Guides & Checklists

It’s Tax Time | What is the Form 1099?

What exactly is a Form 1099, why can they be so frustrating to process, and how do you manage the problem of receiving an amended one? Read on to find out!

What is the Form 1099?
A Form 1099 is any one of a series of documents that contains information on all transactions that occurred inside of a “taxable” account1 during a given tax year. Reporting this information on a taxpayer’s annual federal individual income tax return is required. Most investment custodians (e.g. Charles Schwab, Fidelity, Merrill Lynch, etc.) will consolidate the various Form 1099s into one consolidated document, known as a Composite Form 1099.

The most common transactions represented on a Form 1099 are:

• Dividends and Distributions (Form 1099-DIV): Typically generated by owning a stock/equity investment product.
• Interest Income
(Form 1099-INT): Typically generated by owning a bond/fixed-income investment product.
• Capital Transactions (Form 1099-B): Reflects gains/(losses) from the sale of a capital asset.

Towerpoint Tip:

A Form 1099 is not the same as a Form 1099-R. The latter form reports annual distributions from tax-advantaged retirement accounts, such as “regular” pre-tax IRAs, Roth IRAs, SEP IRAs, and 401(k)s.

What do I do with a Form 1099?

If you work with a CPA/tax advisor, you should provide this tax form to them for inclusion on your federal individual income tax return.

If you prepare your own tax returns, be sure to utilize the import function that many tax preparation software programs now provide. This will ensure accurate reporting to the IRS, which is particularly important for Form 1099s, as any reporting discrepancies in the information you input versus the information the Internal Revenue Service (IRS) receives from your custodian automatically “flags” your federal tax return for additional scrutiny.

Why do I receive my Form 1099 late or even worse, receive an amended Form 1099?

Generally, investment custodians have until February 15 to provide taxpayers with their Form 1099s, although more recently, custodians are requesting exceptions and extensions to, or even flat-out missing, this issuance deadline, so be aware that you may be waiting past this date to receive yours.

Why? Before completing Form 1099s, custodians must first receive and collect taxable income information from each of the underlying investments all of their clients were invested in during the prior year; and more often than not, 1099 issuance delays originate with the underlying companies themselves.

It is also common for custodians to have to restate the originally issued Form 1099, and reissue what are known as amended Form 1099s, when one or more of the underlying investment companies revise, update, or correct an error made in their initial reporting.

What do I do if I receive an amended Form 1099, and are there any steps I can take to make this less of a headache?

if you receive an amended Form 1099 after already filing your tax return, you may need to file an amended tax return. You should speak with your CPA/tax professional for guidance on this important consideration.

To put yourself in the best position to avoid this hassle, we recommend that taxpayers work with their CPA/tax professional to prepare their tax returns in full as early as possible in the filing season, but wait until later in March to actually file them. While we fully understand the desire for some of you to finish and file your tax return as soon as possible, waiting to file minimizes the likelihood that you’ll have to file an amended tax return after receiving an amended Form 1099. Additionally, this gives your tax professional adequate time to properly prepare and file your return should you receive amended 1099s.

Towerpoint Tip:

If the difference between the original Form 1099 and the amended Form 1099 is slight, and can be considered in your favor, the cost of amending the tax returns may outweigh doing nothing. However, we advise you file an amended return when the amended Form 1099 results in additional taxes owed.

How Can We Help?

At Towerpoint Wealth, we are a legal fiduciary to you, and embrace the professional obligation we have to work 100% in your best interests. If you would like to speak with us regarding any other tax questions you may have, we encourage you to call (916-405-9166) or email (spitchford@towerpointwealth.com) to open an objective dialogue.

Towerpoint Wealth, LLC is a Registered Investment Adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Towerpoint Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Towerpoint Wealth, LLC unless a client service agreement is in place.

Own a Concentrated Stock Position? Our 5 Strategies to Help Manage Risk and Taxes

Stock compensation can be a wonderful complement to a traditional compensation package, oftentimes contributing significantly to an investor’s net worth. However, there is an overlying risk to investors who have too much of their net worth concentrated in the stock of one company. This is more complicated if this stock has appreciated to an extent that selling would result in a substantial capital gains tax liability.

How can an investor mitigate the risk of having too much of their net worth concentrated in a single appreciated stock, and avoid significant tax liabilities? 

Multiyear-Sales Strategy 

Some investors may feel that the solution to owning an overconcentration of stock in a single company is simple: sell all of the stock and reinvest the proceeds in a diversified portfolio. While this strategy has the obvious benefit of immediately eliminating the overconcentration risk, the tax “hit” of utilizing this strategy can be substantial – especially considering that investors who received the stock as compensation may have a very low (or no) cost basis in it.

