March Madness? Depends on What You're Talking About
By Christian Stromgren
So far, March has lived up to the old adage “in like a lion, out like a lamb.” Between large amounts of snow and ice, the continuing growth of the stock market, the first tax season under the Tax Cuts and Jobs Act, and the crowning of different Big 12 champions for the first time since 2004, the last month of winter has been nothing short of memorable.
It looks like the winter snow is finally behind us. I remember hearing (and not believing) that this was going to be one of the worst winters in decades back in October of last year. Sure enough, it was one for the record books. The polar vortex ravaged the central and eastern United States. According to weather.com, over 100 U.S. cities experienced snowfall that ranked in its Top 5 over the last 60 years. Many cities even set records for lowest average temperature during the first week of the year. Here’s to hoping the extreme winter doesn’t lead to an extreme summer!
Seeming to mimic the winter weather, the stock market set its own records lately. The Dow Jones Industrial Average (DJIA) and S&P 500 experienced the worst December since 1931—during the Great Depression. But then, the markets took off like a rocket the day after Christmas, and ultimately had the best January in more than 30 years.
As usual, there are two sides to every story. Bert Dohmen of Forbes says “don’t be fooled by the latest stock market rally.” He claims that the trigger for the rally was thanks to massive amounts of short-sales being covered in a “pump and dump operation by the high frequency trading outfits” that ignores fundamentals while simultaneously pushing stocks higher.
On the flip side, history seems to indicate that 2019 should be a positive year. According to the Stock Traders Almanac, when January is positive, the year ends up positive 87% of the time.
WHAT DOES IT TAKE TO GET AUDITED BY THE IRS?
If the IRS does happen to review your return, you’re most likely going to receive a request for more information. For tax year 2017, 70% of the “audits” performed were done through correspondence rather than in-person. However, they should still be taken seriously and handled promptly. Delaying or refusal to cooperate could lead to a full-fledged audit. How can you avoid being audited? What does it take to trigger one?
- High deductions – Overstating charitable donations or other deductions. The IRS uses algorithms to make sure what you’re writing off is in line with your income. If it’s higher, they’re more likely to request documentation
- Missing income – The IRS is notified of all income that isn’t received under-the-table—we are looking at you, neighborhood lawn mowers. If the data the IRS has doesn’t match your return, you’re going to get flagged
- Earning a lot of money – You read that right. Simply making a lot of money can be a red flag to the IRS. In 2017, the IRS reviewed less than 1% of all individual returns. The examination rate jumped to 4.4% for returns that stated income of $1 million or more
- Inflated business expenses – Schedules C’s have more grey areas for reporting business income and deductions to your benefit. But the IRS is more likely to audit a return that:
- Writes off personal items used for business, like a cell phone or vehicle
- Claims deductions in excess of profits
- Reports round numbers rather than exact values
- Rental losses – You are allowed to deduct up to $25,000 in losses if you actively participate in renting the property. However, this phases out between $100,000 and $150,000 in total income. Be sure to document everything
THE TAX CUTS AND JOBS ACT
As I’m sure you’ve heard, the Tax Cuts and Jobs Act is going to change how you file your taxes this year. The marginal tax rates on the bottom 6 brackets stayed the same while the rate on the top bracket decreased from 39.6% to 37%.
Other notable changes include:
- The standard deduction was nearly doubled to $12,000 ($24,000 if married filing jointly or "MFJ”)
- The $4,050 personal exemption was eliminated
- The cap on deductible mortgage interest was reduced from $1 million to $750,000
- The Child Tax Credit doubled to $2,000 per child under 17 and starts to phase out at $200,000 ($400,000 if MFJ) rather than $75,000 and $110,000, respectively
- The estate tax deduction was doubled from $5.49 million to $11.18 million, and
- The flat corporate tax rate was decreased from 35% to 21%
With the standard deduction nearly doubled, many people who itemized in years prior will instead claim the standard deduction for 2018. Despite the loss of some deductions, there are still many ways you can reduce your tax liability. These include, but are not limited to:
- Maximizing your 401(k) Contribution
- Contributing to a Health Savings Account (if you have a high deductible plan)
- Contributing to an IRA
- Running college funds through a 529 account
- Backdoor Roth IRA (it won’t save you this year, but it grows tax free)
- Make a Qualified Charitable Deduction to satisfy your Required Minimum Distribution (applies to those over age 70)
Since we are talking about brackets, how busted is yours? After K-State and Texas Tech took the Big 12 regular season championship away from Kansas for the first time in 14 years, the ‘Cats lost a first-round heartbreaker and every other Big 12 team who isn’t from Lubbock, Texas has fallen out of the NCAA Tournament.
Interestingly enough, this year’s version of March Madness isn’t as “mad” as it’s been in years past. 14 of the Sweet 16 teams were a 4-seed or better. That has only happened one other time in 40 years. A little context—last year, there were only 7 teams 4-seed or better left at this point, which tied for the lowest in 40 years.
With the top-seeds winning the games they are supposed to win, something has happened that we’ve never seen before, and may never see again… a perfect bracket after the first 2 rounds of the NCAA Tournament. Be glad that Gregg Nigl isn’t in your office bracket pool. Gregg is a neuropsychologist from Columbus, Ohio and he didn’t even know that he picked the first 48 games right. He says there is no method to his madness—sometimes he just picked the team from the city he liked better. For the record, Gregg has Gonzaga beating Kentucky in the Championship Game.
So, here’s to hoping that your March has been as mad as the basketball tournaments and not as mad as the weather.
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The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
Photo by: Jeff Jacobs via Pixabay