Charitable Giving Under The New Tax Law

By Christopher R. English, President of Lumen Capital Management, LLC

Tax season is upon us, and I’ve been asked by more than a few people what I think about the new tax code and what are some of the ways to think about the new tax law. From time to time this year, with the help of the good folks at Indigo Marketing, I’m going to highlight some of these changes and some of the strategies you might want to think about that might help you with your taxes. We’ll get back to talking about the markets at a later date, but today let’s take a look at a few new ways to think about charitable giving.

Last year, the Tax Cuts & Jobs Act was all anyone could talk about. Though it has mostly slipped from the public spotlight, we are just now starting to feel the effects of the new bill. Tax season is upon us, and as a result, there are changes in store for just about everyone.

One area the new tax law is affecting is charitable giving. While many people focus on the new, higher standard deduction and fear that it will have a negative impact on charitable giving, there are also provisions in the law that actually increase incentives to give. Here is an overview of how the new tax law is changing your tax filing experience and some of the options you should consider for your charitable giving. 

How Does The Higher Standard Deduction Affect My Donations?

Charitable giving is tax-deductible, but only if you itemize your deduction. When you take the standard deduction, your charitable giving has no effect on your taxes. 

In 2017, the standard deduction for single tax filers was $6,350. Anyone with property and state taxes, interest payments, and charitable giving that totaled more than that would itemize to get a larger deduction. For 2018, the standard deduction for a single filer had almost doubled to $12,000. That means that a taxpayer needs to have over $12,000 worth of property and state taxes, interest payments, and charitable giving in order to receive any tax benefit from their donations.

The higher standard deduction means that fewer people will receive a tax benefit for their charitable giving because fewer people will itemize their deductions.

Increased Limits On Charitable Deductions

The new law also increases incentives for giving, particularly for high-income earners. Previously, deductions for cash charitable contributions were limited to 50% of adjusted gross income (AGI). Under the new law, the limit has increased to 60% of AGI. 

In addition, the new law repealed the Pease limitation. The Pease limitation was a rule that phased out as much as 80% of charitable and other itemized tax deductions for higher-income taxpayers. Now, high-income taxpayers are not limited in their total charitable deduction and can keep more of their itemized deduction.

Bunching Charitable Giving

How the law affects your own personal giving is based on whether you’re affected by the new standard deduction or by the increased giving limits. If it is the standard deduction, you may still be able to benefit from giving while also taking advantage of the higher standard deduction. You can do this by bunching your giving or doing several years’ worth of giving in one year.

For example, let’s say you are a single taxpayer who usually donates $6,000 a year and you have $5,000 worth of taxes and interest payments that are deductible. If you itemize, your deductions will total $11,000, which is less than the standard deduction. As such, you would take the standard deduction and miss out on the benefits of your charitable giving. 

Instead, what if you bunched your giving and only made donations every other year? In year 1 you wouldn’t donate anything, so you would take the $12,000 standard deduction. In year 2, you would give double and be able to itemize for a deduction of $17,000. If you repeat this pattern every other year, then you will get an extra $5,000 of deductions every other year that wouldn’t be available to you if you gave yearly. 

Donor-Advised Funds

One way to take advantage of bunching your giving is through a donor-advised fund (DAF). These work just like charitable savings accounts. You put money into the fund and then distribute it to charities when and how you see fit. You get to take the charitable deduction when you fund the account, not when the money is actually given to charities.

With a DAF, you could contribute a large amount up front and take the deduction for it, and then distribute it to your charities over the following years. 

Giving Opportunities In Retirement

If you are older than 70½ and have an IRA, you can bypass the bunching and itemizing and get an immediate tax benefit from all of your charitable giving. You can do this by making qualified charitable distributions (QCDs). A QCD is a donation made to charity straight from your IRA without having the money go to you first. Since you never lay your hands on the money, it does not count as taxable income to you. 

With a QCD, you get the same tax advantage from your charitable contributions without having to itemize. It also lowers your taxable income, which increases your ability to qualify for other credits and deductions and helps with the taxability of Social Security and the cost of Medicare. Also, a QCD can count toward your required minimum distributions. There are some restrictions for QCDs, so it is important to talk to a financial professional if you want to take advantage of this strategy. 

