Quarter in Review: Q1 2023 Market Update

Quarter in Review: Q1 2023 Market Update

by | Apr 18, 2023 | Advisors, Kristi de Grys, News, Research, Tech Focus

 

Optimism and fear drove markets in equal measure this past quarter. The year started off with a strong rally as the prevailing sentiment was that inflation was easing and if a recession did occur it would be mild. The MSCI All Country World Index (ACWI) ended the month of January up 7.17%. Doubts came creeping in late February and global stocks fell 2.9%. Then all-out fear drove markets sharply down in early March as the possibility of a full-blown banking crisis was raised with the collapse of Silicon Valley Bank and the regulatory takeover of Signature Bank. Quick action in the U.S. and abroad to stabilize the banking system allayed fears over the coming weeks and most segments of the market rallied to end the quarter in positive territory for the year.

While we can wish that the strong market ups and downs driven by the back and forth between optimism and fear would abate, that seems unlikely in the near term. Inflationary pressures appear to be easing but there is still a great deal of uncertainty about how things will play out in the short term. There is also the looming debate over the U.S. debt ceiling. No politician is motivated to have their political career wrecked by the economic fallout of a true default but there seems to be no doubt that there will be much political wrangling leading up to the final outcome. The lack of a clear path to resolution seems likely to drive volatility in the market. As we saw with the post-bank scare rally in late March, even in times of fear and uncertainty, markets can deliver positive returns.

We have seen continued strength in some sectors and major shifts in other areas. Even before the March banking scare, U.S. mega-cap growth stocks had been rebounding in ways not seen since late 2020. Ninety percent of the S&P 500’s gain in the first quarter came from the top 10 stocks and 50% from the top five. Whether this trend will continue or is simply driven by investors seeking perceived safety remains to be seen. While valuations of U.S. large-cap and U.S. growth stocks have fallen from their 2021 highs, by most measures, they remain above historical averages and above the valuations of small-cap and value stocks. While valuations can have some predictive power over long time frames, markets continue to remind us that in the short term anything can happen.

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

Supreme Court Upholds Washington State Capital Gains Tax – What You Need To Know

Supreme Court Upholds Washington State Capital Gains Tax – What You Need To Know

by | Mar 30, 2023 | Advisors, Ask Merriman, News, Scott Christensen, Tech Focus, Wealth Protection

 

Supreme Court Upholds Washington State Capital Gains Tax – What You Need To Know

 

On March 24, 2023, the Washington State Supreme Court ruled in favor of a state capital gains tax, which was originally passed in 2021 to take effect starting January 1, 2022. In light of the court’s ruling, the state will continue as planned and collect the tax due for tax year 2022. The due date corresponds with the federal tax return filing deadline (which lands on April 18th this year), leaving just a few short weeks to file a return and pay the tax. With the clouds of uncertainty dispersed, it’s important for Washington residents to understand what is at play.

 

Who pays the tax?

Individuals with realized long-term capital gains above $250,000 are now required to file a Washington state capital gains tax return. A 7% tax on gains above this threshold will apply. The $250,000 annual standard deduction applies to spouses or domestic partners whether they file joint or separate returns (it is not $250,000 per person rather $250,000 per household). Income from work, pensions, social security, etc. are not included in this tax. It applies to the sale of intangible or tangible property such as stocks and bonds (including mutual funds, ETF’s, and other pooled investments), art, and other collectables. There are, of course, important exemptions to be aware of – we are talking about taxes after all! These include among others:

  • Sale of real estate, regardless of whether it’s a residential or commercial property. The property can be owned by a business, individual, or trust. It doesn’t matter how long the seller owned the property or whether the seller was renting the property.
  • The gain on the sale of a private entity, to the extent that gain is directly attributable to real estate owned by the entity.
  • Gains in retirement accounts, including 401(k)s, deferred-compensation plans, IRAs, Roth IRAs, employee-defined contribution plans, employee-defined benefit plans, and similar retirement savings accounts.

