Outside Economics

A few interesting facts about Iran will help put some perspective on the current status of the world economy. Iran is a country that is rich in other natural resources besides oil and they have a history of being an economic powerhouse in the Middle East region.  It will be interesting to watch how they play their new part on the world stage.

Sanctions imposed on Iran years ago were lifted in January thus allowing Iran to once again export and compete in the global economy. At the height of the sanctions, Iran saw their currency, the rial, collapse by over 80%, sending food and basic product prices to hyperinflation levels.

Iran has an abundance of natural resources it plans to export, including zinc, copper, iron ore, and oil. Iran’s announcement that it will begin adding another 500,000 daily barrels of oil to world oil markets helped sink oil prices further in January as an oversupply issue was magnified by Iran’s new production.

Iran is already the world’s third largest exporter of steel. Iran also has about 18% of the world’s natural gas reserves. Iran was also the first country in the Middle East to discover oil in 1902. It is estimated that Iran has proven oil reserves of 157 billion barrels, representing about 9% of the world’s proven reserves. This is a sore fact for Saudi Arabia, which is a vehement rival to Iran, both financially and religiously.

Demographically, Iran has a young and highly educated population, adding to its vitality and stockpile of a talented labor force. Some economists have identified Iran with Germany, calling it the “Germany of the Middle East”. If this is true then Iran can rise from the ashes and become a real economic powerhouse like Germany has post WWII. However because Iran still lacks the God given human rights, as many nations in the free world have, similar to our Bill of Rights, that are part of the U.S. Constitution, they will never mature to the same status as Germany has, never mind their oil.

Sources: CIA Factbook, IEA, Eurostat

Remember

Long-term care (LTC) insurance allows people to pay a known premium to help protect against the risk of much larger out-of-pocket expenses down the road. This article will help you understand some of the things to consider when purchasing an LTC polciy.

Taxation

When considering policy taxation, there are two general types of long term care policies, they are:

• Tax qualified (TQ) policies which are the most common policies offered. As per HIPPA, a TQ policy requires that a person 1) be expected to require care for at least 90 days, and be unable to perform 2 or more activities of daily living (eating, dressing, bathing, transferring, toileting, maintaining continence) without substantial assistance (hands on or standby); or 2) for at least 90 days, need substantial assistance due to a severe cognitive impairment. In either case a doctor must provide a plan of care. Benefits from a TQ policy are non-taxable.
• Non-tax qualified (NTQ) which was formerly called traditional long term care insurance. It often includes a "trigger" called a "medical necessity" trigger. This means that the patient's own doctor, or that doctor in conjunction with someone from the insurance company, can state that the patient needs care for any medical reason and the policy will pay. NTQ policies may include walking as an activity of daily living and usually only require the inability to perform 1 or more activity of daily living. The Treasury Department has not clarified the status of benefits received under a non-qualified long-term care insurance plan. Therefore, the taxation of these benefits is open to further interpretation. This means that it is possible that individuals who receive benefits under a non-qualified long-term care insurance policy may risk facing a large tax bill for these benefits.

Fewer non-tax qualified policies are available for sale. One reason is that consumers want to be eligible for the tax deductions available when buying a tax-qualified policy. The tax issues can be more complex than the issue of deductions alone, and it is advisable to seek good counsel on all the pros and cons of a tax-qualified policy versus a non-tax-qualified policy, since the benefit triggers on a good non-tax-qualified policy are better.

Most benefits are paid on a reimbursement basis and a few companies offer per-diem benefits at a higher rate. Most policies cover care only in the continental United States. Policies that cover care in select foreign countries usually only cover nursing care and do so at a rated benefit.

Partnership Plans and Medicaid

The Deficit Reduction Act of 2005 makes Partnership plans available to all states, although not all states participate in this program. Partnership plans provide “lifetime asset protection" from the Medicaid spend-down requirement.

In return for purchasing partnership policies, a portion of a policyholders’ assets will be disregarded when determining their eligibility for Medicaid long-term care services, if and when they apply for such services. Traditionally, to be eligible for Medicaid, applicants’ assets cannot exceed certain financial eligibility thresholds.