Get The Most Out Of Your Giving

Now that tax season is here, we will finally see the real effects of the new tax law. No matter how it affects you, it doesn’t need to deter your generosity. You can still give back and receive tax benefits for it. If you want to know more about how to get the most out of your charitable giving or have any questions about the strategies mentioned here, call us at Lumen Capital Management at 312.953.8825 or email us at lumencapital@hotmail.com.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

A Few Thoughts

I'm typing this from the road where I'm combining a few days of R&R with visiting a few clients and friends of the firm.  I am always fascinated by the modern ability to connect with the world via the internet regardless of where one is located.  In my case I'm typing this out on my IPad, something that would have been unthinkable not all that long ago.  Markets don't care where you are though.  They open for business at 9:30 EDT no matter if your sitting at your desk or lounging by the water. 

Right now we are slightly lower after a big shelling on Friday.  I think that decline had a lot to do with markets being over bought and the fact that the world had become perhaps a bit too bullish as we've marched straight higher since the December lows.  Now I don't have any better idea than the next investor on where we're going in the short run but I'm on record as saying that I think it wouldn't surprise me if we chop around now for perhaps an extended period of time.  Note we could do that or perhaps even give some of this rally back and my more positive view of stocks would remain unchanged.  It would not be unprecedented for stocks to try and digest these gains and if that were to occur it would likely be setting the stage for some sort of rally at a later date.

We don't do politics on this blog and when we discuss anything politically related it has to do with the context of how whatever we're discussing plays out in the financial markets.  In that vein I will comment on the Mueller Report and my initial read on its financial aspects.  In the main, the findings likely remove the possibility that Trump will not finish out his term of office.  In finding no collusion on the part of the President the report removes this sword that hung over the President's neck.  There will be other investigations and findings but none will have the power to impact his Presidency the way the Mueller report had the potential to do.  That removes uncertainty and removes the possibility of a potential constitutional crises down the road.  Markets can now scratch that off the list.  Instead markets can now focus in on a normal presidential election cycle.  Markets can now discount the President's political fortunes the way they would in any other time period.  Mr. Trump may have a tougher road than some expect, particularly in regards to the electoral college.  But that's the normal course of events and markets can discount that as is they normally would.

I will post either Wednesday or Thursday of this week unless events warrant.

Cities With Really Rich People

As we talk about world growth and especially as we keep an eye out on Asia, here's a current list of cities with the most ultra-rich residents.  According to Visualcapitalist.com, "the wealthy tend to congregate in world-class cities".  Here's the current top 10 list of those places that will add the most Ultra High Net Worth Individuals {UHNWIs} by 2023:

Currently only London, New York, Paris and Zurich make this cut outside of Asia.  Below are the 10 cities expected to add UHNWIs the fastest between 2018-2023.  

Note that EACH of these cities is expected to be in Asia.

I will be posting Tuesday and Thursday next week as I am going to be out for part of the time.

Link: Visualcapitalist.com: Mapped Cities With the Most Ultra Rich Residents

GDP By Country

We discussed on Monday which economies would add the most to global growth in 2019.  Today we're showing a chart that's a visualization using 2017 GDP data showing Gross Domestic Product by country and their percent of the global pie.  It also slices the pie up by region.  What's not shown here is how this compares to last year, but we've included some commentary on that.  See below from the authors of this article, Howmuch.net:

"An interesting way to understand these numbers is by comparing them to a previous visualization we did last year on the relative size of economies using the same underlying dataset from the World Bank. There are in fact a few changes to note. Looking at the top ten countries overall, India’s economy surpassed France to become the 6th biggest in the world. The UK was the only economy to shrink among the top ten, dropping from $2.86 trillion to $2.62 trillion, not adjusting for inflation. The U.S. is still the biggest both in overall terms and as a share of the global economy (24.32% last year vs. 24.40% this year). China is continuing to rise as a global economic power, accounting for 15.4% of the world’s GDP, up from 14.84%. In short and in general, the world’s heavyweight economies continue to reign supreme."

