shell employees can now contribute up to $19,000 (or $25,000 for those over 50 years old) of pre-tax or Roth savings to the Shell Provident Fund. 

–> Shell’s limit on after-tax contributions has remained at $9,000, which means employees can contribute up to $28,000 (or $34,000 for those over 50 years old) to the Shell Provident Fund, between pre-tax and non-Roth after-tax savings.

 

How Shell Employees Can Make Tax-Efficient Retirement Plan Contributions

If you are contributing after-tax dollars to the Shell Provident Fund, remember to roll out the after-tax funds at least once annually to a Roth IRA so that you can take advantage of the mega backdoor Roth strategy.

 

Many Shell employees will be able to take advantage of higher contribution limits for backdoor Roths. With the IRA contribution limit now being $6,000 ($7,000 if over age 50), super-savers at Shell can put away $34,000 ($41,000 if over age 50) — between the Provident Fund and backdoor Roths– into tax-sheltered retirement accounts.

 

2019 Annual Compensation Limits and Strategic Saving for Shell Employees

The annual compensation limit for 2019 has increased from $275,000 to $280,000. If you make more than $280,000 in base and bonus compensation for 2019, remember to ensure that you max out your Provident Fund contributions before earning $280,000 of income. After you earn $280,000 of income, you can no longer contribute to the Provident Fund.

 

Shell contributes a 10% match to 401(k)accounts for employees that have been with the company over nine years. Since the annual compensation limit for 2019 is now $280,000, Shell will now cap company contributions to the Provident Fund at $28,000.

 

In 2019, once you begin earning more than $280,000, Shell will make their contributions to the Shell Provident Fund BRP (Benefit Restoration Plan) instead of to the Shell Provident Fund.

 

If 2019 is the first year you expect to make more than $280,000, check that you have an allocation and investment strategy set up for your Provident Fund BRP. The 2019 limit adjustments will be advantageous for super-savers at Shell and it is important to be sure that you make the most of these changes.

 

Willis Johnson & Associates will be working with our clients over the next few months to assist with adjusting contributions based on the new IRS rules. In 2019, we will follow up with clients who are eligible to take advantage of backdoor Roth IRAs to ensure they are on track for success. In the second half of the year–once these clients have reached their max contributions– we will help facilitate after-tax rollouts from their Provident Fund accounts.

 

If you have any questions about the 2019 contribution and compensation limits, please contact your advisor, or schedule a free consultation with one of our Shell specialists.

 


Alexis Long, MBA , CFP®

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Alexis Long is a wealth manager at Willis Johnson & Associates. For Alexis, financial planning combines an interest in producing detail-oriented financial plans with a desire to help people obtain their goals, ranging from retiring early, paying for their grandchildren’s educations, buying a second home or leaving a legacy for their children. 
Alexis earned her undergraduate degree in International Business from Texas Tech University and her Finance M.B.A. from the University of St. Thomas.

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.

2019 IRS Contribution Limit Adjustments: How Chevron Employees Can Save MORE in the Employee Savings Investment Plan in 2019

December 14, 2018

The IRS recently released the 2019 retirement plan contribution limits.

For super-savers at Chevron, things are looking up. Here are a few of the most noteworthy changes:

 

–> Chevron employees can now contribute up to $19,000 (or $25,000 for those over 50 years old) of pre-tax or Roth savings to the Employee Savings Investment Plan (ESIP).

–> Chevron’s limit on after-tax contributions has remained at $14,600, which means employees can contribute up to $28,000 (or $34,000 for those over 50 years old) between pre-tax and non-Roth after-tax savings to their 401(k).

 

How Chevron Employees Can Make Tax-Efficient Retirement Plan Contributions

If you are contributing after-tax dollars to the Chevron ESIP, consider rolling out the after-tax funds to a Roth IRA at the tail end of the third quarter to take advantage of the mega backdoor Roth strategy. For many Chevron employees that are contributing after-tax, the end of the third quarter is the best time to do the rollout because the Chevron ESIP freezes all contributions to the plan for 90 days afterward.

 

2019 Annual Compensation Limits and Strategic Saving for Chevron Employees

The annual compensation limit for 2019 has increased from $275,000 to $280,000. If you make more than $280,000 in base and bonus compensation for 2019, remember to ensure that you max out your ESIP contributions before earning $280,000 of income. After you earn $280,000 of income, you can no longer contribute to the Employee Savings Investment Plan.