When applying for Medicaid long-term care benefits, the Partnership program allows individuals who purchase qualifying insurance policies to retain one dollar in assets for each dollar of long-term care insurance benefits paid by the policy. For example, the typical asset limit for an individual applying for Medicaid nursing home services is $2,000. If an applicant received $100,000 in benefits through a partnership program insurance policy, they may retain up to $102,000 in assets.

Deductibles

Most policies have an elimination period or waiting period similar to a deductible. This is the period of time that you pay for care before your benefits are paid. Elimination days may be from 20 to 120 days. The longer the elimination period the lower the premium.  Some policies require that the policy for long-term care be paid up to one year before becoming eligible to collect benefits.

What About Inflation

Because the daily or monthly benefit amount you buy today may not be enough to cover higher costs years from now, most policies give you the option of adding an inflation protection feature, for an additional premium cost. With automatic inflation protection, the initial benefit amount increases automatically each year at a specified rate, such as 3%.

Another form of inflation protection is the guaranteed purchase option. This gives you the option of increasing your benefit amount and your premium every few years. Policies without inflation protection cost less, but their benefit amounts do not increase and may be inadequate if you need long-term care many years from now.

Nonforfeiture Option

Some people feel that if they pay premiums on an insurance policy for years but later drop the policy, they should receive some payment. A policy with nonforfeiture provision does this. Most companies offer nonforfeiture options on long-term care policies. However, that can add from 20% - 100% to the cost of the premium.

Asset Based Policies

Other LTC policies are “asset based” meaning that they are based on an annuity, or a cash value life insurance policy. The benefit of these types of policies are the favorable underwriting, which is a blend of LTC and life insurance underwriting, giving people who may not qualify for one specific type of policy, be able to get a policy this way. Or LTC and annuity underwriting again may provide a benefit to the insured.

An example is a person who for one health reason, like diabetes who was turned down for regular LTC insurance, may be able to obtain a policy via an asset based policy.

This can also provide additional stability for other investments. A fixed annuity provides a solid fixed rate of return, even at three percent, it is much higher than zero! Also with the right annuity you may be able to withdraw money income tax free when those funds are used for qualified long-term care expenses.

A problem with long-term care insurance is that statistically 30 percent of people don’t end up using it and they feel like they have wasted all those expensive premiums. So the asset based policy solves this problem, it is not a “use it or lose it” policy. If you use it for long-term care great, if not then it is left to your heirs as part of your estate plan, either way the policy is preserving your estate. If the policy holder decides to cash it in then they can do that also, in some cases getting more than what they put in the policy.

Because long-term care policies are purchased by more people at or near retirement in preparation for what may happen in near the end of life. The question is this; is your retirement plan complete without some sort of long-term care plan in place? For most Americans, 93% of them, older than 60 years old, the answer is NO. And then for those who are younger than 60 what about your parents? What do they have in place? If they have nothing, will they be moving in with you? If you have questions about who needs long-term care insurance read Who Needs Long-Term Care Insurance.

Remember:

It's been said, "It isn't happy people who are grateful, it is grateful people who are happy!"

Talk is, that one of the reasons the market is falling right now is because it was overpriced, which may be the case, however another part of the problem has been that when considering options, where else can you put your money?

Banks aren’t much of an option – at the continuously low rates it makes it pretty painful to leave money there. At least when rates were higher and a depositor could get 4%-6% at a bank you had a fairly good risk free option. Too much cash on the sidelines will certainly cause the market to be bid up. Maybe it’s an issue of supply and demand – there aren’t enough shares to go around, so the prices get bid up.

Insurance companies, which are very long-term investors, are currently running about 2-4X or more the rate banks are offering. These rates are certainly going to help folks get better returns, with little to no risk. But when chasing performance even those stable rates don’t appeal to everyone. So this week I thought we would look at one reason why the market has tanked over the past several weeks, and consider the option of putting more money in the market – after many of the stocks and bonds are clearly on sale!

