Chris Mullis, Ph.D.,CDFA® Founding Partner Reduce Taxes. Invest Smarter. Optimize Income AskNorthStar.com(704) 350-5028
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Transcription:
Hi, I’m Dr. Chris Mullis with NorthStar Capital Advisors, and I’m here to help you make the most of your tax savings opportunities.
In this video, I’m going to talk about what could happen, and what you can do to potentially maximize your tax savings before the rules change.
We don’t know when tax laws might change but we know they will at some point. That’s what tax laws do.
Our philosophy at NorthStar is that we have a moral obligation to pay the IRS every dollar we owe, but “leaving a tip” doesn’t make us more patriotic.
And if we ever save you “too much” in taxes, you can donate the difference to your favorite charity or even against the national debt for which you’ll receive a deduction which is better than overpaying your taxes.
Now before we describe some of the current-event driven opportunities, please let me remind you an essential truth — playing the long game is where we win in taxes.
The way that most people prepare taxes is one year behind. What happened last year and what do I need to minimize that tax bracket. The problem is you’re playing the IRS’s game and you’re going to lose looking at it one step at a time.
We may or may not be able to beat the IRS working in this narrow, one-step fashion, but you give us time and tax planning, and we can save hundreds of thousands of dollars.
Now that we’ve underscored the criticality of long time horizon in successful tax planning, let’s pivot to more time-sensitive issues.
We have a new administration in Washington, and the Democrats control the House and the Senate. So, what’s next for taxes?
In the near term, we can expect lawmakers to focus on urgent issues, like vaccine distribution, stimulus aid, and the economy. But at some point, a new tax plan is likely to show up.
The Biden administration is likely to raise taxes, at least for some folks. Hopefully, not until the pandemic settles down and the economy gets stronger.
If 2022 sees tax rule changes, 2021 might be our last chance to take advantage of the current rules.
So, what actions can you take now to make the most of today’s low tax rates?
Here are three key areas of your taxes you want to consider in 2021.
Point #1: Biden’s proposed plan targets high-income earners for an income tax hike. If that’s you, 2021 may be an excellent time to consider accelerating income (especially if you own a business) or completing a Roth conversion.
These are big moves with financial consequences, so you’ll want to get advice before you pull the trigger.
Point #2: Estate and gift tax exemptions went up to $11.7 million this year, but they might drop again under a new tax plan. That makes 2021 a critical year for estate planning.
Please don’t think new laws couldn’t affect a much smaller estate, either. As recently as 2001, the federal estate tax exemption amount was just $675,000.
It’s not likely that new rules would go back to such low levels, but I don’t want you to be caught flatfooted by a change.
Point #3: Deductible retirement plan contributions might be treated differently for tax purposes in the future. If you’re a high earner, maxing out deductible contributions this year and considering a Roth-style plan in the future might be smart.
Tax laws are in a constant state of flux. We don’t know when the rules will change or what they’ll look like once Congress gets done haggling, but we can take some proactive steps now.
Part of my job as a financial planner is to help you stay on top of the rules and maximize your opportunities every year.
Remember — tax planning is a cornerstone of real financial planning. And it’s a game of chess won with a multi-year perspective.
If you have a question about what I’ve discussed in this video or you’d like to speak personally about what’s going on, please reach out. I’ll respond personally.
P.S. The market boom times are here, and a lot of folks are looking for magic bullets. But there aren’t any. It’s easy to look brilliant in a rising market or feel like you’re missing out on a hot trend. But the tide will turn. It usually does. If FOMO is keeping you up at night, (or keeping your kids up at night because they’re experiencing their first big bull market) please reach out. We’ll talk about the difference between gambling and investing. And how building wealth takes consistent, incremental progress, not chasing fads.
Here’s a quick guide to the market frenzy you’re seeing in the headlines.
But before we dive in, please don’t lose sight of this essential fact: all this mayhem means very little to the majority of investors. If you’re properly diversified, your 401(k) is fine and your IRA is still doing its thing.
Our clients know that their NorthStar portfolios are firewalled from craziness like this thanks to this critically important truth: We will never own enough of any one idea to make a killing in it. We will never own enough of any one idea to get killed by it.
In fact, it is our considered opinion that owning individual stocks, shorting stocks, and hedge funds are all a form of the Sirens’ song (more on that in the last section below).
Now let’s look at how we got here, and what the impact is for average investors.
Long email ahead. (Buckle up, it’s a little complicated.)