 

Chevron contributes up to an 8% match to employee 401(k) accounts. Since the annual compensation limit for 2019 is now $280,000, Chevron will now cap out contributions to the ESIP at $22,400. In 2019, once you begin making more than $280,000, Chevron will be making their contributions to the Employee Savings Restoration Plan (ESIP RR) instead of the Employee Savings Investment Plan. If 2019 is the first year you expect to make over $280,000, check that you have an allocation and investment strategy set up for your ESIP RR.

 

In addition, many Chevron employees will be able to take advantage of higher contribution limits for backdoor Roths. Since the IRA contribution limit for 2019 is now $6,000 (and $7,000 for those over 50 years old), super-savers at Chevron can put away $34,000 (or $41,000 for those over 50 years old) between the 401(k) and backdoor Roths into tax-preferred retirement accounts.

 

The 2019 limit adjustments will be advantageous for super-savers at Chevron and it is important to be sure that you make the most of these changes. Willis Johnson & Associates will be working with our clients over the next few months to assist with adjusting contributions based on the new IRS rules.

 

In 2019, we will follow up with clients who are eligible to take advantage of backdoor Roth IRAs to ensure they are on track for success. At the tail end of the third quarter–once our Chevron clients who contribute after-tax savings to the Employee Savings Investment Plan have reached their max contributions– we will help  facilitate after-tax rollouts from their Chevron ESIP accounts.

 

If you have any questions about the 2019 contribution and compensation limits, please contact your advisor, or schedule a free consultation with one of our Chevron specialists.

 


Alexis Long, MBA, CFP®

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Alexis Long is a wealth manager at Willis Johnson & Associates. For Alexis, financial planning combines an interest in producing detail-oriented financial plans with a desire to help people obtain their goals, ranging from retiring early, paying for their grandchildren’s educations, buying a second home or leaving a legacy for their children. 
Alexis earned her undergraduate degree in International Business from Texas Tech University and her Finance M.B.A. from the University of St. Thomas.

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.

2019 IRS Contribution Limits Allow BMC Employees to Save More in the Savings & Investment Plan

December 14, 2018

The IRS recently released the 2019 retirement plan contribution limits.

For super-savers at BMC Software, Inc., things are looking up. Here are a few of the most noteworthy changes:

 

–> BMC employees can now contribute $19,000 (or $25,000 for those over 50 years old) of pre-tax or Roth savings to the BMC Software, Inc. Savings and Investment Plan.

 

How BMC Employees Can Maximize Their Retirement Plan Contributions

It’s important to ensure that you are contributing at least 5% of your pay every pay period to receive the full 5% company match. At BMC, it is easy to miss the opportunity to receive the company contributions, so make sure you do the math every year! A great resource to assist you is the BMC 401(k) Deferral Calculator.

 

2019 Annual Compensation Limits and Strategic Saving for BMC Employees

The annual compensation limit for 2019 has increased from $275,000 to $280,000. If you make more than $280,000 in base and bonus compensation for 2019, remember to ensure you max out your BMC 401(k) contributions prior to earning $280,000 of income. After you earn $280,000 of income, you can no longer contribute to the 401(k).

 

In addition to the $19,000 of pre-tax or Roth contributions, BMC also allows employees to contribute non-Roth after-tax savings to the BMC Software, Inc. Savings and Investment Plan. If you make $280,000 or more annually, you can contribute up to $23,000 in additional after-tax savings. If you contribute over $23,000, you may reduce the amount of money BMC puts in the plan on your behalf. Lastly, if you are contributing after-tax dollars to BMC’s 401k, remember to roll out the after-tax funds at least annually to a Roth IRA to take advantage of the mega backdoor Roth strategy.

 

In addition, many BMC employees will be able to take advantage of higher contribution limits for backdoor Roths. With the IRA contribution limits now $6,000 (and $7,000 if over age 50), it means super-savers at BMC can put away $48,000 (or $55,000 if over age 50) between the BMC 401(k) and backdoor Roths into tax-preferred retirement accounts.

 

The 2019 limit adjustments will be advantageous for super-savers at BMC and it is important to be sure that you make the most of these changes. Willis Johnson & Associates will be working with our clients over the next few months to assist in adjusting contributions to ensure they get the full 5% company per paycheck match.