Below is a look at why the markets are falling, what is up with bonds, and a check on precious metals.

Why Stocks Went Down When Oil Went Down – Domestic Equities

Equity markets descended in January alongside oil prices, while testing new lows with a visible increase in volatility. Oil’s dramatic price drop has been a catalyst for stock prices heading lower, a so-called correlation that has actually existed for years.

There are various theories as to how oil and stock prices might be correlated, yet one of the most accepted revolves around macro economic global dynamics.

Oil is the most traded and actively utilized commodity in the world whose consumption represents the economic activity worldwide. So when oil supplies grow and demand drops, markets interpret that as an economic slowdown. Such a slowdown thus migrates into the equity markets, where economic activity and growth is essential for expansion and higher equity prices.

Lower oil prices can also be beneficial for certain sectors, such as consumers, transportation and airlines, whose primary expenses are fuel. Economists expect a possible lag effect with recent low oil prices, which may eventually appear on corporate income statements. Obviously, lower oil prices are not conducive to oil industry sector companies, whose margins shrink as oil prices drop.

Some fixed income investors now view U.S. energy stocks as opportunities to earn higher yields on dividends compared to where they were months ago. Lower valuations on energy stocks have led to higher stock dividend yields as prices have fallen.

Does this mean that the markets won’t recover until oil prices go up? For that answer only time will tell…

Fixed Income – Global Bond Markets

The Fed is now at odds with nearly every other developed country central bank as others employ a rate decrease and stimulus strategies.

In its latest FOMC meeting in January, the Fed decided to leave its rate hike plans intact, disappointing markets and lifting U.S. rates slightly. The Fed did acknowledge slightly lower economic growth and volatile equity market conditions as variables to monitor.

International rates fell in January as central banks moved forward with stimulus efforts aided by lower borrowing rates. The ECB and Japan both reduced their key lending rates enough to drive markets in both regions towards risk assets. Japan’s central bank surprised markets by lowering one of its main lending rates into negative territory for the first time in order to stimulate its sagging economy.

Gold and Silver - What's Up?

Considering the markets and the downward trend, it seems that Gold and Silver (precious metals) have come off the winner over the past couple months. Both gold and silver are up, about 14% and 10% respectively. It makes sense to own some precious metals, but as with any investment how much higher will it go? Typically, people own precious metals as a balance to inflation but it can be a stabilizer to an investment portfolio.

With that news, it looks like for the time being, Gold is floating to the TOP! So does this mean we are at the bottom of the current sell off? No, perhaps but not likely. Does it mean its time to put more money in the market and buy while things are on sale? Maybe. Many of these answers are particularly personal to your current situtation that is why a good comprehensive evaluation is valuable.

Sources: Federal Reserve, Bloomberg, Economic Premise #150 World Bank, IMF Research Bulletin, Federal Reserve System Perspective

Remember:

"The hardest thing in the world to understand is income tax." - Albert Einstein

It’s funny in conversation how many times people when asked what they are invested in talk about the hot stock fund from last year, which they were not in, but they are now! They just bought some! How many times have you found yourself looking at investment options find yourself looking at last year’s performance figures and say, “well that one did great, I think I will put some money there.”

That is the wrong way to approach to investing – after all past performance is no indication of future results. The thought of being a Monday morning quarterback and calling the plays after the game is over just does not work well as an investment strategy. It may be better to simply keep a small amount of money in several funds and rebalance than think you can be a “crystal ball” investor and always pick the winners.

Its the ups and downs that get people sick - the roller coaster may be fun for a theme park, because it last for a couple minutes; an investment portfolio is suppose to last many years! That is a lot of ups and downs - particularly when chasing last year's best performer.

My friend, Dr. Craig Israelsen, PhD., wrote an article on Chasing Fund Performance and how impossible it is to select the winners regularly. However by keeping a diversified portfolio you will generally pick-up some winners and maybe some losers. Over the long term the winners will outweigh the losers and the portfolio will succeed.