In addition to the exemptions outlined above, there are specific deductions that apply to the taxable capital gain income in Washington. Beyond the $250,000 standard deduction already mentioned, the following deductions also apply:

  • Long-term gains on the sale of qualified family-owned small businesses
  • A charitable deduction up to $100,000 for qualifying charitable gifts in excess of $250,000. The catch is that the charities need to be directed or managed in the state of Washington, which makes it unlikely for donor-advised funds to qualify for the deduction. Since the deduction is capped at $100,000 annually, to qualify for a full deduction one would need to have made qualified charitable contributions of $350,000.

The Revised Code of Washington defines the specifics for applying each of the family-owned small business and charitable deductions. Please don’t hesitate to reach out to us if you have questions.

For general examples of how the tax is calculated, please see our previous article on the topic. We also include a specific example for the charitable gift deduction below.

Charitable Deduction Example:

Sarah had $300,000 of long-term capital gains subject to the Washington state capital gains tax. She owes a tax of 7% on $50,000 (the excess above the $250,000 standard deduction). If Sarah contributed $50,000 to a charity directed or managed in the state, she would still owe tax on the full amount since the minimum charitable contribution is $250,000. Since the $50,000 charitable contribution is below the minimum, it would not reduce the $50,000 taxable income.

If Sarah had instead contributed $300,000 to a qualified charity directed or managed in Washington, she would qualify for a $50,000 charitable deduction which would eliminate her taxable realized gains subject to Washington state capital gains tax.

 

How do I pay the tax?

The Washington state capital gains tax return is filed separate from your federal tax return, but because your federal income tax return is required to be attached to your Washington state capital gains tax return, it’s necessary to first complete your federal return. Then you will submit the Washington state capital gains tax return electronically using the Washington Department of Revenue website. This video tutorial walks through the process of filing the return and paying the tax.

An extension can be granted to those who file an extension for their federal income tax return, but payments must still be made by April 18, 2023 or penalties will apply.

 

What you need to know when filing

  • When completing the capital gain tax return, you will be asked whether the gain is allocated to Washington. Only gains allocated to Washington apply when calculating the tax. So what is and is not allocated to Washington? It depends where the sale or exchange occurred, regardless of where it was purchased. You could have purchased a stock years ago while living in a different state, but if you sell the stock while you reside in Washington, it is allocated to Washington.
  • For tangible property, such as art or collectibles, there are a few more rules to determine whether it is allocated to Washington. A FAQ can be found on the DOR website that covers tangible property, cryptocurrency, business owners, and mutual fund distributions.
  • Since this is a tax only on realized long-term capital gains (property held for more than one year), property that is sold within a year is not included in the Washington state capital gains tax. This means there may be a difference between what is reported on your federal return and the state return since both short-term and long-term capital gains are netted together at the federal level, but only long-term gains are considered at the state level. Capital loss carryovers can be used but are limited to the amount used in determining the federal net long term capital gain.
  • For those receiving restricted stock units (RSU’s), vested shares sold within one year will not be considered in the Washington state capital gains tax. Only shares held for longer than a year after vest are considered long-term and potentially subject to the tax.

 

Conclusion

It’s more important than ever to be aware of how much capital gains income is being realized. It will likely make sense to diversify from a concentrated stock position over time where possible, to not incur an extra 7% tax. In cases where cash is needed, we can help analyze other options such as using short-term borrowing tools like a home equity line of credit or margin on your brokerage account. With a payoff plan in place, these tools may present a lower interest cost than the capital gains tax that would otherwise be paid. For those subject to the tax this year, your CPA should be able to help fill out your Washington state capital gains tax return. If you have questions determining how this impacts you, we’re happy to help.

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

The SVB Bank Collapse and What It Means For You

The SVB Bank Collapse and What It Means For You

by | Mar 15, 2023 | Emergency Savings, Kristi de Grys, Merriman's Take, News, Tech Focus, Wealth Protection

 

The SVB Bank Collapse and What It Means For You

 

On Friday March 10, the world woke up to headlines that Silicon Valley Bank (SVB) had “failed.” Bank failures, though rare, are nothing new and the story roughly plays out the same each time. Runs start with higher-than-anticipated demands for cash that turn into a contagion as depositors become fearful they won’t be able to get their money out and withdraw it, even though they don’t need it right then. The speed at which the SVB collapse happened showed us what a run looks like in an age when information travels almost instantaneously and money can be requested from anywhere via a simple request from a phone.