{Highlights mine}

Note as we observed on Monday the continued rise of economic growth in Asia.  For example note that India now has a larger overall economy than France.  If you head over to the article which I've linked below you'll see that three of the top six economies in the world are located now in Asia.

Back Friday.

*Since I emphasized Asia above I'll again remind you that we are long ETFs related to international and Asian markets in both client and personal accounts.  Please note that positions can change at any time without notice.

Link:  Visualize the Entire Global Economy in One Chart

Global Growth in 2019

We're going to jump from discussing Ireland and St. Patrick's day to talking some this week and next about the global economy with a highlight on Asia.  In that regard, here's a fascinating chart from the website Visualcapitalist.com showing which economies are adding the most to global growth in 2019.  It's pretty easy to see that China and Asia are accounting for the lion's share of that growth.  To me the most important point in this graphic is that the US and EU accounted for more than half of the global economy in 1980 and today they are at 31%.   Makes one wonder how those percentages might change over a similar period going forward?  I doubt that trend is going to reverse particularly in the case of Europe.  

This to me is just another reason why investors need to have some of their assets invested abroad and need some focus on Asia within that part of their portfolio.  Asia is where the growth is now and likely will be in the future.  Hard to say if that is correct tomorrow or even six months down the road, but it is hard not to look at the trends and believe that time isn't on Asia's side.  I know their stock markets have not performed as well as the US over the past decade but longer-term probability suggests that has a higher likelihood of changing, particularly if these growth trends continue.  We're going to highlight some other global trends that we believe will also show Asian growth as well.

Link:  "The Economies Adding the Most to Global Growth in 2019."

*Long ETFs related to international and Asian markets in both client and personal accounts.  Please note that positions can change at any time without notice.

St. Patrick's Day 2019

There are no little Irish dancers left for me to ferry about these days and so I find the first three weeks of March to be a low key period as opposed to all the hustle and bustle that used to come with "the season" as it's called in Irish Dance circles.  Fact is the Chicago area is home to well over a million people who claim some form of Irish ancestry and if you're an Irish dancer in March and you can't find a gig then you're in the wrong activity.  Time was I spent most nights in early to mid-March squiring a gaggle of young ladies to their next performance.  I think I've been in every West Side and North Side parish, Union Hall,  hotel and even the WGN studies during that period.  

While that part of my life has passed into happy memory we still honor St. Patrick's Day around here so I thought I'd update and reprint 10 facts about the Irish, the parade or about Ireland which are not well known. Just trying to have some fun with the season and we will get back to more serious matters soon. Irregardless if you are 100% Irish, part Irish (like my family) or just Irish For The Day- Cead Mille Failte!

1) Ireland is slightly larger than West Virginia. If it were part of the U.S. it would rank approximately 19th in terms of population between Wisconsin and Maryland according to 2000 census figures.

2) The Gross Domestic Product of the U.S. is in excess of $11 Trillion dollars & is ranked 1st in the world. Ireland is ranked 30th at $183 billion dollars. Chicago's GDP has been estimated at around 380 Billion.

3) According to the Chicago Tribune, "Corned Beef and Cabbage" is an Irish-American staple and more Budweiser is consumed in Ireland than Guinness.

4) Musicians with Irish ancestral ties include Paul, McCartney, John Lennon & George Harrison of the Beatles; Bruce Springsteen & Keith Richards.

5) 17 American Presidents have Irish Ancestry. This list not only includes obvious Presidents such as Kennedy and Reagan but also includes Andrew Jackson, Both Bush's, Bill Clinton and President Obama. Until the election of Donald Trump, every elected President since 1960 claimed Irish ancestry.

6) New York City has the largest St. Patrick's Day parade in the world. Last year more than 150,000 marchers participated and it attracted roughly 2 million viewers. That is roughly 500,ooo more souls attended the parade than the combined populations of Dublin, Belfast, Limerick & Cork.