In the article he describes what happens when portfolios chase the best asset class of last year. The growth rate of that model really drops when compared to other model portfolios. As Israelsen points out, it drops to 2.71% over a 15 year period.  This shows the value of a well-managed diversified portfolio. Using his 7Twelve portfolio over the same time period the 15 year annualized return would be 7.95%.

There are a ton of investment strategies that people use, if you are looking for a solid balanced portfolio, then I invite you to read the article – you can down load a free .

REMEMBER:

Sam Ewing Said, "Inflation is when you pay $15 for the $10 haircut you use to get for $5 when you had hair."

Here we are at the start of the New Year when folks get to review their contribution limits to their retirement plans. Below are the limits, however depending on the type of plans available and whether or not you are using a qualified or non-qualified plan determines your limits (certain non-qualified plans have no limits).

Often times non-qualified plans may yield more after tax income during retirement than qualified plans will, so it depends on if you want to pay taxes now or in the future. Perhaps, there is a balance between the two? That analysis should be performed.

If you think taxes are going to go up in the future, consider using more non-qualified plans now. You can think about it this way: would you prefer pay taxes on the seeds you plant or all the vegetables you harvest? Both plans take time for money to grow!

For 2016, the elective contribution limit for employees who participate in 401(k)s will remain the same at $18,000 for the year. That is the amount that a saver can contribute annually on a tax-deferred basis, and it also applies to many plans offered by nonprofit and government employers. The catch-up contribution for employees age 50 and over will remain the same at $6,000, so someone in that age group could contribute a total of $24,000. (Matching contributions from employers do not count against this figure.)

IRA annual limits remain unchanged at $5,500, with the catch-up contribution for those 50 and over also flat at $1,000. Of IRA holders who contributed to their plan, 53.5% contributed the maximum annual amount, according to data from the Employee Benefit Research Institute (EBRI).

A change to Roth IRAs is the ability for workers to earn more and still be able to contribute to a Roth. Individuals making contributions to Roth IRAs have a new AGI phase out range, which is $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000 in 2015. 

For small business owners (and their employees) you may consider a SEP. Contribution limits for 2016 is $53,000 or 25% of total compensation, whichever is less. Employers must contribute the same percentage for all employees; often in a one person business the maximum is contributed.

If you are changing jobs, rolling over a 401(k) into a self-directed IRA is most often the best choice. The typical 401(k) plan may have anywhere from 12 to 25 investment options and often many over-lap in asset classes. For example: a large cap growth fund, an S&P 500 index fund and a large cap value fund.

There can be enough of an overlap in those three funds that there is little distinction between them. So really, you do not have three choices you have one, when trying to diversify based on asset class. Achieving a well balanced portfolio in a 401 (k) plan can be tricky as the fund offerings are not always clear.  As a suggestion you may want to look at this article for a basic format on how you might rebalance your 401(k) plan.

A self-directed IRA can allow you to invest, quite literally, A-Z type of investments. From precious metals, rental real estate, stocks, bonds, mutual funds, ETF’s, Annuities, commodities, alternative investments, REITS, and the list goes on. Many of these options have additional risks associated with the investments, but often time’s practical knowledge can help minimize those risks.

Work with your investment advisor to help make the right decisions for you and your current situation, doing the best you can to plan for your future. Examine the use of both qualified and non-qualified retirement plans and their complete income tax effects on income as well as your Social Security Benefits. Additionally, you should be familiar with the three legs of retirement planning: investments, estate planning, and long-term care. If you do not have an investment advisor I would be happy to answer your questions and help you understand which strategy is best for you, your business, and family – give me a call or click on the link below. In everything you do, I wish you the best of success.

Sources: IRS, Employee Benefit Research Institute

Remember:

"When you cannot do what you do what you have always done, then you only do what maters most" Robert D. Hales

A 40-year ban on U.S. oil exports was lifted as the House of Representatives and Senate passed a spending bill that included the dismantling of the decades-old rule.

