Saturday, February 16, 2019

12 Tax Secrets of the Wealthy - 2019

When I was living in Honolulu about 20 years ago, I remember a local infomercial where a guy was talking about how the wealthy understand the tax laws and are able to take advantage of them to increase their wealth.  He referred to the different pages of the IRS 1040 tax return as "rooms." Some of the rooms were green and made you money, while others were red and cost you money.  It was called "Tax Secrets of the Wealthy."  His message was rather simple:  It doesn't matter how much you make, it's how much you keep that counts.  His message still rings true today.  If you work for a paycheck, most likely your main opportunity to reduce your taxes is with 401(k) or IRA contributions and a mortgage deduction.  With the recent tax legislation, mortgage deductions will be worth less in the future with the new limitation on the amount that you can deduct.  The 401(k)/IRA deduction is good, but you will pay a lot of taxes in the future if your investments do well.  

The wealthy, on the other hand, have many strategies to reduce taxes:

  1. Use a team of experts (i.e., tax / estate attorney, tax accountant) to structure investments and their ownership to minimize taxes and liability, maximize returns and optimize estate planning
  2. Own one or more businesses, which allow for deduction of business expenses and payment of a salary to the owner (also a business expense)
  3. Own real estate through limited liability entities and lease to their company(ies), which provides a tax deduction to the business (rent), minimizes taxable income at the entity owning the property due to depreciation and ownership expense deductions that offset the rental income, and allows for ultimate sale of the underlying business while retaining control over the real estate
  4. Change ownership of their companies to take advantage of tax rates; recently many companies are converting from "S" to "C" Corporations to take advantage of the new lower 21% "C" corporation tax rate, which is less than the top individual tax rate (which is also the "S" corporation tax rate) of 37%
  5. Beginning in the 2018 tax year, the new tax law provides small business owners with a 20% deduction against business income. It’s officially referred to as the Section 199A deduction, and it applies to small businesses, other than “C” corporations.  There are income limits against which that deduction can be taken. 
  6. Invest in tax-preferred investments such as municipal bonds (tax free for Federal and possibly for State as well if issuer is state of residency, which can meaningfully boost returns)
  7. Invest in stocks that pay qualified dividends or generate capital gains (taxed at 0%, 15% or 20% rate depending on tax bracket, which is much lower than corresponding tax bracket rates for ordinary earned income)
  8. Invest in oil/gas/affordable housing partnerships, which have various tax benefits including deferral of taxes on cash distributions and income tax credits
  9. Own investment real estate, which provides tax benefits due to depreciation and operating expense deductions that offset rental income, thereby reducing or eliminating taxable income, while providing positive cash flow and building wealth through appreciation of property and leverage (mortgage that reduces your initial cash investment)
  10. Sell investment property using a 1031 exchange transaction, which allows for the deferral of taxes and the use of all of the sale proceeds to buy a new, more valuable investment property
  11. Invest in alternative investments using leverage (debt), the interest cost of which can be deducted against the investment income and generating infinite returns using "other people's money"
  12. Use life insurance to fund a portion of retirement needs and for estate planning (death benefit is tax free and life insurance loans to fund retirement are also tax free, but reduce death benefit)
For more investing ideas, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.

Saturday, February 9, 2019

Crypto Update

Crypto has woken up recently, with Litecoin up about 30 percent in the past couple of days and many other coins are also seeing some nice increases.  Do we think this is sustainable?  Not sure, but it certainly helps to have some portion of your investment portfolio in Crypto as I have blogged in the past.  If you're interesting in learning more, here is a quick summary of my past posts:  Investing in Crypto is a basic overview, Crypto Rankings attempts to make some sense of various published rankings that are out there as a basis for choosing from the dizzying array of crypto coins and Developing a Crypto Investing Strategy proposes a rational, diversified investment strategy to take advantage of the incredible upside of this asset class but also managing the downside risks.  I'm not a trader, nor do I recommend trading in crypto.  I think buy, hold and diversify with a relatively small portfolio allocation makes the most sense with crypto.