7) Michael Flately of Riverdance fame is credited with popularizing Irish Step Dancing around the world. It is widely assumed that Flately is a native of Ireland but in fact he was born and raised right here in the Chicago area. Perhaps because of this it is claimed that over 100,000 young women in Chicago and its surrounding environs actively participate in some form of Irish Dance.

8) George Clooney, Harrison Ford, Mel Gibson, Gregory Peck, Barbara Stanwyck, John Travolta, Spencer Tracy, Judy Garland & John Wayne all had Irish ancestors.

9) Guinness & St. Patrick's Day seem to go hand in hand. (At least they do in my neck of the woods). They also have a side business of that World Record Book. Almost 2 billion pints of Guinness are served each year. More Guinness is served on St. Patrick's Day than on any other day of the year.

10) Finally the best for the last. It is claimed that Ireland has never had a population greater than about 8 million people. The Irish have emigrated all over the world. The majority of their descendants are found in Canada, the U.S., Australia, New Zealand and the United Kingdom. 55 million Americans claim Irish Ancestry. Their descendants can also be found in more unexpected places like Chile, South Africa, Mexico, Argentina and even China. Former Mexican President Vincente Fox is of Irish ancestry. Altogether it is estimated that perhaps as many as 100 million people can trace some part of their family tree back to Ireland. This is over fourteen times the population of the island of Ireland itself!

Beannachtaí na féile Pádraig!

Back Monday!

Ten Years

I didn't mention it before but last week marked the 10-year anniversary of the last bear market's bottom and the beginning of this bullish phase.  Now there's some debate on when this bull market actually began amongst the Wall Street crowd.  Some say the bull market didn't actually begin until we cleared the previous highs from the 1990's bull.  By that measure this current market expansion isn't that old or that impressive.  Frankly the semantics of that are lost on me.  Instead I prefer to focus on when that market turned and bullish sentiment began to prevail.  That dates this bull phase back to those March lows.

The chart above shows how a select number of major market indices have done since that date.  The returns have been pretty fantastic.  The worst performing index in this list is the Ishares S&P 100 {OEF}.  These are the largest 100 companies in the S&P 500.  That index is ONLY up 373% during that time.  The Nasdaq Invesco QQQ Trust is up over 650%.  Note I'm not sure if these returns include dividends.  If they don't then these returns are even better.  

Remember this chart the next time the "Gloom and Doomers" rule the airwaves.

Note:  I am long the majority of these indices in various client and personal accounts.  Also the chart is from Stockcharts.com.  They are the ones who calculate the data and the returns.  You can double-click on the chart to make it larger if you'd like.

Back Friday.

Go Read

We noted in our post last Thursday how certain costs like college and health care have exploded to the upside over the past two decades.  The trajectory of some of these advances is unsustainable as it has completely outstripped the average person's ability to afford them. In that vein go read the article at Morningstar.com "Your University is in Trouble".  The article highlights the issues many colleges are facing as the cost balloons beyond what most students can afford.  

Coincidentally, just after I found this article my Alma Mater, DePauw University, sent out an email where they outlined a campus restructuring to get a handle on costs.  DePauw is a wonderful liberal arts university.  Unfortunately, I'm guessing small liberal arts colleges all through the country are going through this same process.  Many of these are located in smaller communities.   Many  now  also struggle with not only attracting students to these kinds of places but also in explaining why paying $40-50,000 yearly in tuition for a liberal arts degree makes sense given the predominance of STEM related opportunities at other universities, many located in or closer to larger urban environments .  

DePauw has a fairly substantial endowment that will likely help it weather this storm but many other smaller schools are probably not that fortunate.  I also think this current generation of college students is likely the last that will have the traditional four year college experience.  School simply costs too much.

Back Wednesday.

What Was Expensive Is Now Cheap or Cheaper

I've  noted in the past that one of the key differences between when I was growing up back in the 1960s and 70s is that many of the things that were relatively affordable back then are today expensive and the things that were expensive are now much more affordable.  Take for instance televisions.  My parents bought a color TV set for our living room in the late 1960s and they had it until probably 1980.   These things were expensive back then and you had them repaired when there was a problem. Today of course TVs are basically mini-computers as well as ways to watch programming and a lot of folks buy a new one every couple of years.  But then the cost of these things has come way down.