In response to the Arab oil embargo, the U.S. imposed regulations in 1975 that restricted the exportation of crude oil. For years, oil companies and industry leaders have sought a relaxation of the export restrictions in order to compete in the global oil markets.

As oil production has risen, so have the inventories and stockpiles of crude oil. With a growing supply of crude oil reserves, oil companies are eager to export crude to satisfy demand from foreign countries. Net crude oil imports have dropped nearly 25% over the past five years, as U.S. production has steadily increased.

The growth of the oil industry in the U.S. has been a significant help our economic growth these past several years since the Great Recession in 2008. It has helped provide jobs in many sectors as companies have scrambled to ramp up to serve the oil industry. While global oil prices are down now, many of the more established companies are still profitable, many are looking for a merger opportunity to keep going.

According to the Energy Information Administration (EIA), U.S. oil production averaged about 9.45 million barrels a day in 2015, marking the highest production levels since the mid 1980’s. At 487 million barrels at the end of December, U.S. crude oil inventories remain near levels not seen for this time of year for the last 80 years.

As the U.S. has increased crude oil production, demand for U.S. oil has also risen worldwide. In the international oil markets, there are two primary types of crude oil: West Texas Intermediate (WTI) and Brent Crude. Both are used as benchmarks in pricing oil worldwide, with varying prices depending on existing supplies.

WTI is also known as Texas light sweet (Texas Tea) because of its relatively low density, light characteristics and sweet because of its low sulfur content. Conversely, Brent Crude is a bit heavier and not as sweet, thus making WTI a higher quality oil and more desirable worldwide. The lighter and sweeter WTI is easier and less expensive to refine and distill into gasoline, diesel, jet fuel, and other fuel products.

For the past few years crude oil production in the United States has surged tremendously because of the technology behind horizontal drilling and hydraulic fracturing, primarily in the states of North Dakota and Texas.

The United States is becoming one of the world’s leading oil producers and refiners, it is considered good for economic and job growth nationwide. Inexpensive crude along with an abundance of supply in the United States has allowed refiners to become extremely profitable and capable of efficient refining.

The International Energy Agency (IEA) estimates that any exports of U.S. crude oil will be quickly consumed by the international markets and help stabilize any supply inefficiencies caused by political uncertainty in the OPEC countries.   

Divergence of WTI and Brent Oil Prices

West Texas Intermediate (WTI) represents the price that U.S. oil producers receive and Brent represents the prices received internationally. The two prices have been diverting due to a recent surge in production in the United States that has caused a buildup of crude oil inventories at Cushing, Oklahoma, where WTI is stored and priced. Before this increase in U.S. oil production, the two crudes had historically traded in line with each other. 

Realization of an oversupply issue put pressure on oil prices throughout 2014 & 2015. Crude oil production in the U.S. has surged because of the technology behind horizontal drilling and hydraulic fracturing, primarily in the states of North Dakota and Texas. Fracking makes it possible to extract oil and natural gas in places where conventional technologies are not effective. Fracking involves the use of high water pressure combined with sand and chemicals to create cracks in rock that allow the oil and natural gas it contains to escape and flow out of a well.

Both oil benchmarks have fallen substantially over the past two years. Brent lost 48% in 2014, followed by a 35% loss in 2015. WTI lost 46% in 2014, followed by a 30% loss in 2015.

Sources: IEA, EIA, Commerce Department

Remember:

"Truth will rise above falsehood as oil above water." - Meguel de Cervantes

What does it really mean when the Board of Governors of the Federal Reserve System, (“the Fed”, “the Federal Reserve Bank”) raises the Federal Funds Rate? Mortgage companies begin advertising that “rates are going up come see us now”! Well the Fed Funds Rate and Mortgage rates are not the same and really don’t have anything to do with each other – so what does happen when this rate goes up?

The actual rate that the Fed increased was the Federal Funds rate, from a range of 0.0% to .25% to a range of .25% to .50%. This the rate the Federal Reserve will pay banks that place “extra” or “idle” money on deposit at the Fed. The rate indirectly affects other borrowing rates set by large money center banks, such as the prime rate. Banks will deposit or loan money to the Fed if they don’t have places in the general public to lend money.