One approach to mitigate the tax impact of these stock sales is to amortize them over a period of two or three years. While this will not reduce an investor’s risk exposure as quickly as an outright sale, this strategy has the advantage of spreading the capital gains taxes over a multiyear period – allowing an investor to better control the timing of the capital gains with the goal of realizing more of these gains in relatively low tax years.  

 Put Option or Protective Equity Collar

A put option gives an investor the right to sell a stock at an agreed upon price on or before a particular date. The advantage of owning a put option is that it establishes a “floor” price at which the investor will be able to sell a stock position. This greatly reduces an investor’s downside risk, while at the same time allows them to retain the unlimited upside.

Instead of paying “out-of-pocket” to cover the premium (cost) of the put option, an investor can simultaneously sell a call option, which gives the purchaser of the call option the right to buy the stock at an agreed upon price on or before a particular date.

The strategy of simultaneously buying a put option and selling a call option is known as a protective equity collar. The potential drawback of an equity collar is the investor is now limited on the upside of the stock price as well. However, understanding that the premium from selling a call option will often cover the entire premium to purchase the put option, an equity collar can be a low-cost approach to hedging a concentrated stock position. Buying and selling options is best handled by a financial professional working on your behalf. 

Pool Shares into an Exchange Fund 

Exchange funds are private placement partnerships where an investor contributes a concentrated stock position into a fund that includes a mix of other stock positions. Oftentimes, these other stocks were donated by investors that had the same intent of diversifying their own appreciated stock positions.

With exchange funds, each investor receives a pro-rata share of the partnership (measured in units) based on the value of the stock that they contributed.

While one obvious advantage of an exchange fund is immediate diversification, an additional appeal of this strategy is that capital gains taxes are deferred until the investor sells their fund units. 

There are several important disadvantages of exchange funds, such as the typically high fund management fees, the lack of control over the other stock positions in the fund, and the lock-up period before an investor can sell their units (which is often as high as seven years). Further, exchange funds are regulated private placements, so they are typically subject to investment minimums and only available to investors that meet certain net worth thresholds.

Variable Prepaid Forward Contract

A Variable Prepaid Forward (VPF) contract is an agreement that an investor will sell a specific number of shares at a discount (usually between 75-90%) at a pre-specified future date in return for an upfront cash payment.

The “variable” in the term VPF refers to the fact that the shares the investor is selling at a future date are not fixed and are dependent on the performance of the stock. A lower stock price results in more shares sold to satisfy the obligation and a higher stock price results in fewer shares sold.

The benefit of a VPF contract is the immediate liquidity received from the cash advance. In addition, the use of the VPF contract allows for the deferral of capital gains – as the variability of the shares to be sold means that a VPF contract is not deemed a constructive sale by the IRS until the shares are delivered. However, in order to avoid IRS scrutiny, a VPF contract should be drafted by a qualified tax professional or lawyer. 

Charitable Gifting

While charitable gifting is a broad category that requires further in-depth discussion, there are several charitable gifting strategies an investor can utilize to reduce the risk of an overconcentrated stock position.

The simplest strategy is for an investor to donate the overconcentrated stock position to a charity (or charities) of their choice. Not only will an investor generally receive the same exact 

tax deduction as if they donated cash, donating stock has the dual benefit of eliminating the capital gains tax that would be associated with selling the stock outright. 

In our view, donating stock is a great way for an investor to both reduce their concentrated stock position and fulfill their charitable intentions.

Pairing this with a Donor-Advised Fund (DAF), a charitable investment account, can streamline the process of gifting stock and has the added benefit of allowing an investor to control the timing of both their tax deductions and their donations.

There are also different charitable trusts that may be appropriate for an investor with an overconcentrated stock position. These types of trusts, which include a Charitable Remainder Trust (CRT) and Charitable Lead Trust (CLT), allow an investor to better control and customize the charitable strategy that works best for them.

Charitable trusts come with material costs and added complexity, and we recommend you work with an experienced estate planning attorney and your financial advisor to determine the best choice for you.

How Can We Help?

At Towerpoint Wealth, we are a fiduciary to you, and embrace the legal obligation we have to work 100% in your best interests. We are here to advise you, and will work with you to decide the optimal strategy for your concentrated stock position. 

Search results for “wealth advisor near me” include the Towerpoint Wealth team because we’re in the middle of it all. Towerpoint Wealth is a fee-only certified financial planner near Roseville, Rocklin, Granite Bay, Folsom, Gold River, El Dorado Hills, East Sacramento, Curtis Park, Land Park, Elk Grove, and Rancho Murietta.

Are you searching “certified financial planner near me?” You’ve found Sacramento independent financial planner Joseph Eschleman, as well as certified financial planner Steve Pitchford, CPA, CFP^®, our entire independent wealth management team. Please reach out to us to learn more about how our Sacramento financial planning team can assist you.