The chart above shows what I've been saying.   The cost of things like college and health care have exploded to the upside while items like furnishings, TVs etc have declined on an affordability basis or remained constant.

A couple of other things that are different today than when I was growing up from this chart.  For one there was no cellular service or computers.  Also the line item for childcare really didn't exist back then as for the most part mom stayed home with the kids.  This was as true back then for the working class as it was for the middle class and white collar households.

Back Monday. 

Link: Carpe Diem:  "The Chart of the Century."

Chart Talk {3.05.19}

We said on Friday {The post directly below this one.} "if you look at the history of this advance since 2009, you will see a market that has had multiple periods where it staged pretty spectacular advances followed by periods of consolidation that lasted anywhere from a few months to several years."   I also stated that I believe that we are currently in one of those consolidating periods.  Today I wanted to show those to you by posting a monthly chart of the S&P 500.

If you look in the highlighted areas you can see the market has previously gone long time periods where it basically trended sideways.  These periods have lasted months to years.  The sideways movement that started in roughly 2014 lasted the better part of two years but it was consolidating a better than 30% gain from the prior move higher.  

There are a few of other things to note here.  First although it's not noted on the chart, this market has never decisively penetrated it's trend line from the 2009 lows.  Thats the purple line you see roughly bisecting the chart in have while also sloping upwards from left to right on the chart.  The index has  touched that line on a few occasions but never had a convincing breakthrough below it at any time during this bull run.

Another is that this market has probably spent as much time consolidating prior advances as actually trending higher.  We've tended to trade flat for months or years and then witness these explosive moves out of these ranges that so far have all resulted in nice gains.  If you tried to time the market and you hit it wrong you missed out on some pretty substantial profits.

Finally don't get all that hung up on point moves in the market.  Instead pay attention to the percentages.  As an index like the S&P 500 moves higher the point swings are going to increase.  Last year's declines on a percentage basis were pretty substantial but not that much different than the declines we experienced back in 2011 or in early 2016.  

Back Thursday.

*The chart above is from Tradingview.com although the annotations are mine. You can double click on the chart to make it larger if you would like.  The boxes denoting the trading ranges are not exact.  They are meant to show the concept of how we've consolidated during certain periods in this bull market.  Also as of this writing I am long SDS in a personal account.  SDS is an ETF that gives you leveraged short exposure to the S&P 500.  I am long as part of a separate individual strategy unrelated to our normal portfolio investment decisions.  This is a very short term oriented position and will be subject to change at any time without notice.

A Few Thoughts As We Say Goodbye To Winter

By Christopher R. English, President of Lumen Capital Management, LLC

If there’s anything Chicago-area residents have learned of late, it’s that winter still exists. The polar vortex came and went, but the snow is still falling even as I type this letter. Regardless of what the forecast shows, February is now almost behind us and winter is slowly fading away. The days are getting longer, spring training marks the return of baseball, and summer clothing now lines the store shelves. In other words, we can hope that better weather is right around the corner, even though we know we still have at least two more months of the usual cold and damp conditions. At the very least, it’s an improvement on what we’ve experienced thus far!

As the seasons outside change, so do the market seasons. Traditionally, there are six good months for investors and six not-so-great months. We’re getting closer to the six months where history shows us that stocks typically struggle, the period from roughly April to sometime in the early fall. Here is a summary of what I’ve previously written about this topic.

The Seasonal Nature Of The Markets

“[T]he reasons I think this pattern works is the philosophy behind how most…institutional money is invested. Institutional money is a generic term for large institutions such as pension plans and...mutual funds. It is managed on a relative basis, usually tied to a specific benchmark, and is also managed so as to not give up the assets. By relative basis I mean, as an example in a market that loses 10%, institutional accounts that go down only 8% are said to have outperformed their peer group. That influences how their portfolios are set up. Institutions generally start a year with similar economic and valuation expectations for stocks.