The Federal Deposit Insurance Corporation (FDIC) was established expressly to prevent the fear that drives bank runs. If depositors are guaranteed they will get their money back, there is no need for panic and small dislocations don’t turn into full-blown explosions with wide-reaching collateral damage. The challenge for SVB and Signature Bank, which was also shut down by government regulators over the weekend, was that the vast majority (up to 97%) of depositors had exceeded limits for FDIC coverage.

SVB was also particularly susceptible due to its concentrated depositor base of startups and small technology companies. In the pandemic, many of them became flush with cash and parked it at SVB. SVB, seeking yield and safety, invested it in longer-dated Treasury bond and other government backed securities. As higher interest rates hit the tech sector and startups particularly hard, companies began withdrawing cash at a faster rate. At the same time, the value of SVB’s longer-dated bonds fell. This pattern had been going on for multiple months until last week when SVB announced the sale of securities at a loss to cover withdrawals. That announcement triggered broad concern and the fear that SVB would not be able to cover the full amount of their deposits. Whether that would have ultimately been true or not remains unclear.

To avoid further panic and contagion risk across the banking system, the FDIC stepped in and took over the bank on Friday, following up with a guarantee to cover all deposits at SVB and Signature Bank, even those above the standard insurance limit. Given the commitment to cover deposits for these two banks, it seems likely they would do so for others. They also extended very attractive loan arrangements that can be used by any bank. Many believe these actions should be more than enough to provide stability.

While the government has stepped in to cover depositors, this intervention is far different than what happened in 2008 when the government also bailed out bond and equity shareholders. With the government takeover, the equity of SVB is worthless as is that of Signature Bank. Thankfully, the ETFs we recommend in our core portfolio had immaterial exposure to these stocks (< 0.1%).  

However, our core portfolio overweighs U.S. small-cap value ETFs that have exposure to many other regional bank stocks which have been hit hard by association. Fear-driven market pullbacks are never fully logical, so one never knows what will happen in the next few days and weeks, but there are good reasons to believe that SVB and Signature Bank were outliers in many respects and that other small and medium-sized banks are in a stronger position.

It is very common in fear-driven market declines for small-cap stocks to suffer greater losses and then rise more quickly during a recovery than the broader market. The COVID crash in March of 2020 was the most recent example of this phenomenon. We believe one reason small-cap value stocks have historically delivered returns higher than the broad market is their greater volatility in times of stress. To be in a position to capture the potentially higher returns and diversification benefit of investing in these stocks, we must stay the course.

Anytime there is stress in the financial markets, it is an opportunity to assess whether we are taking undue risk. Investing is never risk free, but our goal is always to maximize our return for a given amount of risk. There are already some good reminders coming out of the current situation:

  1. Make sure the cash you hold at any given bank is below the FDIC insurance limit. There are plenty of good options to help you do this even for cash balances in the millions. If you, someone you know, or the business you work for is in this situation, please reach out to us and we can help direct you to solid options based on the specific needs.

     

  2. Reassess any concentrations you may have in your wealth. One of the major reasons SVB was susceptible to a bank run was the concentration of its depositor base and the high exposure in its investments to a single risk – rising interest rates. The likelihood of any given company going bankrupt is small, but the consequences can be catastrophic if a significant portion of your wealth and livelihood are tied to a single entity. The power of diversification across all aspects of your current and future wealth should not be underestimated as an effective means of protection.

Financial market stress and the associated volatility can be unnerving. We strive to provide peace of mind by designing our portfolios to keep clients on track to reach their goals through a variety of market conditions.

 

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

Take Advantage of New Tax Adjustments in Planning for 2023!