Each year, the Internal Revenue Service (IRS) releases an annual report known as the “Dirty Dozen.” The report highlights the most commonly practiced tax scams that the IRS identifies each year. Which of these current and past scams should you be most worried about? We have identified six worth keeping a special eye on.

1) Phishing

Phishing is the process of an individual or organization illegally trying to collect your sensitive information (personal, financial, etc.). 

According to the IRS website, common phishing schemes center around fraudsters impersonating the IRS via email, regular mail, telephone, text messages, or even social media.

As a matter of policy, the IRS does not contact taxpayers by email, text message, or social media.

What should you be on the lookout for to identify phishing? Fraudsters…

• Claiming that they are with the IRS and are missing some of your financial or personal information to process your tax returns
• Stating that suspicious activity has been detected on your online IRS account
• Asking you to click a link to finalize a tax payment
• Offering a tax refund         

2) Identity Theft

Tax season is a dream time of year for fraudsters. 

Once a taxpayer has become the victim of phishing, a common next step for the fraudster is to file a tax return in their victim’s name early in the filing season to receive a sizable tax refund. The biggest challenge with tax refund identity theft is that the taxpayer likely won’t even realize the occurrence until they try to file their return. At which point, the IRS will “flag” the return and mail the taxpayer a 5071C letter to verify their identity.

The first step to prevent identity theft is to diligently protect your personal and financial information. Be wary of the phishing tactics described above, and also be cautious when providing businesses and individuals with your social security number. In addition, you should file for “my Social Security” online, install antivirus and firewalls on your computer, change passwords on online accounts frequently, review your credit report for suspicious activity, and most importantly, use common sense.

If you are concerned that you were subject to identify theft, immediately inform your CPA/tax professional, your financial advisor, your bank, the Social Security Administration, and the IRS.

3) Fake Charities

Fraudsters know that using a fake charity to solicit contributions from unwitting victims has a history of past success.

Be cautious if you notice that a charity’s name is similar to, but not the same as, well-known charitable organizations.

Vetting a charity before you contribute to it is always a smart idea. One way to do so is by visiting Charity Navigator and searching for a charity to ensure that it’s legitimate. 

4) Inflated Refund Claims

While most CPA/tax professional firms are reputable and trustworthy operations, there are those out there established for the sole purpose of stealing your money by offering inflated refunds.

If you find a firm advertising, and often guaranteeing, a sizable refund, don’t just be skeptical, run the other direction! The refund is often simply incentivizing you to provide the fraudster with your personal and financial information, so they can then use this information to file for this refund on their own.

A firm offering to be compensated by a percentage of the refund is just another variant of this strategy.

5) Falsified Income for Credit Claims and Padded Expenses

The IRS regularly analyzes tax returns to check for income that is inflated (to allow for a refundable tax credit claim) and to ensure that expenses are not exaggerated.

Always be sure to review your tax return prior to submission for inflated income, falsified deductions, and padded expenses.

If you believe you were a victim of a falsified income for credit claim or padded expenses fraud, you should immediately file Form 3946-A with the IRS.

6) Tax Return Preparer Fraud

Tax return preparer fraud is the overarching theme of this white paper and encompasses all sections above.

It’s important to remember that you are the one who is ultimately responsible for your tax return.

And while you may have a CPA/tax professional preparing your return, it pays to have at least baseline knowledge of taxes to be able to identify when a tax preparer is not working in your best interest.

It’s also prudent to review your tax returns before you sign. If reviewing your taxes is confusing or overwhelming, you can often find low-cost help. Check your local resources for libraries and community centers to see if they have tax preparation volunteers.

How Can We Help?

Search results for “sacramento financial advisor near me” include the Towerpoint Wealth team because we’re in the middle of it all. Towerpoint Wealth is a fee-only certified financial planner near Roseville, Rocklin, Auburn, Granite Bay, Folsom, Gold River, El Dorado Hills, East Sacramento, Curtis Park, Land Park, Elk Grove, Rancho Murietta and Davis. We are conveniently located on Capitol Mall in downtown Sacramento.

Are you searching “certified financial planner near me?” You’ve found Sacramento independent financial planner Joseph Eschleman, as well as certified financial planner Steve Pitchford, CPA, CFP^®, our entire independent wealth management team. Please reach out to us to learn more about how our Sacramento financial planning team can assist you.

While 2020 will rightfully be remembered for the challenging and unprecedented COVID-19 battle we have all been impacted by, at Towerpoint Wealth we have continued to proactively work with clients to identify economic opportunities presented by the coronavirus crisis. Specifically, we have identified a “silver economic lining” tax planning strategy this year, one that is designed to take advantage of today’s low income tax rates, which we feel are temporary, while at the same time leave our clients better positioned for tomorrow’s higher income tax rates, which we feel are inevitable. This white paper will discuss what a “Roth IRA conversion” is, who may benefit from a Roth conversion, why 2020 is a potentially great year to do a Roth conversion, and how to utilize important tax planning tools to evaluate this opportunity.

