Market Update and Tax Changes for North Carolinians
 
Quick Market Update

 

The market continues to climb higher. We are having regular conversations about how high the market can go from here, and discussing getting more conservative. While US stocks are starting to look expensive, we are reminded of 1996. After stocks started to look expensive, the S&P 500 went up another 100% before it peaked. That was without the monetary stimulus we are experiencing today. There is no question that there is more risk in the market as it goes higher. We are starting to see the first signs of the “greed cycle”. In the greed cycle investors want higher returns, want to own more stocks, and want to take more risks. The cycle may last a year or three years. The longer it lasts, the worse the shift will be when it finally occurs.

 

Bottom Line: At this point, we believe that we are early in the greed cycle with stocks beginning to look expensive but the monetary stimulus putting the wind at the back of the markets. We are maintaining a neutral outlook for stocks at this time.

 

 

For North Carolinians
 

We realize that several of our clients don’t live in North Carolina, and we don’t mean to leave you out. For our local clients, this information may be useful for your planning.

 

This July, North Carolina Governor Pat McCrory signed a new tax bill into law. We would like to highlight some changes so that you are aware of how they may affect your personal tax planning.

 

First, the new law reduced our maximum state income tax rate from a tiered approach ranging from 6% to 7.75%, to a flat tax rate of 5.8% in 2014 and 5.75% in 2015. It also eliminated the state “death tax” and increased the standard deduction for all taxpayers. The list of positive changes also included lowering our state corporate tax rate from 6.9% to 6% in 2014 and 5% in 2015.

 

Of course, there were drawbacks as well. The most well-known drawback was limiting the maximum deduction for property taxes and mortgage interest to $20,000, which really only affects taxpayers with very large homes or large pieces of property. However, a less publicized drawback was the elimination of the tax deduction for contributions to the State’s 529 College Savings Plan starting in 2014. Many of our clients have taken advantage of this deduction using the College Foundation of NC 529 Plan in the past. The prior law allowed for a $5,000 deduction per joint tax return ($2,500 per individual tax return) for deposits made to the North Carolina 529 Plan.

 

The elimination of the deduction does not take away the other benefits of using a 529 for college savings; it is still an excellent way to save. Savings still grow tax free as long as they are used for “qualified” education expenses, and the donor maintains control of the assets rather than the child taking control at any specific age.

 

There are two takeaways for North Carolina residents that have used or have considered using the North Carolina 529 Plan: 1) If you are considering a contribution, make one this year to receive the tax deduction for 2013; 2) In future years you may want to consider other 529 plans rather than North Carolina’s. If you would like to talk about how you are saving for your children or grandchildren’s college education, please give us a call.

 

*Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer's official statement and should be read carefully before investing.

 

*Investors should also consider whether the investor's or beneficiaries home state offers any state tax or other benefits available only for that state's 529 plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state's 529 Plan.

 

 

REQUIRED DISCLOSURES:  Past performance is no guarantee of future results. Investments in securities are not FDIC insured, and may lose value.   Please consult a current prospectus prior to investing in mutual fund shares. All information contained herein gathered from sources deemed to be reliable. For more complete information, please see your official statement. The views are those of Adams Financial and should not be construed as investment advice. All economic and performance data is historical and not indicative of future results. Investors cannot invest directly in an index.

November 6th, 2013

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