What is GameStop and why does everyone care?
GameStop is a brick-and-mortar video game chain that hit hard times in the pandemic. Like many distressed companies, it was targeted by short sellers betting that the stock’s price would go down.1
Basically, short sellers do the opposite of most investors. They try to make money when a stock’s price falls. They borrow shares from their brokerage for a fee, immediately sell them, and plan to buy them back later at a lower price when the price falls. Shorting is a strategy used by certain types of hedge funds.
What’s a short squeeze?
Shorting stocks is risky since any positive news or interest in a company can drive the stock’s price up. When short sellers bet wrong and a stock’s price rises, they can be forced to buy shares at higher prices to cover their losses (or pony up more collateral).
A squeeze happens when short sellers scramble to buy shares to cover their positions when the stock price is rising. The more investors who buy and hold those shares, the harder it is for short sellers to find shares to buy (exposing them to potentially huge losses).
With me so far?
Where does Reddit come in?
After it became clear that short sellers were betting on GameStop’s demise, the popular company became the focus of amateur traders on the popular WallStreetBets forum on Reddit, a popular community of chatrooms and forums.
By banding together and coordinating buying activity, these small-time traders boosted the stock’s price far above what the company’s financial fundamentals support, putting pressure on the hedge funds betting the other way.2
The stock went viral.
Why?
Social media chatter + free trading apps like Robinhood + bull market + new investors with time on their hands = FRENZY
Is it illegal? That’s a stretch. These armchair traders are egging each other into speculative bets, but we don’t think it rises to the level of illegal market manipulation. However, regulators might feel differently.
Is it bad for markets? The battle between gleeful amateurs pushing prices up and hedge funds scrambling to force prices down has led to some of the highest volume trading days on record and cost short sellers billions.3
Is this David vs. Goliath?
We don’t think the GameStop bubble is just about greed or boredom or euphoria. We see a powerful narrative at play.
We think a lot of these small traders are angry at the perception that All-Powerful Wall Street is pulling strings and using their connections to hurt mom-and-pop investors. They see this as an opportunity to stick it to the big-money pros by using their own strategies against them.
It’s new school vs. old school. Rebels vs. the Empire. Bueller vs. Principal Rooney. Reddit vs. CNBC.
So, should I be investing in GameStop?
No! GameStop’s stock is massively inflated and trading has been halted multiple times because of its meteoric rise.4 At this point, it looks like folks are piling in just to say they were there.
When the bubble bursts, it’ll be a rush to sell and many GameStop holders will end up losing most of their investment.
(It might already be happening by the time you read this.)
We’ve seen frenzies like this many times before. Tulip mania in the 1630s, the Nifty Fifty in the 1970s, the dot-coms in the 1990s, Bitcoin’s multiple bubbles over the last decade, etc. We’ll see more in the future.
Why are people angry at Robinhood?
Amidst the buying frenzy, Robinhood and other popular brokerage platforms suddenly restricted trading on several red-hot stocks, including GameStop.5
Protests erupted from investors, many market pros (not the short sellers, obviously), lawmakers and more.
Did Robinhood halt trading to appease big investors at the expense of small investors? Did they do it to protect markets from manipulation and liquidity problems?
What are the implications of this frenzy?
There’s no predicting the future, obviously, but we think a few things are likely. Most bubbles end naturally when the euphoria turns to panic, folks start selling, and the price crashes.
However, it’s also possible that regulators will step in if they think there’s risk to markets (or they see too many investors getting hurt).
We think this ride’s going to end in tears for many folks caught up in it. But I’m not sure who will be crying hardest.
Finally, The Sirens
Remember the story from The Odyssey, where Ulysses and his crew have to sail past the island of the Sirens?
The Sirens, you’ll recall, sing a song so seductively sweet that no sailors can resist it: they must steer toward the song, only to be dashed upon the rocks surrounding the island.
Ulysses, being the conniver he is, looks to have it both ways: he wants somehow to hear the song while not getting shipwrecked. So he stuffs all his crewmen’s ears with wax, and has himself lashed to his ship’s mast — ordering his mates on pain of death not to obey him if he orders them to change course.
Individual stocks (GameStop!), shorting, and hedge funds are all part of the Sirens’ song, and they are singing it to you and to millions of other investors, who are perhaps losing touch with how fatal it will be to their long-term plans if the “miracle” implodes.
In this analogy, we are the one true friend who accepts the responsibility of lashing you inextricably to the mast. And diversification is the rope.