Roth IRA Conversion

A Roth conversion is a retirement and tax planning strategy whereby a taxpayer “converts” some, or all, of their “regular” pre-tax retirement assets into tax-free Roth retirement assets. It is important to note that ordinary income taxes are owed on the tax-deferred contributions and earnings that are converted.

While the most common Roth conversion strategy is a pre-tax IRA to a Roth IRA, two other popular methods exist:

1. Convert pre-tax employer-sponsored retirement plan assets (401k, 403b, 457, etc.) to Roth IRA assets (if the taxpayer has separated from service from the employer).
2. Convert pre-tax 401k assets to Roth 401k assets (if the employer retirement plan allows for an in-plan conversion).

A Roth conversion, when utilized properly, is a powerful tax planning strategy for the following reasons:

• It maximizes the tax-free growth within a taxpayer’s investment portfolio.
• As distributions from Roth retirement accounts are tax-free, a Roth conversion provides a hedge against possible future tax rate increases.
• As Roth IRAs do not have required minimum distributions (RMDs), it reduces taxable RMDs on pre-tax retirement assets that a taxpayer is annually subject to after reaching the age of 72.
• It leaves a greater tax-free financial legacy to heirs.

However, even understanding these benefits, a Roth conversion may not always be in a taxpayer’s best long-term economic interests if:

• The current tax cost of the conversion is prohibitively high. A Roth conversion, in its simplest sense, is a trade-off between paying taxes now vs. paying taxes later. For the strategy to be impactful, the current tax cost of the conversion should not be so expensive that it outweighs the benefit of any expected future tax-free investment growth.
• The taxpayer is making regular and material withdrawals from their pre-tax IRA.
• The taxpayer does not have the cash to pay the tax due on conversion.

Towerpoint Tip:

We recommend converting shares of investment positions rather than selling investments in the IRA and then converting cash proceeds. This ensures that the taxpayer continues to have market exposure during the conversion process, and also saves on the transaction fees that may be levied when selling an investment position.

2020 – A Perfect Year for Roth Conversions?

There are three reasons why we believe 2020 is a great year for Roth conversions:

1. While no one has enjoyed this year’s market volatility, material intra-year market pullbacks, such as the one we experienced in March, provide a unique opportunity to convert pre-tax investments to Roth IRA at a time when their value is, we believe, temporarily depressed.
   Performing a Roth conversion with these temporarily depressed assets “locks in” the income taxes owed at their lower value upon conversion. While we are humble in recognizing we do not have a crystal ball, we strongly believe that crisis events are temporary, and given time, these assets will recover in value. Thus, this tax strategy results in paying a lower tax price when converting investments to a tax-free Roth IRA.
2. Understanding the uncertainty surrounding the upcoming Presidential election, and given the government’s need to raise funds to offset its massive 2020 stimulus packages, there is certainly no guarantee that income tax rates will stay this low in future years.
3. Given that the CARES Act eliminated RMDs for 2020, this is a uniquely low tax year for those taxpayers who are ordinarily subject to RMDs, allowing them to convert a greater amount of assets while remaining in low income tax brackets.

Towerpoint Tip:

At Towerpoint Wealth, pairing a Roth conversion with the “frontloading” of a Donor-Advised Fund (DAF) has been a powerful tax planning strategy, allowing our clients to convert more to tax-free Roth assets at lower tax rates, while also allowing taxpayers who would not ordinarily itemize deductions to “hurdle” the standard deduction – this ensures that they receive at least a partial tax deduction for their charitable contributions.

Executing a Roth conversion

When determining the optimal amount to convert to tax-free Roth assets, there is no “one size fits all” approach.
A taxpayer’s unique personal and financial circumstances should drive the conversion discussion. For one taxpayer, recognizing any amount of conversion income may not make tax or economic sense, while for another, particularly those who want their heirs to inherit assets tax-free, converting a sizeable amount (even at a material tax cost) may be attractive.

One window of time in which we look to help clients aggressively execute a Roth conversion is immediately upon retirement, before they begin filing for Social Security benefits. This is often a uniquely low income-tax window of time, where a taxpayer is still young enough to potentially enjoy many future years of tax-free growth that Roth assets allow.

If a Roth conversion is worth evaluating for a client, many CPAs and tax professionals assemble customized tax projections to optimize the decision-making process.