Minutes following the Fed’s announcement, a major U.S. bank announced that it was raising its prime rate from 3.25% to 3.50%. Consequently, the Fed discount rate was also increased. This is the interest rate that the Fed charges banks as a direct loan, which increased to 1% from 0.75%.

In later disclosures by the Fed, the FOMC also voted to set a target for the Federal Funds rate of 1.375% at the end of 2016, implying four quarter point increases throughout 2016.

Should Fed officials continue on with their targets, economists and analysts expect a gradual rise in short-term rates over the course of the year. The Fed did state that loans linked to longer-term interest rates are unlikely to move very much during the same period.

The high-yield corporate bond market saw considerable turmoil throughout 2015 as energy sector debt weighed on the entire high-yield market. Even though only 15% of the high-yield market is made up of the dreaded energy sector, all other industry sectors were affected as well. Analysts believe that the sell off in high-yield debt now implies an expected default rate of 10%. That would be a sharp rise in defaults from the current 3% level should it come to fruition. Many believe that the odds of defaults rising to 10% are unrealistic and that the markets have already priced in worst case scenarios.

Some fixed income analysts have upbeat assessments for the bond markets in 2016. Assuming the U.S. economy continues to grow at a modest but steady pace, it will allow companies to expand and make it easier to repay bond debt. Improving consumer confidence and a low unemployment rate will help foster a healthy bond market.

Are you starting to see interest rates rise in your accounts? Perhaps the first rates to rise are of course the prime rate, then CD rates, and credit card rates, and maybe passbook savings accounts. Mortgage rates are based on long term bond rates that are sold on the secondary market, but that is a story for another day.

Onto a different topic: I want to thank you my readers, I am grateful for you following my blog and allowing me to be a part of your busy lives. I am truly grateful for your interest in financial topics – I really enjoy putting these articles together. So, Thank You and please feel free to subscribe your friends and family.

Sources: Bloomberg, Fed, Reuters

Remember: In honor of this weeks powerball. Classic response on establishing a lottery: they are "a tax on imbeciles." - Count Camillo Benso De Cavour, Italian Statesman, Diplomat 1810-1861

The New year is upon us now and there is much to do to get things rolling. One thing to consider is how you plan your taxes for this year. What you did in 2015 is over! Don't make the same mistakes. Here are the new numbers/limits issued by the IRS for 2016 they may affect your current situation. Plan this year to pay less!

Tax Day Is April 18^th:

Emancipation Day is the day that Washington decided that taxes are due which traditionally has been April 15^th. However under federal law, the tax deadline gets extended when it falls on a holiday or weekend, so the tax deadline for this year will be the following Monday, April 18^th. States in New England that celebrate Patriots’ Day will have even a later filing deadline of April 19^th.

Because this year is leap-year (29 days in February) and three extra days in April, taxes this year will be due a total of four days later than normal. WeeHa!

Most Tax Brackets Are Rising Slightly:

Based on an adjustment for inflation, 2016 will see most tax brackets rise by roughly 0.4%.

Head of Household Filers Will Get A Bigger Standard Deduction:

Taxpayers qualifying as head of household, will see their standard deduction rise $50 to $9,300.

Rise In the Earned Income Credits:

Families with three or more qualifying children will see their maximum earned income credit rise to $6269. Families with two children will be getting a maximum earned income credit of $5572, while families with one child will be able to get up to $3373 in earned income credit. Taxpayers with no children will be able to claim up to $506 in 2016.

HSA Contribution Limits Going Up:

Health savings accounts (HSAs) allow individuals with high deductible health plans to set aside money on a pretax basis in order to cover anticipated healthcare costs. For 2016 the contribution limits for individual policies will remain at $3350, however, the maximum contribution for family policies will rise to $6750. A catch up contribution of $1000 for those 55 or older will continue to apply.