 

In 2019, we will follow up with clients who are eligible to take advantage of backdoor Roth IRAs to ensure they are on track for success. We will help facilitate after-tax rollouts from the 401(k) in the second half of the year once contributions have been maxed.

 

If you have any questions about the 2019 contribution and compensation limits, please contact your advisor, or schedule a free consultation with one of our BMC specialists.

 


Tyler Baker, CFP®

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Tyler Baker is an associate wealth manager at Willis Johnson & Associates.Tyler enjoys guiding individuals and their families through the financial planning process, and he specializes in uncovering new opportunities that work to minimize client expenses, while increasing their savings. Tyler graduated from the University of Georgia with two degrees, a Bachelor of Science in financial planning, and another in housing management and policy. 


 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.

The Markets (as of market close November 30, 2018)

December 4, 2018

The Markets (as of market close November 30, 2018)

 

November proved to be a very volatile month for stocks.

 

By the third week of the month, the benchmark indexes listed here had given back just about all of the gains accumulated during the year. However, a spurt during the last week of November helped push stocks higher by the end of the month. Each of the indexes listed here outperformed their October end-of-the-month closing values, led by the large caps of the S&P 500 and the Dow, followed by the Global Dow and the small caps of the Russell 2000. The technology stocks of the Nasdaq edged higher by the close of November, and that index still maintains a sizeable lead year-to-date among the indexes listed here. 

 

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Nevertheless, investors head into the last month of the year anxiously, as fears of a slowing economy and growing international trade tensions will likely temper expectations for steady stock gains moving forward. Energy stocks have been hit by falling oil prices, and the yield on 10-year Treasuries fell below 3.0% as bond prices rose after the Federal Reserve chairman intimated that interest rates may not be increasing as aggressively as previously thought… Click here to read the full article. 

Tax Loss Harvesting: How to Benefit From Your Investment Losses

November 15, 2018

 

Positive investment performance is desirable, but not achievable 100% of the time.Though it may seem counterintuitive, the upside to negative performance in an investment is the potential tax savings when the investment is sold or distributed. 

There are times, during both good and bad market years, when seeking to generate losses through the sale of underperforming investments may present an opportunity.

 

Reaping the Benefits of Losses with Tax Loss Harvesting

The U.S. federal tax system allows for taking realized capital losses on investments against income, which reduces a taxpayer’s overall income tax liability. The process of tax loss harvesting involves proactively selling investments in taxable, non-retirement accounts where the current market values are below the purchase cost bases. This enables the investor to realize losses, which can then be used to offset realized gains as well as additional income.

 

How Can You Apply Tax Loss Harvesting to Your Financial Situation?

Tax loss harvesting can be effected with stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Beyond offsetting capital gains…

 

–> Any net losses (losses that exceed gains) can be used to offset $3,000 in ordinary income.

–> Net losses on marketable investments can also offset gains on the sale of assets, which are taxed at higher long-term rates like gold coins or a gold ETF (at 28%), or depreciation recapture on rental property (at 25%).

–> Any net losses not used to offset gains or ordinary income in one year may be carried forward indefinitely to offset realized gains in other years.

–> Depending on portfolio investments and selling strategy, long-term losses could be used to offset short-term gains which are taxed at ordinary income tax rates.

 

Also, you can sell an asset class- like internationals– and immediately buy the asset class back with a different fund. This strategy allows you to maintain the same allocation to an asset class with a slightly different fund, while reaping the tax benefit. 

 

 

Let’s walk through an example to demonstrate how tax loss harvesting works…

 

Mary owns two investments- BLUE stock and RED stock. BLUE has a $100,000 accrued gain in the investment and RED has a $50,000 loss from its cost basis. Mary is in a tax bracket such that if she sold BLUE stock she would pay 23.8% tax (20% capital gain plus 3.8% net investment tax) on her gain, generating a tax liability of $23,800.

 

$100,000 BLUE Gain @ 23.8% = $23,800

However, if Mary sold both her BLUE and RED investments, she would reduce her taxable gain to $50,000 and her tax liability to $11,900.

$100,000 BLUE gain (minus) $50,000 RED loss @ 23.8% = $11,900

 

tax loss harvesting

 

Why Would Mary Want to Take a Tax Loss on Her Underperforming RED Stock?

