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.

Last week’s data, next year’s economy

November 28, 2011

The numbers are in. Retail sales are up two months running. Black Friday online sales were up 26% over last year. Industrial production is up. Permits for new single-family homes are at their highest point in a year and a half. Inflation is down, and the number of people applying for jobless benefits is near the lowest point since April. The economy may not be dancing a jig, but it has risen from its deathbed and is up and walking around. Few, if any, economists are predicting a double-dip recession; their consensus estimate puts fourth quarter GDP growth at 2.5%

So why was the S&P 500, the broad measure of market performance, down 4.8% for the week after being down 3.5% the previous week?

One reason is questions about the long-term sustainability of the recovery. Roughly 70% of GDP is consumer spending. And consumer spending is dependent on people having jobs. The economy added 80,000 jobs in October, down from 158,000 in September and 104,000 in August. It needs to do much better, at least 200,000 per month in order to reduce the current 9.0% unemployment rate. The growth in retail sales can’t continue unless hiring increases and wages rise. Neither of those things is happening at a self-sustaining rate.

The other reason is Europe, which promises to be a source of financial instability for the foreseeable future, and a drag on the confidence of American markets and businesses. 

In the short term the cascading series of potential failures, Greece to Italy to Spain to France, has financial markets unsettled; banks on both sides of the Atlantic own trillions in European sovereign debt.

In the medium term Europe faces the likelihood of recession, in large part due to the failed policy of budget cutting to trim deficits instead of spending to create job growth. That means decreased demand for American goods from our biggest trading partner and fewer American jobs created.

The net: uncertainty continues to reign on Wall Street, on Main Street, and across Europe, so it is important to keep your portfolio diversified. We’re watching the markets and keeping our options open to make prudent investment shifts as necessary.

James Copenhaver, Director of Investment Management

Current Economic State: “Shaky Stability”

October 12, 2011

A respected economist recently referred to our current economic state as “shaky stability.” It isn’t often that an oxymoron is more than an amusing description, but this one is particularly apt.

Unemployment is stuck at 9% and has been since spring. Job growth is stuck at an average of 72,000 per month and has been since spring also. The economy is creeping along just fast enough to employ new workers entering the labor market, but not fast enough to budge unemployment. We’re not in a recession, but we haven’t recovered from the last one either.

That’s the stability part, and it isn’t a good stability.

The economist didn’t talk much about the shaky part, but it’s pretty clear. The U.S. political process is shaky, with the two parties unable to agree on measures that would lead to economic recovery and growth. Europe is shaky, with the countries of the Euro Zone unable to agree on measures that would save their banks from the cascading failures resulting from a Greek default. Even China, the engine of global growth, is shaking a little as its furious rate of modernization inevitably slows.

The Greek default situation right now is the event most likely to shake the stability. A solution to the Greek debt crisis, or measures that would spur U.S. job growth, could inspire business and consumer confidence that would lead to long-term, self-sustaining economic growth.

The future is uncertain. Stay tuned.

James Copenhaver, Director of Investment Management



Economist Jared Bernstein:

Proposed Reforms (Part 3)

December 22, 2009

Consolidation of bank regulators – Currently, there are four major bank regulators: Office of the Comptroller of the Currency (OCC), Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS). We think it is most likely that the OCC and OTS are merged into a new National Bank Supervisor (NBS), but more aggressive consolidation is also possible. Senator Christopher Dodd’s has recently proposed combining all four and stripping the Fed and FDIC of their regulatory functions. In addition, there are proposals to merge other agencies involved in the regulation of financial markets, including the Security and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Also, non-federally regulated financial institutions (such as AIG and Countrywide) were prime contributors to the financial crisis. Bringing these financial institutions under the scrutiny of the federal regulatory umbrella is likely to be part of the consolidation.

Systemic risk regulator – The gaps in the patchwork of financial industry regulators contributed to the series of failures that led to the financial crisis. The Obama administration’s proposal to grant enhanced authority to the Fed to oversee overall financial system risk appears to be losing favor to the idea of creating a Financial Services Oversight Council to make recommendations on preventing systemic risk. This is very likely to get passed in some form.

Other measures include requiring hedge funds to register with the SEC, restructuring Fannie Mae and Freddie Mac, increasing SEC regulation of the credit rating agencies and even considering changing their business model.