And while Towerpoint Wealth is not a public accounting firm, we regularly utilize BNA Income Tax Planner, a powerful tax projection software, to assemble Roth conversion tax projections for our clients, in order to streamline collaboration with their CPAs and tax professionals. If our client prepares their own tax returns, we work directly with them to evaluate these Roth conversion scenarios.

Towerpoint Tip:

Under the Tax Cuts and Jobs Act (TCJA), the IRS eliminated the ability to recharacterize (i.e. undo) a Roth conversion after it has been made. For this reason, we generally recommend waiting until closer to the end of a tax year, when taxable income is clearer, prior to executing a Roth conversion. However, in unique tax years such as 2020, we have been strategically executing Roth conversions throughout the year to ensure we are taking advantage of market volatility and pullbacks, while also looking for an opportunity to “top up” the conversion later in the year.

How Can We Help?

Towerpoint Wealth is a fee-only certified financial planner near Roseville, Rocklin, Granite Bay, Folsom, Gold River, El Dorado Hills, East Sacramento, Curtis Park, Land Park, Elk Grove, and Rancho Murietta. At Towerpoint Wealth, we are a fiduciary to you, and embrace the legal obligation we have to work 100% in your best interests. We are here to serve you and will work with you to formulate a comprehensive and tax-efficient retirement strategy.

Are you searching “certified financial planner near me?” You’ve found Sacramento independent financial planner Joseph Eschleman, as well as certified financial planner Steve Pitchford, CPA, CFP^®, and our entire independent wealth management team.

We serve clients primarily in the Northern California region. Glad you’re here! Please contact us with any questions you have about our wealth management process.

Since the start of the COVID-19 pandemic,  millions of workers have begun to work from  home. Before this massive transition to remote work, Americans spent an average of 6.42  hours on the internet every day.  36% of  internet users in the USA between ages 16-64  were using mobile banking or financial services apps every month, and 20% of internet users in the USA between ages 16-64 use mobile payment services every month.i These metrics have likely increased over the last few months, which is a perfect reminder to consider digital security best practices.  

While many assume they are up to speed on basic internet security topics, the chart at the left from Pew Research suggests that there are still significant gaps in common understanding of best practices while working or browsing online. In particular, the chart reveals how a significant percentage of the public is uncertain or uninformed about crucial cybersecurity topics, such as encryption of websites with https://, or two-factor authentication. 

Encrypted Browsing 

Constant internet connectivity is a very useful resource, but it can also make us more vulnerable to a number of risk factors often taken advantage of by malicious actors. Technology also makes everyone more efficient, including cyber criminals. One study found that 64% of Americans have been impacted by some form of data theft.  Following a few basic procedures in your online life can significantly reduce exposure to cyber-attacks. 

Home Network Security

When you first contacted an internet service provider (ISP) to set-up your WiFi and cable, you likely considered the internet speed you needed, what cable channels you wanted, and how much these services would cost. But, once you were connected, did you ask your ISP how to change your router’s default password (not to be confused with your WiFi Password)?

Contact your ISP if you need help configuring any of the above.

Password Best Practices

While configuring your home WiFi, you should have created at least three separate, unique passwords, before creating any passwords for your different devices and applications. According to industry-leading password management firm LastPass, weak or compromised passwords cause approximately 80% of data breaches. Remember to follow the below password basics and avoid reusing the same password across multiple accounts.

Phishing Attacks and Social Engineering

Phishing is a cybercrime in which malicious actors attempt to gain access to sensitive personal data by posing as legitimate organizations or people.

According to the FBI, as of March 30, 2020, their Internet Crime Complaint Center (IC3) has received and reviewed more than 1,200 complaints related to COVID-19 phishing scams alone.iv
Phishing emails are often crafted to appear as if they were sent from health organizations, financial institutions, social media sites, or retailers. Often, phishing emails include suspicious links or attachments that try to trick you into you into taking an action or visiting a website that is against your own best interest.

To stay vigilant against phishing:

Look for spelling and grammar errors both in the content of the email and the sender’s address. However, keep in mind that hackers have also learned how to steal and use legitimate email addresses.

Don’t click on links until you can verify that they lead to a legitimate website. Hovering over a hyperlink in an email with your cursor will reveal the web address where the link leads, before you click through. If you receive an email that appears to be from a known contact (such as a client, friend or company) and you are unsure if the email, a link, or an attachment is authentic, contact the sender by phone or a separate email (don’t just
“reply” or “forward”) to verify.

Never share your email address, passwords, or any other sensitive personal information via email unless you are absolutely certain of the sender’s authenticity and of how the information will be used. Be skeptical of language implying urgency or immediate need. When in doubt, pick up the phone and call to share such personal details for any reason.