Here's the current "Top 10" cryptocurrencies by Market Cap (see links to detailed profiles on coinmarketcap.com for more information about each):

  1. Bitcoin - BTC ($64.0B)
  2. Ripple - XRP ($12.7B)
  3. Ethereum - ETH ($12.4B)
  4. Litecoin - LTC ($2.6B)
  5. EOS - EOS ($2.5B)
  6. Bitcoin Cash - BCH ($2.2B)
  7. Tether - USDT ($2.0B)
  8. TRON - TRX ($1.8B)
  9. Stellar - XLM ($1.5B)
  10. Binance Coin - BNB ($1.2B)
If you haven't already started investing in Crypto and want to get started, I have been recommending opening an account with Coinbase.   If you click the link, you'll get my invitation and we both get $10 in Bitcoin when you open your account with at least $100!  Most of the coins listed above are available on Coinbase.  You may also look at Crypto.com, which also has Ripple.  Crypto.com also has great perks like a no annual fee metal MCO Visa Card and cash back.  If you click the link and enter my referral code (UQWQBQM9CV), you can get a free $20 sign-up bonus for a limited time only!
   
Good luck with your crypto investing!

For more investing ideas, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.


Saturday, February 2, 2019

Side Hustle - Selling on EBay

If you would like to earn some extra money by selling items on EBay as a side hustle idea, here are a few tips based on my experience over the years.  There are other sites you can use, but EBay has the best platform / audience and a high degree of trust which is critical, especially if you are selling something valuable.


  1. I like to use the EBay app to setup a listing; you can use your phone to take pictures of the item
  2. If the item is fairly common, the app will be able to pre-populate a lot of the listing details for you
  3. Use auction format to get maximum value - start with a $0.99 listing price if you want to get a lot of interest; you can also accept offers until the first bid comes in or you can just do "buy it now" at a fixed price (but people can still make offers)
  4. Make sure you take lots of pictures and use all of the 12 available photo slots
  5. Description should be honest, detailed and informative; the more detailed, the less emails you will get with questions (which can be annoying)
  6. Make sure you calculate the shipping correctly before you list (I prefer to have buyer pay but you can also setup your listing where you pay the shipping) - either way, use USPS flat rate Priority Mail packaging where you can, since the cost is fixed and you can ship anywhere in the US - just make sure your item fits in the box or envelope
  7. Make sure you pack your item well (use bubble wrap or other padding and make sure your item is in a sturdy box and doesn't "rattle" around)
  8. Selling internationally gets complicated with shipping and customs, so I don't do it
  9. Post your listings on your social media accounts to get more "looks"
  10. Ship quickly and leave buyer feedback right away
  11. Don't ship until you have confirmed payment first (usually best through PayPal)
  12. Be careful of scammers who buy your item, pay and receive the shipment and then file a claim with EBay for a refund - this happened to my son and it was a bummer because he had to pay back the sales proceeds and never got the item he sold back.  
  13. Make sure the person you are selling to has good ratings and isn't a brand new account, which can be a red flag
  14. EBay usually waives the listing fee for the first 50 items per month and charges a final value fee of 10% of the item (including shipping charge, if any).  PayPal fees add another 3%.  An easy to use EBay fee calculator is located here.

For my personal finance books, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog. 


Saturday, January 26, 2019

10 Best Interest Rate Ideas for 2019

Many institutional investors are saying that cash may be the best investment in the coming year, especially after the recent volatility in the stock and bond markets at the end of 2018 and early 2019.

“We forecast S&P 500 will generate a modest single-digit absolute return in 2019. The risk-adjusted return will be less than half the long-term average. Cash will represent a competitive asset class to stocks for the first time in many years,” analysts at Goldman Sachs, led by David Kostin, wrote in a research reported dated Nov. 19.

Regardless of whether you plan to shift more of your investments into cash, you should have an emergency fund at least and a portion of your investment portfolio already allocated to cash. 

Here are 10 ideas for earning better interest rates in 2019.  My favorite of these is the first one, investing directly in 4 week US Treasury Bills.  I have included links to the websites (Disclosure:  I don't receive any referral fees from these companies if you click the link). 