Higher AMT Exemption Offers Some Reprieve:

Ever since its inception in 1969, AMT has been a fairly unpopular tax. It was initially intended to tax higher income individuals who may have been paying too little in taxes. However, since AMT was never properly adjusted for inflation, it now affects middle income taxpayers as well. A reprieve in 2016 with an increase in the exemption up to $53,900 for single tax payers, and a jump to $83,800 for joint filers.

Estate Tax Exemption Edges Up:

Since the lifetime exemption amount for the gift and state tax is tied to inflation, it is slated to rise slightly this next year for 2016, increasing the exemption amount to $5.45 million, applicable to those that pass in tax year 2016.

Affordable Care Act (ACA) Penalties On The Rise:

The affordable care act imposes penalties for those not having qualified healthcare coverage. For 2016, a penalty of $695 or 2.5% (whichever is higher) of income will apply to individuals not having any healthcare coverage. Families with no healthcare coverage will see a significant increase from a $975 maximum penalty to $2,085 maximum household penalty or 2.5% of household income (whichever is higher).

Dont get caught trying to plan your taxes in the month of December to maximize deductions and lower your taxes. Now is the time to start the plan and work the strategies throughout the year. Make it a successful 2016!

Sources: Tax Foundation, IRSClick to edit your new post...

Remember:

"How does what we know get in the way of what we don't know?" - Liz Wiseman

A couple days ago the Federal REseve raised its short term rate 0.25 points, on that note we hope tha it has not spoiled your holidays! Americans seem to love debt, as many use debt for major purchases and economist use debt as economic indicators. While Americans are paying off their debt in one area they are increasing it so much in another area that economist are now following that debt much more closely…

Debt…

Following the financial crisis of 2008-2009, bank loans and financing became very challenging for U.S. consumers. As the job market has improved over the past few years, more Americans are working, thus allowing them the ability to pay down left over debt from the crisis.

Demographically, most loans are taken out by younger consumers with growing families in the prime of their spending and borrowing years. Improving debt, characteristics of younger consumers, may also lend to better saving and investing behaviors as finances are managed better.

Delinquencies are a gauge of how well borrowers across the credit spectrum are able to repay their loans on a timely basis. Should delinquencies rise, it is an indicator of various factors, including weakening job market, lower wages, increased household expenses, and overextended consumers.

Over the past several months, delinquencies have dropped with an increased number of consumers paying their debt off on time. Such a pattern is an encouraging indication of improving consumer dynamics.

Auto Loans

Rather than struggling to get approved for a new home loan or refinance, Americans are instead financing cars, where getting a loan approval is easier. The ability of fresh loans available to car buyers is also helping to elevate auto sales dramatically throughout the country.

This past quarter, auto loans, outstanding reached $1 trillion for the first time ever. The amount of total auto loans is rising faster than the amount of mortgage loans.

The average car loan is approximately $21,700, with the average monthly payment at $400. The average purchase price stands at about $32,529.

As expensive as some automobiles have become for some people, an auto loan is the only method of actually affording the pricey cars of today. Over the years, several automobile companies have established their own financing thus allowing buyers to buy and borrow directly from them.

Economists have always placed a value on home mortgages, an indicator of economic growth, since homeowners must eventually furnish and maintain their valuable purchase. But now, the amount of auto loans being made is tracked by economists as yet another indication of consumer spending ability. An improving job market and stable wages have allowed consumers the ability of obtaining larger loans on more expensive cars.

Years ago I learned that most people (more than half) purchase a new car within six months after buying a house. I have watched many people do this over the years and then watched the struggles afterwards. Debt no matter the purpose is a cruel task-master. I encourage everyone to get out of debt, however fast you can, get out and stay out of debt.

I remember the old silly joke: if you are going to spend money on a car vs. a house spend it on the car, because you can always sleep in a car, but you can’t drive a house!

Source: Federal Reserve

REMEMBER:

The best pillow is a clear conscience. Merry Christmas

Last week I talked about China and the placement of China’s Yuan in the IMF basket of currencies. This week China is back in the news with it becoming our largest trading partner. Additionally, my good friend Keith Earl, CPA offered a two major income tax issues that tax payers will face this coming year. It is best to get a handle on these issues before they become problems, costing time and money.