“Institutions have a very strong incentive to be heavily invested in the early months of a new year. They are afraid to fall too far behind their benchmarks. Their thinking is similar to that of a baseball manager at the beginning of a long season. The manager knows you don't win a pennant in April but you can lose one during that time. As the year progresses and, in particular, if stocks have advanced in the first few months, equities begin to look less attractive on year-end expectations. Stocks will either need unexpected positive news (i.e., better-than-expected earnings news or higher economic forecasts for example) or prices will begin to stall out…

“...Summer is typically a down period for Wall Street as the news flow often dries up (unless it’s bad news. It is amazing how many international crises begin [then]. Both world wars, the Korean War, 9/11, the first Gulf War, and the 2008 banking crisis are examples of this).

“Summer is also when analysts fine-tune their expectations for stock prices as clarity begins to enter the picture about year-end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period…Once this discounting process is completed stocks will usually then begin to rally often in the fall. The cynical among us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply, Wall Street wants to get paid so there is a strong incentive to boost share prices during the fourth quarter of the year…”

How Do The Seasons Impact My Portfolio?

The above summary describes the typical pattern we’ve seen over the years for how stock prices trade during a normal year. This pattern was broken in 2018 because the market had a significant meltdown in the fourth quarter. However, from Christmas Eve until now, market indices are up about 20% on average, and we are currently only a few percentage points away from the old September highs. Markets are also very overbought, by my analysis. Given that and given the rapidity of the current advance, there is a possibility that prices might now struggle for a bit. That doesn’t necessarily mean that we’re going to revisit those old lows or that things are going to fall apart, but I do think there is a possibility that we could see the markets reach a point where they pause and digest the big gains we’ve seen over the past two months. 

In light of this, what should investors do? Frankly, I think not much. I may tweak a few things in client portfolios in the coming weeks, but for the most part, I am comfortable with our positions and the way our investments are allocated. Furthermore, nothing changes my view of where we are in this longer-term bull market. On the other hand, if something has changed in your own personal investment situation, then please let me know so we can make sure your portfolio is still in line with your goals and your overall financial picture. Otherwise, consider this a friendly reminder that stocks don’t go straight up forever. 

What’s The Current Market Trend?

Stepping back a bit, if you look at the history of this advance since 2009, you will see a market that has had multiple periods where it staged pretty spectacular advances followed by periods of consolidation that lasted anywhere from a few months to several years. I believe that we have been in one of those consolidating periods. I think this could possibly last for several more months, even into the fall. At that point, I believe the evidence proving that the economic expansion remains intact will be overwhelming and we’ll have a clearer picture on earnings for 2020. That could be an environment more favorable for the next leg higher for stock prices, especially if earnings growth accelerates by then.

Of course, I could be wrong and stocks could continue to rocket higher. I’m simply saying that there is a higher probability now after such a large move in prices over the past few months for volatility to return to the markets and for some sort of corrective force to come calling before the flowers blossom and the trees bud in a few months up here in Chicago. Stocks correct all the time, and this is actually healthy since it wrings out speculative excess. Stocks can correct by time (treading water for a certain period) as well as by declining, so even if I’m correct, nothing says prices have to go down.  

I think the markets have a reasonable probability of retesting their highs from last September and have the potential to be even higher than that by the end of 2020.  However, it is also highly probable that the path to that point won’t be a straight line up, so a period of consolidation would not be that unusual. I figured you’d rather hear it from me and be prepared for it than be taken by surprise. I also hope this makes you feel more prepared for what could happen in the near future. If you are concerned about or have questions regarding where our market sits today and how your portfolio is built to withstand the seasonal nature of the markets, please call my office at 312.953.8825 or email us at lumencapital@hotmail.com.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

*As of this writing I am long SDS in a personal account.  SDS is an ETF that gives you leveraged short exposure to the S&P 500.  I am long as part of a separate individual strategy unrelated to our normal portfolio investment decisions.  This is a very short term oriented position and will be subject to change at any time without notice.

Back Tuesday and Thursday of next week.