Tips from Donna Wesban Monthly June 2018

Tax Changes, Luxury Goods, Pick your plastic
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Wesban Monthly

June 2018

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Mid-Year Planning: Tax Changes to Factor In

The Tax Cuts and Jobs Act, passed in December of last year, fundamentally changes the federal tax landscape for both individuals and businesses. Many of the provisions in the legislation are permanent, others (including most of the tax cuts that apply to individuals) expire at the end of 2025. Here are some of the significant changes you should factor in to any mid-year tax planning. You should also consider reviewing your situation with a tax professional.

New lower marginal income tax rates

In 2018, there remain seven marginal income tax brackets, but most of the rates have dropped from last year. The new rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Most, but not all, will benefit to some degree from the lower rates. For example, all other things being equal, those filing as single with taxable incomes between approximately $157,000 and $400,000 may actually end up paying tax at a higher top marginal rate than they would have last year. Consider how the new rates will affect you based on your filing status and estimated taxable income.

Higher standard deduction amounts

Standard deduction amounts are nearly double what they were last year, but personal exemptions (the amount, $4,050 in 2017, that you could deduct for yourself, and potentially your spouse and your dependents) are no longer available. Additional standard deduction amounts allowed for the elderly and the blind remain available for those who qualify. If you're single or married without children, the increase in the standard deduction more than makes up for the loss of personal exemption deductions. If you're a family of four or more, though, the math doesn't work out in your favor.

Itemized deductions - good and bad

The overall limit on itemized deductions that applied to higher-income taxpayers is repealed, the income threshold for deducting medical expenses is reduced for 2018, and the income limitations on charitable deductions are eased. That's the good news. The bad news is that the deduction for personal casualty and theft losses is eliminated, except for casualty losses suffered in a federal disaster area, and miscellaneous itemized deductions that would be subject to the 2% AGI threshold, including tax-preparation expenses and unreimbursed employee business expenses, are no longer deductible. Other deductions affected include:

  • State and local taxes - Individuals are only able to claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income).
  • Home mortgage interest deduction - Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married individuals filing separately) of qualifying mortgage debt. For mortgage debt incurred prior to December 16, 2017, the prior $1 million limit will continue to apply. No deduction is allowed for interest on home equity loans or lines of credit unless the debt is used to buy, build or substantially improve a principal residence or a second home.

Other important changes

  • Child tax credit - The credit has been doubled to $2,000 per qualifying child, refundability has been expanded, and the credit will now be available to many who didn't qualify in the past based on income; there's also a new nonrefundable $500 credit for dependents who aren't qualified children for purposes of the credit.
  • Alternative minimum tax (AMT) - The Tax Cuts and Jobs Act significantly narrowed the reach of the AMT by increasing AMT exemption amounts and dramatically increasing the income threshold at which the exemptions begin to phase out.
  • Roth conversion recharacterizations - In a permanent change that starts this year, Roth conversions can't be "undone" by recharacterizing the conversion as a traditional IRA

Why People Buy Luxury Goods

It's common knowledge that brand-name items cost more money than their off-brand counterparts. But that doesn't prevent consumers from paying up. In fact, according to one study, the wealthiest households (the top fifth of earners) spend approximately 65% of their consumption on luxury goods and 35% on necessities. By comparison, middle-income households spend 50% on luxuries and 50% on necessities. Even lower-income households (the bottom fifth of earners) spend 40% on luxuries and 60% on necessities.1

Why do consumers choose to spend more money on luxury goods? The following factors help explain this financial behavior.

Ignorance is bliss

Consumers have the tendency to focus on the positive attributes of a product while ignoring its drawbacks. Non-luxury items are viewed as inferior, so it's easier to identify the negatives of those products over the brand-name ones.

For example, let's say you're in the market for a new phone. What sounds more appealing: an expensive smartphone produced by a well-known brand name, or a cheaper smartphone with comparative features made by a less-recognizable brand? Luxury retailers and their marketing departments rely on consumers to buy the more expensive products because of the legitimacy and quality associated with brand names. As a result, it's easier for consumers to ignore the higher cost of the pricier product and purchase it anyway, because it feels as though it's worth the extra money.

A mood booster

Do you treat yourself to a shopping spree when you're in a vulnerable emotional state? If so, you may be splurging on items you can't afford in order to boost your mood. On the opposite end of the spectrum, you may celebrate a big promotion or other life milestone by spending hundreds (or thousands) of dollars on a designer item. The instant gratification that comes with extravagant spending is a feeling that some consumers can't pass up.