Take Advantage of New Tax Adjustments in Planning for 2023!

by | Jan 12, 2023 | 401k, Advisors, Chris Waclawik, Investing 101, News, Retirement Savings, Tech Focus, Wealth Preservation

 

 

Tax adjustments happen every year, but this provides an excellent opportunity to review and plan for a better personal tax situation for 2023. Let’s take a look at the changes! Legislation has given even more planning opportunities for employees and retirees than usual. The planning opportunities for 2023 fall into three broad categories: tips for current workers, tips for retirees, and ongoing strategies.

 

Updates for Current Workers

Here are some items that people who are currently working will want to review for the new year:

  • New Tax Brackets and Standard Deduction: Tax brackets and the standard deduction are all indexed to inflation. The large numbers in 2022 created bigger changes than usual in 2023, making it worth reviewing tax withholding.
  • Higher 401k (and 403b and 457) Employer Plan Contribution Limits: 2023 will see an increase from $20,500 ($27,000 if age 50+) to $22,500 ($30,000 if age 50+) that can be added to your employer retirement plan.
  • Higher IRA and Roth IRA Contribution Limits and Phase Outs: The contribution limits to IRA and Roth IRA accounts will also increase, potentially in addition to employer plan contributions. There will also be an increase to the income limits regarding when your ability to take advantage of these plans starts to phase out.
  • Health Savings Account Increases: For employees with a health savings account (HSA), the amount that can be contributed to the plan will also increase in 2023.
  • NEW Employer Matching 401k Contributions as Roth: Starting in 2023, employers may start allowing employees to take matching contributions as Roth contributions rather than pre-tax contributions. This is brand new and opens up significant planning opportunities.

 

Updates for Retirees

Retired individuals will also see several changes in 2023 to plan around:

  • NEW RMD Age Increased from 72 to 73: The biggest change for retirees in 2023 is the delay of the first required minimum distribution (RMD) from age 72 to 73. Individuals turning 72 in 2023 now have an additional year of flexibility for things like Roth conversions or other strategies to minimize taxes over their lifetimes.
  • Social Security Benefits and Medicare Premiums: Social Security will get an 8.7% increase in 2023. The base monthly premium for Medicare will decrease from $170 to $165.For higher earning retirees, the thresholds for Medicare’s IRMAA surcharge will be increasing.

 

Ongoing Planning Opportunities

There are several ongoing planning opportunities as individuals start looking ahead at 2023:

  • Qualified Charitable Contributions (QCD): For individuals who are at least 70½ years old, qualified charitable distributions (QCDs) from an IRA may be one of the most tax-effective ways to give to charity.
  • Roth Conversions and “Backdoor” Roth IRA Contributions: Depending on your current income and current retirement accounts, Roth conversions or “backdoor” Roth IRA contributions may allow more savings into accounts that will grow tax-free in the future.
  • Tax Loss Harvesting: With the decline in both stock and bond markets in 2022, there may be more opportunities than usual to sell investments at a loss and offset taxable income realized in other areas.

 

The Bottom Line

The new tax changes have created significant planning opportunities to review. It’s worth exploring how your personal tax situation may benefit from making adjustments in 2023. At Merriman, we live and breathe this stuff so you don’t have to. We are happy to answer your questions and partner with you to develop and/or refine the best approach for your taxes for 2023. Schedule some time with us today!

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

 

 

 

Aimee Butler & Chris Waclawik Promoted to Principals

Aimee Butler & Chris Waclawik Promoted to Principals

by | Jul 8, 2022 | Aimee Butler, Chris Waclawik, Life at Merriman, News, Your Professional Team

 

Merriman Wealth Management, LLC, an independent wealth management firm with over $3.5 billion in assets under management, is pleased to announce the promotion of two new principals – Wealth Advisors Aimee Butler, CFP®, and Chris Waclawik, AFC®, CFP®.  

“Aimee and Chris’s contribution and dedication to Merriman and our clients has been invaluable as we seek to be the destination for clients and employees who are looking to Live Fully,” said CEO Jeremy Burger, CFA®, CFP®. “Aimee and Chris continue to demonstrate a strong commitment to improving the lives of our clients, lifting up their fellow teammates and giving back to their communities.”