  1. TreasuryDirect (4 week US Treasury Bills) - 2.36%
  2. PNC Bank - 2.35%
  3. Investors Bank eAccess - 2.35%
  4. Goldman Sachs Bank USA - 2.25%
  5. State Farm Bank - 2.25%
  6. HSBC Direct Savings - 2.22%
  7. Sallie Mae - 2.20%
  8. American Express National Bank - 2.10%
  9. ETrade Bank - 2.10%
  10. Capital One - 2.00%
I recommend having at least 20% of your investment portfolio in cash at all times in order to buffer against unplanned events (emergency funds) and also to take advantage of investing opportunities that may come up.  For more information about my recommended portfolio strategy to guard against volatility, see my prior post on the "5-20 Rule."

I hope this post helps you earn more in 2019!

For my personal finance books, click here.

Sunday, January 20, 2019

2019 Tax Planning - 9 Areas to Think About

Here are 9 things to know about the recent tax law changes.  While you can't do much about your 2018 taxes now, it's a good time to start thinking about your 2019 taxes.  This is especially true if you live in coastal areas where state income taxes and home prices are high and particularly if you own one or more homes.  
As always, your own tax situation will be unique and you should consult with your tax adviser.
1) Standard deduction - doesn't matter if you itemize, but helps those that have simple tax situations
  • Increased to $12,000 for single or married filing separately, $24,000 married filing jointly
  • Increased to $18,000 for Head of Household
  • 65 and over, blind, or disabled will get an additional standard deduction
2) Families - loss of dependent exemption offsets lower tax bracket savings
  • Dependent exemption of $4,050 is eliminated
  • Child Tax Credit doubles to $2,000
  • Adds $500 credit for other types of dependents
3) Home mortgages - pay attention to these, especially if you own a home or have a second home
  • Mortgage interest paid on new loans deductible up to $750,000 (or existing loans up to $1,000,000) - this is a significant change since it includes all residential loans, including your primary and secondary home; if you are thinking of buying or refinancing a new or second home this year, you'll need to do the math on a potential loss of tax deduction benefit if the loans will exceed $750,000
  • Interest paid on home equity loan or home equity line is limited to building and improving your home - this is also a significant change, since previously you could use deductible home equity line of credit to pay off non-deductible credit cards or other personal loans
  • If your home equity line and the first mortgage on your primary (and if applicable secondary) home exceed $750,000, the interest paid in the excess is not deductible!
Here are some more details:  
For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return.  The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.  
The following examples illustrate these points.  
Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000.  In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.    
Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home.  The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home.  Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.  
Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home.  The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home.  Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible.

4) Tax rates & brackets - loss of dependent exemptions and deductions for some will offset the benefit of the lower rates
  • Most taxpayers will see lower rates
  • Highest rate drops from 39.6% to 37%
5) State & local taxes - pay attention to this if you live in a high tax state like California or New York
  • State and local property, income, and sales taxes limited to $10,000 - this is a major change and will impact people who live in high tax states like California or New York (although if you were in an Alternative Minimum Tax situation already, the impact may not be as significant since state income and property taxes are not deductible for AMT purposes)
  • No income tax prepayment for 2019 allowed
6) 1040 form
  • New 1040 form with six new schedules
  • Eliminates 1040EZ and 1040A versions - this will make tax compliance more difficult for people with very simple tax situations and may require more people to get a professional to do their taxes
7) Alternative Minimum Tax
  • Raises the income cap so that less people are impacted, which is significant since unlike the ordinary tax schedule, alternative minimum tax is not "indexed" to inflation so it gets worse every year unless the tax law adjusts the exemption
  • Single taxpayers raised exempted income from $54,300 to $70,300
  • Married filing jointly raised exempted income from $84,500 to $109,400
8) Self-Employed
  • New 20% Qualified Business Income Deduction, which is a big boost for small business owners:

Section 199A of the Internal Revenue Code provides many taxpayers a deduction for qualified business income from a qualified trade or business operated directly or through a pass-through entity. 
The deduction has two components. 
1) Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.  
2) Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property.
The sum of these two amounts is referred to as the combined qualified business income amount. Generally, this deduction is the lesser of the combined qualified business income amount and an amount equal to 20 percent of the taxable income minus the taxpayer’s net capital gain. The deduction is available for taxable years beginning after Dec. 31, 2017. Most eligible taxpayers will be able to claim it for the first time when they file their 2018 federal income tax return in 2019. The deduction is available, regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.
  • Qualified business equipment can be deducted up to $1,000,000 - this almost doubles the prior "Section 179" deduction that was previously allowed to expense the purchase of new business equipment in the first year (vs having to depreciate over many years) and is also a big boost for small business owners
  • Potentially a greater business auto depreciation deduction
9) Healthcare
  • Eliminates tax penalty for not having health insurance (starting in 2019) - this is a nice change
  • Lowers floor on out-of-pocket medical expenses to 7.5% for 2017 & 2018; probably not a big deal unless you have a lot of medical expenses and don't have a high income

In closing, now is a good time to be thinking about the new tax law changes and how they will impact you in 2019.  It's never too early to start planning!

For my personal finance books, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog. 







Monday, January 14, 2019

Home Equity is Not an Emergency Fund and Other Lessons

Back in 2006, when I bought my new house and sold my old house, I learned some valuable lessons about emergency funds and home buying and selling.  

I bought a brand new house from a home builder that year.  It was really nice, but of course expensive.  It was also great because I didn't have to sell my old house first (they did something where they assumed you rented out your old house so you basically have no net payment on it if for some reason you weren't able to sell).  Today, that would never fly.  The builder used Countrywide Financial (failed in the Great Recession and taken over by Bank of America) to originate a 70% first mortgage that was interest only for the first 10 years, after which the payment stepped up in years 11 - 30 and a second mortgage home equity line of credit for 20% of the purchase price of the new house that was also interest only and matured in 10 years.  Yes, it was the "good old days" of the housing bubble.  The 10% cash down payment actually came from a home equity line of credit on my old house, so I had no cash in the new house - it was 100% financed and all my cash was tied up in the sale of my old house.  That would also not fly in today's lending environment. 

Selling my old house was a white knuckle experience for sure, since I was doing it after I had bought my new house (I didn't want to move twice) and also considering all of this was happening:

  • My real estate agent didn't want to work with me (she actually pulled her sign from my yard after we got into a disagreement)
  • My agent refused to show the house, so I ended up having to do it myself and actually met with the buyer in my living room one evening to go over their offer (they really wanted the house and fortunately their agent was a little more level headed and made the deal happen)
  • The Great Recession and real estate crash were right around the corner - the house closed in July 2006; subprime loan problems started to show up in the fourth quarter of 2006 and things began to snowball after that with subprime lender failures throughout 2007 and 2008, culminating with the bankruptcy of Lehman Brothers in September 2008
  • The buyer needed a subprime loan at 100% loan to value to buy the house - it was probably one of the last loans New Century Financial did before they went under in April 2007 (they stopped accepting loan applications one month earlier)

After I miraculously closed on the sale of my old house, I used the proceeds remaining after paying off all the loans to pay off the home equity line on the new house, thereby making it available for future use and getting my monthly payment down to something I could handle.  Since I had used all of my available cash from the sale of my old house to pay off the equity line, I had no "emergency fund" at that time.  However, I did have the home equity line of credit available with no draws on it, which I figured would be a perfect emergency fund.  

What I didn't count on was less than two years later, the value of my property took a 30%+ hit and the bank shortly thereafter sent me a letter letting me know they were suspending draw privileges on the home equity line.  There went my emergency fund.  Thankfully, I was able to build a real cash emergency fund back up over time.  Also, I was able to refinance the  interest only mortgage for a lower payment with a traditional 30 year fixed loan before the loan adjusted in 2016 when interest rates were much lower, which was also a big relief.

So, lessons learned:

  • Don't buy more house than you can afford with a conventional mortgage; bigger is not better, it's only more expensive
  • Sell your old house before buying a new one; don't worry if you have to move twice, the cost and inconvenience is minor compared to having two mortgages
  • Emergency funds should be held in cash in a bank account or in Treasury Bills
  • Home equity credit lines are not good for emergency funds because banks can shut them down at their discretion if something happens to the value of your home
For more investing ideas, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.