In addition to your emotions, your self-esteem can also determine how likely you are to buy luxury goods. Consumers who want to feel better about themselves might buy expensive items because they serve as status symbols. Whether or not you're able to afford it, a flashy product can act as a physical representation of your success in life and increase your self-esteem.

Knockoffs won't cut it

You've probably passed by a store or kiosk selling discount goods that are supposed to look like authentic luxury items. Even though they look like the real thing, there's a reason why you're likely to pass up knockoffs in favor of more expensive goods: authenticity. Purchasing a knockoff might save you money, but the knowledge that you're toting around a fake diminishes the meaning behind the purchase. In other words, buying an authentic luxury good also provides a sense of accomplishment or pride. Those feelings aren't the same when it's a knockoff item - treating yourself to a fake is really like not treating yourself in the first place. Consumers who continue to seek that sense of authenticity wind up spending more money on higher-end items again and again.

Shop smarter

If you want to rein in your spending, use good common sense when shopping. Ask yourself questions to help decide whether a purchase is really worth it. Why do you want this particular item? Will buying it affect you later? Can you afford it? Do you actually need it? If you can't live without it, do some comparison shopping to see whether you can score a better deal on a generic, nonbrand-name counterpart.

Avoid shopping when you want to reward yourself or boost your mood. But remember that it's okay to splurge from time to time as long as you plan your purchase and save for it accordingly.

1 MarketWatch, July 21, 2017

Pick Your Plastic: Debit or Credit?

According to a Federal Reserve study, Americans use debit cards more often than credit cards, but the total value and the average value of credit card transactions are higher than those of debit card transactions.

While consumers made 69.5 billion transactions using debit cards, the total value of these transactions was $2.56 trillion, with an average transaction value of $37. Credit card usage resulted in 33.8 billion transactions, with a total value of $3.16 trillion, and a $93 average transaction value. 1

This reflects fundamental differences. A debit card acts like a plastic check and draws directly from your checking account, whereas a credit card transaction is a loan that remains interest-free only if you pay your monthly bill on time. For this reason, people may use a debit card for regular expenses and a credit card for "extras." However, when deciding which card to use, you should be aware of other differences.

Fraud protection

In general, you are liable for no more than $50 in fraudulent credit card charges. For debit cards, a $50 limit applies only if a lost card or PIN is reported within 48 hours. The limit is $500 if reported within 60 days, with unlimited liability after that. A credit card may be safer in higher-risk situations, such as when shopping online, when the card will leave your sight in a restaurant, or when you are concerned about a card reader. If you regularly use a debit card in these situations, you may want to maintain a lower checking balance and keep most of your funds in savings.

Merchant disputes

You can dispute a credit card charge before paying your bill and shouldn't have to pay it while the charge is under dispute. Disputing a debit card charge can be more difficult when the charge has been deducted from your account, and it may take some time before the funds are returned.

Rewards and extra benefits

Debit cards offer little or no additional benefits, while some credit cards offer cash-back rewards, and major cards typically include extra benefits such as travel insurance, extended warranties, and secondary collision and theft coverage for rental cars (up to policy limits). Of course, if you do not pay your credit card bill in full each month, the interest you pay can outweigh any financial rewards.

Credit history

Using a credit card responsibly can help you build a positive credit history because your usage is reported to credit reporting agencies. A debit card has no effect on your credit.

Money management

Using a debit card helps ensure that you don't overspend. Because purchases are deducted right away from your checking account, you aren't in the dark about how much you're spending. You can quickly check your balance online or at an ATM, and see which purchases are pending.

A credit card offers you the flexibility of tracking your monthly expenses on one bill, which can help you establish and stick to a realistic budget. A credit card can also be used in emergencies.

Considering the additional protections and benefits, a credit card may be a better choice in some situations - but only if you pay your monthly bill on time. The good news is, you don't have to choose just one option.

1U.S. Federal Reserve, 2016 (2015 transactions, most recent data available)
Disclaimer: The information in this e-mail or any social media site associated with Wesban Financial Consultants, P.C. is meant to provide general educational information and is not a substitute for legal, accounting, or financial advice for any particular case, situation, or person
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Donna Gordon

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