Merriman is proud to offer a path to partnership for intellectually curious, motivated individuals who combine technical expertise and empathy. With the addition of Aimee and Chris, Merriman now has 15 principals. 

Aimee joined Merriman in February 2018 in its newly acquired Eugene, OR, office after holding senior leadership roles at Waddell & Reed and Ameriprise. Her leadership experience was indispensable as she helped integrate the newly merged teams and worked with clients to fulfill Merriman’s long-term vision of empowering people to Live Fully. Along with assisting many clients on Merriman’s behalf, Aimee serves on two leadership committees: the first designed to continually enhance the Merriman client experience and the second to attract and retain talented individuals to Merriman.

Chris joined Merriman in May 2014 as an Associate Advisor. Within two years, he was asked to lead and enhance the associate program into a development program for future advisors. While managing this growing team, he continued to be an advocate for clients and has helped the firm grow through new channels. In addition to his direct client work, Chris now focuses his leadership expertise on the Wealth Management Services and Client Experience Operations committees at Merriman. Always ready to contribute, Chris’s tax experience and attention to detail deliver great intellectual value, which consistently benefits our clients and team.  

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

Market Response to Russian Invasion of Ukraine

Market Response to Russian Invasion of Ukraine

by | Mar 15, 2022 | Advisors, Kristi de Grys, News, Research

 

Russia’s threats and invasion of Ukraine have upset global markets and driven them lower to start the year. Losses and volatility are typical when the future course of events is highly uncertain. However, as shown in the graphic below, what happens in the short term usually has little bearing on future market returns.1

 

 

Intra-year market declines are much more common than one might realize. Every year since 1979, the U.S. market (represented by the Russell 3000 Index) has experienced an intra-year decline of at least 2.7%. In 1987, the market experienced an intra-year decline of 33.1% but still finished the year with a positive return.2

We are biologically hard-wired to respond to uncertainty with action. When we were hunter-gatherers, uncertainty looked like a lion waiting in ambush and action was a beneficial response. When it comes to markets, the opposite is usually true. Time after time, we have seen that sticking with a carefully designed, diversified allocation through ups and downs yields a better outcome compared to selling out and trying to guess when to buy back in.

As we saw in March 2020, early in the pandemic, what feels like the worst of times can, in hindsight, be a market bottom followed by a strong rally. It is also very possible we will see further declines from here. There are many players whose decisions will influence the trajectory of events as well as new paradigms at play, like economic sanctions of unprecedented size and speed of application, and cyberoperations assisted by commercial companies. Given the complexity of the conflict, it is impossible for anyone to predict the outcome or its effects on the global economy.

What we do know is that diversified portfolios are designed to weather uncertainty, and that human ingenuity, perseverance, and adaptability have enabled businesses and their investors to prevail even through difficult times, especially when they are on the side of democracy and freedom. The Ukrainian businesses switching from making farm combines to tank-stopping hedgehogs and metal road spikes, and turning malls into logistics warehouses are great examples.

While our portfolios are diversified, the emerging market funds we recommend have less than 1% of their assets currently in Russian companies and as of March 4, our largest emerging market fund provider, Dimensional, has announced they will be divesting from all Russian assets. We anticipate the others will follow shortly. The markets are signaling that the biggest fear right now is inflation, especially if Western nations choose to cut off the flow of Russian energy. Historically, value stocks have done better in inflationary periods than other areas of the market and we are seeing this with our value positions outperforming the growth segments of the market. With their heavier exposure to natural resource companies, we anticipate this trend could continue if commodity prices and inflation continue to rise.

Hopefully you can find peace of mind knowing that your Merriman portfolio will weather the current storm. If you want to act, you can feel confident in your ability to donate in support of humanitarian aid or the valiant fight of the Ukrainian people, or take action to help reduce dependence on Russian energy.

 

 

 

 

Sources:

1 Vanguard

2  Dimensional Fund Advisors.

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal, or accounting advice, and noting contained in these materials should be relied upon as such. Past Performance is no indication of future results.  The Russell 3000 Index is a market-capitalization-weighted equity index maintained by FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks, which represent about 97% of all U.S.-incorporated equity securities. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.