Managing Devices

Software Updates: A Pew Research study indicated that more than 50% of smartphone owners update operating systems only when it is convenient and 14% never even bother with updates.v Manufacturers like Apple and Samsung release updates to patch security vulnerabilities, so it’s important to update your software, applications, browsers, and firewall protection to the latest versions available. Consider enabling automatic updates for your convenience.

Protecting the Data on Your Device: Survey results indicate that 28% of smart phone owners do not lock their phones with a passcode.vi Would you leave your home unlocked when you leave for work or an errand? Always lock your devices when you are not using them. Even if one of your devices is lost or stolen, password protection can help protect your data against theft or unwanted access.

Wireless Configurations: Public Wi-Fi networks, like the one in your local Starbucks, don’t offer the same security as your private home or work network, yet 20% of internet users report completing financial transactions on public networks.vii It is always safest to assume that public networks do not offer any protection to your browsing. Consider configuring your devices so they do not automatically join detected networks (with your private home or work networks as the only exceptions).

Resources and Further Reading
National Institute of Standards and Technology (NIST)
Center for Internet Security (CIS)
FINRA

Download White papers

How Can We Help?

Towerpoint Wealth is a fee-only certified financial planner near Roseville, Rocklin, Granite Bay, Folsom, Gold River, El Dorado Hills, East Sacramento, Curtis Park, Land Park, Elk Grove, and Rancho Murietta. At Towerpoint Wealth, we are a fiduciary to you, and embrace the legal obligation we have to work 100% in your best interests. We are here to serve you and will work with you to formulate a comprehensive and tax-efficient retirement strategy.

Are you searching “certified financial planner near me?” You’ve found Sacramento independent financial planner Joseph Eschleman, as well as certified financial planner Steve Pitchford, CPA, CFP^®, and our entire independent wealth management team.

We serve clients primarily in the Northern California region. Glad you’re here! Please contact us with any questions you have about our wealth management process.

From ancient civilizations to modern society, humans have always had a fascination with gold. The yellow metal has been used as currency, as jewelry and incorporated within various other industrial applications. Gold also helped shape United States history when it was discovered in the Sacramento Valley in 1848 sparking the California Gold Rush. But does it belong in your investment portfolio? We will discuss some of the benefits and drawbacks below.    

1) Store of Value

Famed financier J.P. Morgan once stated, “Gold is money, everything else is just credit”. This quote strikes at the core of the “gold as a store of value” argument. But what exactly is a store of value and what qualifies gold to be viewed as such?

By definition, a store of value is an asset that maintains its value without depreciating. Gold’s ability to maintain wealth by preserving purchasing power has been well documented. Civilizations throughout history have turned to gold as a means of exchange as well as a hedge against currency devaluation.

Gold’s finite supply also helps boost its appeal as a store of value. To date, all the gold mined throughout history would fit into two and a half Olympic-sized swimming pools. According to the US Geological Survey (USGS), approximately 187,000 metric tons of gold has been mined in total, with 57,000 metric tons remaining underground.

Critics of gold state that it is an antiquated means of exchange with little utility or industrial applications, outside of jewelry, and should therefore not be considered a store of value. Specific to utility, their argument could be viewed as valid. But what gold lacks in utility, it makes up for in investor psychology. Humans have long placed value in gold. While this value may very well be due to its historical reputation, until this connection is broken, gold will remain one of the primary assets used to preserve wealth.

2) Low Correlation to Other Investments

One key aspect of a properly diversified portfolio is owning investments that have a low correlation to each other. What does this mean, and why is it important? Correlation is a numeric value from -1 to +1. The closer that two different investments are to having a +1 correlation, the higher the likelihood their respective market values will move in tandem with each another. Vice versa is true for investments with a -1 correlation. Investments with a correlation of 0 are completely unrelated, meaning the price movement of one has no relation to the price movement of the other.

For longer-term investors, it is important to work to have the correlation between the various asset classes (read: stocks, bonds, alternatives, cash, etc…) held in their portfolio be as close to zero as possible. This allows investors to better manage the risk of their portfolio, and increases the likelihood that the share price of investments held in differing asset classes will not move in the same direction in response to current economic and market trends.

Gold is a unique asset in that it has a low, or sometimes even negative correlation to the other primary asset classes typically included in a properly diversified portfolio. In fact, as you can see from the above graph, it tends to have a negative correlation to U.S. equities, hence sometimes being described as a “flight to safety” asset.

3) Portfolio Insurance

Just as you purchase home or auto insurance to protect your assets against unforeseen events, you should consider doing the same with your investment portfolio. As recent events have shown us, market and economic crises can and do happen.

Given its negative correlation to U.S. equities, gold can provide needed insulation to your portfolio, helping it to better absorb these inevitable pullbacks. While it will not completely offset equity losses, gold can help reduce volatility and provide “downside insulation” to a portfolio.