Proposed Reforms (Part 1)

December 15, 2009

With sweeping financial industry reform again on Washington’s agenda what should investors be watching? Last week, the House Financial Services Committee took up debating the major proposals. The big issues to be debated in the coming months include:

Too-big-too-fail institutions – A proposal would create a designation for financial institutions that are systemically important and subject them to special regulation. The outcome of this legislation is likely to have a market impact. At first glance, this designation would give an institution a competitive advantage because it would have what amounts to Government Sponsored Enterprise status with an implied government guarantee. This competitive advantage for Tier 1 institutions to access capital cheaply may result in consolidation of the industry among a few systemically important institutions rather than a larger number of competitors that would pose less individual risk to the financial system – which would be counter to the intention of the legislation. However, the additional cost to these firms in the form of higher capital requirements, contributions to pre-fund a bailout fund, and the threat of a break-up may have negative consequences. Last week, the UK regulators forced Royal Bank of Scotland to sell some business lines to reduce the size of the institution and the stock reacted poorly falling over 10% in a couple of days. Clearly, how this issue is dealt with is very important to the financial services industry. This is the most contentious issue and is unlikely to be resolved before the end of the year resulting in lingering uncertainty for the sector.

Consumer Financial Protection Agency – The Obama administration has proposed the creation of a new agency intended to protect consumers purchasing financial products. The focus has shifted from regulating the types of products that can be sold, (which would eliminate complex financial products and ensure only plain vanilla products are marketed) to making sure the disclosure is appropriate on products that are more complex. The reach of this agency to regulate what products are sold, how they are marketed, and perhaps even how they are priced is critical to the size and profitability of the financial industry. This could be a positive for the sector if it lessens the risk of default or litigation risk for lenders, but presents challenges if it forces consolidation as the products become commoditized.

What is “The Fed”? (Part 3)

October 8, 2009

The most effective tool the Fed has, and the one it uses most often, is the buying and selling of government securities in its open market operations. Government securities include treasury bonds, notes, and bills. The Fed buys securities when it wants to increase the flow of money and credit, and sells securities when it wants to reduce the flow.

Sometimes, in order to understand why you need something, it helps to find out what it was like before that “something” was created. Before the Federal Reserve was created in 1913, there were over 30,000 different currencies floating around in the United States. Currency could be issued by almost anyone — even drug stores issued their own notes. There were many problems that stemmed from this, including the fact that some currencies were worth more than others.

There were even times when banks didn’t have enough money to honor withdrawals by customers. Imagine going to the bank to withdraw money from your savings account and being told you couldn’t because they didn’t have your money!

Before the Fed was created, banks were collapsing and the economy swung wildly from one extreme to the next. The faith Americans had in the banking system was not very strong. This is why the Fed was created.

The Fed’s original job was to organize, standardize and stabilize the monetary system in the United States. It had to set up a method that could create “liquidity” in the money supply – in other words, make sure banks could honor withdrawals for customers.

Source: HowStuffWorks, Lee Ann Obringer

What is “The Fed”? (Part 2)

October 6, 2009

The Fed uses three tools:

  • The reserve requirement
  • The discount rate
  • Open market operations
  • The reserve requirement is the balance that banks must maintain, which is typically a percentage of their total Interest-bearing and non-Interest-bearing checking account deposits (currently 3% to 10%), to ensure that the bank will always be able to give you your money when you ask for it. Changing this requirement has a very large affect on the economy and Is rarely used. The last time the rate was changed was in the early 1980’s.

    In the event that a bank’s money supply drops below the required reserve amount, that bank can borrow either from another bank or from a Reserve Bank. If it borrows from another bank’s excess reserves, then the loan takes place in a private financial market called the federal funds market. The federal funds market interest rate, called the funds rate, adjusts according to the supply of and demand for reserves.

    If a bank chooses to borrow emergency reserve funds from a Reserve Bank, then it pays an interest rate called the discount rate. This was lowered by one-half percent in late August in reaction to the “credit crunch”.

    The “discount rate” is the interest rate that a regional Reserve Bank charges banks and financial institutions when they borrow funds on a short-term basis.

    The discount rate often plays a larger role in the overall monetary policy than would be expected because it is a visible announcement of change in the Fed’s monetary policy. This is the most talked about rate and can affect your mortgage and credit card rates.

    The Fed more often alters the supply of reserves available by buying and selling securities. All of this buying and selling is referred to as open market operations.

    Source: HowStuffWorks, Lee Ann Obringer