China surpassed Canada as America’s biggest trading partner this past quarter as reported by the U.S. Department of Commerce. Through September 2015, China had more import and export activity with the United States than Canada, the first time to ever occur. Total trade in 2014 with China and Canada was close, but now China has clearly eclipsed Canada as the primary trade partner with the U.S.

As America’s neighbor to the north, Canada and the U.S. share similar languages and customs, that have allowed for an ample trading relationship. The enactment of the North American Free Trade Agreement (NAFTA) in 1994 expanded America’s reach into Canada, as well as Canada’s into the U.S. Even with China’s distance and cultural differences, it has still been able to build and expand its trading relationship with the U.S. to new levels.

Imports from Canada into the U.S. include petroleum and automobiles, while the U.S. is a major exporter of grains and other food products to Canada. The U.S. is an exporter of food and capital products to China, with Chinese imports into the U.S. primarily led by computers and electronic devices. For more info on China's economic growth and the world market see this article: China, Currency and the World Market

From Keith…

I recently attended the tax update provided by my tax software company.  I learned a lot and wanted to share a couple of points to help each tax payer better prepare for the 2015 income tax filing season that begins shortly after the New Year. 

Identity Theft: We spent more time than ever before reviewing identity theft and the epidemic it has become related to income taxes.   Identity theft affected just about every tax practitioner office that attended the update. I had tax clients whose identity was compromised.  

There is an expanding identity theft industry mostly based overseas.  They acquire tax identification numbers from various sources and then prepare and electronically file income tax returns for these taxpayers, generating millions of dollars in refunds before the actual taxpayer is even ready to file their return.  

The IRS has made this one of its top priorities to stop this theft and to protect the American taxpayer.  Preparers like myself are doing all we can to prevent it too. In fact we are being tasked with the responsibility to maintain security of the data provided to us by our clients.  Our office is doing all we can to keep all data secure and confidential.   

There are some additional things that can be done for any taxpayer who wants to file a form with IRS to request that no electronic return can be filed using your social security number unless an IRS provided pin number is also used.  There are pros and cons for doing this.

The time to get this pin number is NOW before the tax season begins and identity thieves begin filing returns using your number.  

The conference discussion leader stated that it is not a question of whether your identity has been stolen.  The only question is how soon a thief will use that identity to create havoc in your life. 

The Affordable Care Act: The other topic of interest was the topic of the Affordable Care Act “Obamacare”.  Last year (2014) was the first year that reporting on tax returns regarding health insurance was required.  

There were many errors throughout the system in reporting health care information on 2014 income tax returns.  The instructor shared some statistics and some of the IRS enforcement activities that are associated with this new law and income tax filing requirement.  

Some taxpayers who obtained insurance from the online exchange got discounts on their insurance that should have been reported, but for which the taxpayers were unaware and did not correctly report.  Some taxpayers, especially senior taxpayers, may not have even filed a return because the only thing they needed to report was the healthcare subsidy they received.  And they had never had to file this in previous years.  This may be affecting you, your parents, or older relatives.  

If you have insurance from an exchange and got assistance with the premium, there is a good possibility that your insurance information was not 100% accurate on your tax return.  The IRS is matching tax returns with insurance policies and will advise insurance companies to take away the discounts that many citizens thought they had knowingly or not.  

The result is that some people on the insurance exchange may see their insurance rates go up in a huge way come January 1^st. 

The people most likely to have this negative experience are senior citizens, such as your parents or grandparents, who got a subsidy, but maybe didn’t even file a return because their income was low enough that they would not have been required to file a tax return.  Because of the Affordable Care Act, they maybe were required to file a return just to report their insurance. 

If either of these issues are affecting you or someone you know, we are here to help in any way we can.

Sources: Dept. of Commerce, U.S. Census Bureau; Keith Earl, CPA

Remember:

Money flows from those who don't manage money to those who do. - Anonyms