As the chart below shows, with the exception of two instances, the 1997 Asian financial crisis and 2013’s “Taper Tantrum,” gold has achieved positive returns during times of equity unrest. It also has a tendency to outperform U.S. Treasuries during these downturns, which many view as another safe haven asset.

4) But What About Income…?

Gold is not without its faults. One of the main arguments against gold ownership is the lack of a dividend or interest payment and the fact it has little to no industrial production value.

One of the most famous investors in the world, Warren Buffet, is an outspoken critic of gold ownership for these very reasons. He has been quoted as saying,

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

…and Mr. Buffett would be correct. Gold has little to no real economic utility, does not generate sustainable cash flow, and does not pay a dividend.

What it does offer is relative stability and the potential for price appreciation. During turbulent economic times when company cash flows decline and dividends are cut or reduced, gold tends to shine, as investors try to preserve capital and fear the inevitable stimulus measures taken by central banks and/or government could stoke inflation and decrease the purchasing power of their currency.

More recently, financial markets have also been grappling with historically low interest rates, with some countries even experimenting with negative interest rates (i.e. investors paying the government interest, instead of receiving it, when owning government-issued bonds). This has significantly lowered the opportunity cost of owning gold (which pays no interest) versus owning government-issued bonds (which pay interest) as investors look for safety during times of market unease. Gold has been a direct beneficiary as the declining interest rate trend has gained steam, particularly in countries issuing bonds with negative interest rates. Why would an investor choose to pay interest to own a government bond when they could own gold instead, achieving the similar end goal of capital preservation?

4) What happened to gold with the COVID-19 pandemic and the March 2020 decline?

During the depths of the COVID-19 market pullback in March of 2020, gold suffered sizable declines along with equities. In fact, it suffered its largest weekly decline since 1983 while equities dipped into bear market territory in a record-shattering 20 days. Doesn’t this fly in the face of all the previous arguments for owning gold?

It depends on what you believe. Some have argued that the declines in the price of gold, at the exact same time equities were dropping precipitously, debunks the theory that gold should be viewed as a safe haven asset during times of market turmoil. Especially coupled with the fact that US Treasury bonds and the U.S. dollar remained strong throughout the collapse in equity prices.  

Proponents of gold have argued that the price decline the metal suffered in March, 2020 was due to the rapid shock the U.S. economy experienced as virtually all of us entered lockdown. This forced many investors to raise cash as rapidly as possible, and gold, being a very liquid asset, provided easy access to needed cash. These proponents would challenge that the price of gold acted similarly during the 2008/2009 financial crisis before ultimately touching all-time highs, not too different to what has happened over the last three months. By analyzing the above chart, we are able to see that initially gold did maintain its strength as equities began to move lower. As the equity losses accelerated gold prices declined before beginning its steady march higher prior to the March 23 low in equity prices. This does lend credence to the claim by gold “bulls” that the metal was used as a source of cash by investors during the selloff, and in doing so, helped them limit their losses.

In Summary While critics may remain unconvinced, it is hard to deny that gold has maintained its luster throughout history as a go to asset during times of uncertainty. Its ability to provide ballast to a portfolio allows your longer-term financial goals to remain upright and on course. We are by no means advocating that investors transition 100% of their assets into gold. However, we feel that a modest allocation of 3-7% in gold does have a place in a properly diversified investment portfolio.

How Can We Help?

Towerpoint Wealth is a fee-only certified financial planner near Roseville, Rocklin, Granite Bay, Folsom, Gold River, El Dorado Hills, East Sacramento, Curtis Park, Land Park, Elk Grove, and Rancho Murietta. At Towerpoint Wealth, we are a fiduciary to you, and embrace the legal obligation we have to work 100% in your best interests. We are here to serve you and will work with you to formulate a comprehensive and tax-efficient retirement strategy.

We serve clients primarily in the Northern California region. Glad you’re here! Please contact us with any questions you have about our wealth management process.

Nathan P. Billigmeier, Director of Research and Analytics | (916) 405-9170

By Steve Pitchford, Director of Tax and Portfolio Planning: Tax Cuts: 2018 Tax Planning Considerations

The Tax Cuts and Jobs Act (TCJA) of 2017 is the most significant amendment to the Federal tax law since 1986, causing drastic changes to both the individual and corporate tax code. Below we describe some of the most pertinent changes and offer tax planning opportunities to consider in response to these changes.

Notable Changes for 2018

By now, most of us are familiar with some of the changes that have taken place at the federal level for both individuals and corporations. On the individual side, one of the most notable differences in 2018 is the removal (or limitation) of many tax deductions. Of special note to those who work in, or who have hired from, the professional service industry (us at Towerpoint Wealth, your CPA, or your estate planning attorney), is the elimination of your ability to deduct professional fees as a miscellaneous itemized expense. And three notable limitations may impact homeowners adversely (especially those in higher tax states such as New York and California) as well:

1. A new cap on the deduction of income, sales, and property taxes to $10,000.

2. The reduction of the interest deduction on mortgage debt. This deduction is now only allowable on debt up to $750,000, down from $1 million previously.

