Post-DOMA Financial Planning

July 23, 2013

In late June, the U.S. Supreme Court found that Section 3 of the federal Defense of Marriage Act (also known as DOMA) violates the equal protection clause of the Fifth Amendment of the Constitution. This monumental decision carried with it significant implications for same-sex couples, particularly when it comes to financial planning issues like tax strategies, education planning and retirement accounts.

Generally speaking, planning for same-sex married couples will be very similar to opposite-sex married couples, as same-sex married couples will file either Married Filing Jointly (MFJ) or Separately. For most, but not for all, this should be a benefit from having to file single or head of household due to differences in marginal tax brackets (and corresponding rates) as well the standard deduction, personal exemptions, and Adjusted Gross Income (AGI) phase-out levels. Incomes (and deductions) will be combined, and since each situation is a little different, some taxpayers may be eligible for more benefits, others less.

Read on for a brief overview of how certain areas of financial planning are impacted by this ruling:

Marriage Penalty

  • There are marriage “penalties” for certain items, such as the Net Investment Income surtax that begins in 2013, hitting MFJ taxpayers at $250K in MAGI, versus $200K for single/head of household filers ($250K is a far ways off from the $400K that would be double the single level).
  • Other items subject to a marriage penalty: itemized deduction and personal exemption phase-out levels, ordinary income and long term capital gains rates, child tax credits, IRA deductibility, and Roth IRA contributions.

Education Planning

  • One might find that a single person whose income might have been too high to qualify before for tax credits, such as the American Opportunity/Lifetime Learning Credits, now might be able to via filing jointly.
  • Spouses can now withdraw funds without penalty from their IRA for education expenses for the other spouse. This was not previously available to same-sex couples.

Retirement Accounts

  • Same-sex spouses can now rollover a deceased spouse’s IRAs via spousal rollover, versus treating as a non-spouse beneficiary with an inherited IRA.
  • Same-sex couples can use both spouses’ earned income for purposes of retirement account contributions, in the case that one spouse had earned income and the other did not.
  • Same-sex spouses now receive spousal rights to 401(k)s, pensions, etc.

Overall, same-sex married couples will now enjoy many of the same benefits that were previously only available to opposite-sex married couples. The financial benefits of marriage could be all for naught, though, if you don’t have an effective financial plan in place. If you have questions about how your marital status may affect your plan, meeting with a financial advisor can help clarify what strategies may work best for your specific situation.


Quirky market predictors

July 11, 2013

The so-called “Hemline Index,” which gained popularity back in the 1920s, suggested that as women’s hemlines rise, the markets generally go up, and vice versa: when more modest hemlines are de rigueur, this generally doesn’t bode well for the economy. The “Lipstick Theory” similarly suggests that as the markets go down, lipstick sales go up.

While the Hemline Index has generally been discredited over time, the Lipstick Theory has a more solid rationale. When markets are down, Lipstick Theorists believe, consumers generally feel less wealthy, so they’ll spend money on small indulgences (like lipstick) to make them feel better, as opposed to luxuries like designer clothes.

Sounds reasonable, right? How about something a little…sweeter?

There’s a new theory of economic indication that’s making headlines at the moment – it’s called the “Chocolate Indicator,” which is based on tracking chocolate-and-other-confectionary giant The Hershey Company’s market movements. A study conducted by CNBC demonstrated that, dating back to 1985, when Hershey stock has moved up or down, the S&P 500 tended to follow suit nine months later – a whopping 86% of the time.

Chocolate sales

It’s an impressive correlation, but we wouldn’t advise you to base your next market moves on it. While demand for consumer staples is used by many as a market predictor, it isn’t infallible. No one can consistently time the market perfectly – not even those who analyze markets for a living. Basing your portfolio moves on one single stock alone? You could be setting yourself up for disaster.

Sure is one deliciously fun factoid, though.


High-dividend stocks: Are they really worth the price?

July 3, 2013

If there’s any indication that investors are still skittish about the markets, let this example add fuel to the fire. The following graph charts the popularity of Google searches for the phrases “dividend stocks” (blue line) and “hot stocks” (red line) from 2005-2013.

High Dividend Stocks

Is anyone surprised that investors are apparently flocking to what they perceive to be “safer” stocks, rather than seeking out the next big thing? Probably not, given the turbulent state of our markets. The problem is: dividend stocks, especially those that are offering a high yield, may not be as safe as you think they are.

Read more in our current newsletter.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. Stock investing involves risk, including loss of principal.