Taking the loss on RED could be a choice that is investment strategic. Perhaps, a determination that RED stock was not going to render positive performance in the foreseeable future supports a conclusion that it would be a good time for Mary to sell RED. Or, perhaps, Mary has several lots in RED stock, some of which are at a gain, but she decided to sell her highest purchase cost basis lot because it proffers the best opportunity to take a loss which she can use for reducing her tax liability on her BLUE gain. This approach would exemplify a HIFO (highest-in-first-out) strategy.

 

Why is 2018 a Particularly Good Time to Pursue a Tax Loss Harvesting Strategy?

Even though tax loss harvesting presents a tax savings opportunity in both good and bad market years, the 2018 market volatility may enable investors to lock in greater gains and net those gains with losses to minimize their tax liability. The type of volatility we are experiencing creates considerable divergence – of different international markets, of different industry sectors, and of different asset types, and fielding a net of gains and losses in this environment can be the most effective when compared to less volatile market environments.

 

This divergence can also create a need for rebalancing an investment portfolio necessitating transactions to bring the portfolio into parity with its objectives. Prospective performance can also drive the need for trading. For example, interest rates and their effect on medium-term and long-term fixed income investments may prompt a transfer to shorter-term investments. In short, the opportunity to generate a loss for tax purposes may be attractive outcome coupled with a need to properly maintain the portfolio.

 

What are the Risks Associated With Tax Loss Harvesting?

One considerable risk when harvesting losses is the wash sale rule. The IRS prohibits the recognition of a loss for tax purposes if “substantially identical” securities are purchased within 30 days before or after the loss generating transaction.

 

What qualifies as a “substantially identical” security?

 

–> Securities are the same stock 

–> Two different classes of stock issued by the same corporation

–> ETFs offered by different investment firms that track the same index

 

A loss could be excluded, in whole or part, if the wash rules are not followed. Note that inadvertent violation of the rules can occur if a dividend reimbursement election is in place on a particular security and a reinvestment takes place within 30 days of the loss transaction.

 

There are many reasons and potential applications for investors to employ tax loss harvesting. You should seek the counsel of your tax advisor and financial advisor when implementing a loss harvest in order to maximize the benefits of this strategy. Throughout the month of December, we will be implementing tax loss harvesting strategies for our clients and will proactively notify those concerned. If you have any questions, please contact a member of the Willis Johnson & Associates team for more information.

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.

International Equities and Market Volatility: A Breakdown and What to Expect

November 9, 2018

During the month of October, the S&P 500 briefly touched a 10% correction before finally somewhat recovering, and has recently been helped by the political outcome of the election.

 

On the other hand, the international asset class year-to-date has continued to lag the S&P 500 noticeably and has been a cause for concern among market participants.

 

When we disaggregate the contributions to international equity returns this year, we see that the biggest detractors have been the contraction of P/E multiples, and currency weakness against the U.S. dollar. Earnings per share growth has been a positive driver for international company stock performance in 2018.

 

So, what does this tell us?

 

This data indicates that the response to internationals has been driven not by the economic fundamentals of these international markets and companies, but by a reaction to the recent trade conflicts and tariffs, whose effective economic impact has not yet materialized. The selling of these international companies has caused the price to contract while earnings have simultaneously been growing, a sign of forced selling.

 

A prime example of what encapsulates the factors at play in this most recent pullback has been the performance of a number of companies in the Chinese technology sector that have maintained strong quarterly earnings growth through the third quarter of 2018, yet have seen their valuations cut by 35% in 2018. There is a strong disconnect between the company’s earnings and economic prospects and their stock price performance, driven not due to any fundamental differences in these companies’ economic position, but of fears regarding uncertain outcomes of these trade wars.

 

Currently, European, Japanese, and emerging market equities are trading below their 25-year historical average P/E ratios, whereas the U.S. is slightly above its historical average P/E ratio. The valuations overseas continue to look more favorable relative to those in the U.S. In volatile times like these, tried and true investing approaches involve staying the course, recognizing good valuations when we see them, and not overreacting during periods of volatility. It may be a couple of months or as long as 18-24 months before valuations from internationals normalize.

 

You may ask, should we wait to invest until everything has worked out? No, because the first positive results usually yield the most significant returns.

 

If you have any questions about this, please reach out to a member of the Willis Johnson & Associates team.

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.

The Markets (as of market close October 31, 2018)

November 5, 2018

The Markets (as of market close October 31, 2018)

October truly was a scary month as stocks closed the month well below their end-of-September values.