• • This new rule is only applicable to newly originated mortgages taken out after December 15, 2017.

3. Interest paid on a home equity line of credit (HELOC) is no longer deductible, regardless of when the HELOC was established.

With all of this being said, and speaking to how convoluted our tax code was and continues to be (in our opinion), if a taxpayer had previously been subject to the Alternative Minimum Tax (AMT), a separate tax calculation targeting higher income individuals, the elimination of the deductibility of professional service industry fees, and the limitation of the deduction for income, sales, and property taxes may be of little consequence, as these items were considered “preference” items that had already been added back to taxable income for those “qualifying” for AMT.

High Property Tax States Hit Hard

On the whole, taxpayers residing in high property tax states such as California and New York very well may feel more of the sting of the TCJA. New York Governor Andrew Cuomo estimates the new tax act will raise property and income taxes for New Yorkers by 20 percent! California Governor Jerry Brown, commenting on the reduced mortgage interest deduction in particular, stated that this provision would disproportionally affect California.

Not surprisingly, California is leading the charge in considering different approaches to mitigate TCJA’s impact on its residents. Ideas include:

• Allowing employers to withhold state income taxes as payroll taxes. 
• Allowing taxpayers to gift their state income taxes to the state, thus making them deductible as charitable contributions.

These ideas being said, there are major hurdles with these approaches, and we feel the likelihood the Internal Revenue Service (IRS) readily accepts them to be quite low.

Planning Opportunities to Consider

Tax Cuts: Understanding the myriad of moving parts associated with the Tax Cuts and Jobs Act of 2017, we here at Towerpoint Wealth continue to be resolute in our philosophy of helping our clients be proactive rather than reactive with their tax planning, and there are still plenty of planning opportunities to consider, obviously depending on your unique tax situation. Examples of proactive tax planning ideas include:

• Reevaluate which accounts your Towerpoint Wealth professional service and advisory fees are being debited from.
  • These professional fees are no longer tax deductible.
  • Reviewing whether deducting these fees directly from pre-tax retirement accounts (e.g.Traditional IRAs, but NOT Roth IRAs) would be time well spent, as doing so may effectively provide a tax-free distribution from these accounts.

• Frontload charitable contributions into a single tax year.
  • For those who are charitably inclined, taxpayers continue to receive a federal and state income tax deduction for any donations made to approved 501(c)(3) charitable organizations.
  • The TCJA created a higher standard deduction (doubled for most taxpayers beginning in 2018), and many taxpayers may need to make a more sizeable charitable contribution in order to receive the deduction benefit.
  • One possible solution is frontloading charitable contributions into a single tax year (this would be even more impactful in a year where taxable income may be expected to be higher).
  • Any charitable contributions not applied or “used” in any particular tax year can still be carried forward five more years.

• Make a Qualified Charitable Distribution (QCD) from your traditional IRA account.
  • Available for those who are 70 ½ years old or older, and subject to required minimum distributions (RMDs) from their traditional IRAs.
  • Rather than make a donation of cash or investments from a “regular” taxable account (i.e. a checking, savings, or brokerage account), a taxpayer obligated to taking a RMD can make a direct contribution from their traditional IRA account to the charity, up to their RMD amount.
  • This is known as a Qualified Charitable Distribution (QCD), which has a dual benefit of both satisfying the taxpayer’s RMD, while excluding the distribution amount from taxable income.
  • From a tax perspective, a QCD has the potential to achieve virtually the same impact as donating funds from a taxable account, but is not subject to the standard deduction “hurdle” as discussed above.

We Are Here to Help

In the end, while the TCJA and the hastily-assembled manner it was enacted left many taxpayers confused and frustrated, we at Towerpoint Wealth believe there are a number of planning opportunities worth evaluating. We understand that “talking taxes” is not everyone’s ideal topic of conversation, yet an important one to be having, and we are here to directly facilitate that conversation and make it less painful as you formulate a tax strategy for 2018 and beyond. If you would like to speak further about any of the topics covered in this article, we encourage you to call (916-405-9140) email (info@towerpointwealth.com), or Tweet (@twrpointwealth) us.

Are you searching “certified financial planner near me?” You’ve found Sacramento independent financial planner Joseph Eschleman, as well as certified financial planner Steve Pitchford, CPA, CFP^®, and our entire independent wealth management team.

We serve clients primarily in the Northern California region. Glad you’re here! Please contact us with any questions you have about our wealth management services.