 

The tech-heavy Nasdaq lost over 9.0% by the end of October, while the small caps of the Russell 2000 fared even worse, losing almost 11.0%. The S&P 500 fell close to 7.0% – its largest monthly decline in over seven years.The Dow dropped 5.0%, and the Global Dow sank over 7.0%. A slide in internet stocks, coupled with investor concerns that global economic growth is slowing, helped amp up volatility during October. Yields on long-term bonds rose as prices fell, with the yield on 10-year Treasuries climbing about 8 basis points on the last day of the month. By the close of trading on October 31, the price of crude oil (WTI) was $64.95 per barrel, down from the September 28 price of $73.53 per barrel.

 

October 2018 Market Review
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

The national average retail regular gasoline price was $2.811 per gallon on October 29, down from the September 24 selling price of $2.844 but $0.356 more than a year ago. The price of gold rose by the end of August, closing at $1,216.80 on the last trading day of the month, up from its price of $1,195.20 at the… Click here to read the full article.

Approaching the 2018 Midterm Elections as a Rational Investor

November 1, 2018

Americans will head to the polls in less than one week to vote for their preferred candidate in the United States midterm elections. No matter who controls the House or Senate both parties will no doubt spin their stories jockeying for a perceived mandate.  

The question going into Election Day is: “What are the issues at hand and what is a rational investor to do?”

 

 

“It’s the economy, stupid.” – James Carville, strategist for Bill Clinton’s 1992 presidential campaign 

 

 

Unlike the concerns surrounding Bill Clinton’s presidential campaign, the  issues of today may be in fact, non-issues. The headline unemployment rate has reached historic lows, consumer confidence is higher than before the dot-com bubble, interest rates may no longer be “accommodative” but are no worse than neutral, tax reform boosted paychecks, and the stock market is hitting new records. A frustrated electorate can be found voicing their opinions on every twitter feed and news program, but the economic fundamentals do not support a mass recall of our governing party.  

 

President Trump touted his polling numbers throughout his presidential campaign and has since maintained historically low approval ratings while in office according to ABC News’s  FiveThirtyEight running calculation. While unimpressive overall, there has been a remarkable consistency to the data indicating most Americans disapprove of his presidency. Disapproval as a descriptor may be misguided when judging a man and a president with such a uniquely colorful resume. However, the approval or disapproval of President Trump may not fully encapsulate how Americans will vote for House and Senate candidates of the same party. According to the Reuters/Ipsos polling data, President Trump may face disapproval from Americans who disagree with his character or leadership style but are likely to benefit from his positions on tax reform and deregulation.

 

A rational investor should reference recent examples of misinterpreted polling results as a word of caution – the 2016 presidential election, Brexit, and the unexpected success of Germany’s AFD electoral performance. There appears to be a growing disconnect between headline polling numbers and the eventual results. We may witness yet another departure from traditional polling expectations next week.

 

All 435 House seats are up for reelection this November. Pundits, too numerous to count, are predicting the House will swing left lead by Nancy Pelosi as the new majority leader. As of October 31, 2018, ABC News’s FiveThirtyEight estimates an 85.4% chance of Democrats winning control of the House. Further supporting these predictions are the micro-level shifts in demographics and voting districts that tend to favor Democrats this election season. 

 

The Senate is where things get interesting. Twenty-six of the 35 Senate seats up for grabs are held by Democrats, indicating that the odds favor a continuation — or increase– of Republican control of the upper body. 

 

Regardless of Tuesday’s outcome, corporate CEOs will return to work on Wednesday morning, and American consumers will begin their holiday shopping season. A rational investor should maintain a long-term investment horizon while rebalancing portfolios when market volatility skews the target allocation beyond an acceptable tolerance band.  

 

If you have any concerns or questions regarding the the impact of 2018 U.S. midterm elections on market activity, reach out to a member of the Willis Johnson & Associates team to schedule a conversation with one of our financial professionals.

 

Join Vice President Nick Johnson as he dives into an  in-depth review of recent market activity during our Market Update webinar. Click here to browse our upcoming webinar presentations and register today.

 


SOL_3311 (2)Tyler Baker, CFP®

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Tyler Baker is an associate wealth manager at Willis Johnson & Associates.Tyler enjoys guiding individuals and their families through the financial planning process, and he specializes in uncovering new opportunities that work to minimize client expenses, while increasing their savings.

 

Tyler graduated from the University of Georgia with two degrees, a Bachelor of Science in financial planning, and another in housing management and policy. 

 


 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.

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