Investment Commentary – March 5, 2019

Year to Date Market Indices as of Market Close March 5, 2019
Dow 25,806 (10.63%)
S&P 2,789 (11.28%)
NASDAQ 7,576 (14.18%)
Gold $1,348 (4.45%)
OIL $57.12 (23.74)
Barclay Bond Aggregate (1.24%)
Fed Funds Rate 2.50% (last increase was 12/19/18)

Stocks close slightly lower as investors seek catalysts beyond U.S.-China trade talks

U.S. stocks closed slightly lower Tuesday after major benchmarks spent all session flipping between gains and losses as investors looked beyond U.S.-China trade talks for further catalysts to trade on.

How did indexes fare?

The S&P 500 index SPX, -0.11% dropped 3.16 points to 2,789.65 and the Dow Jones Industrial Average DJIA, -0.05% fell 13.02 points to 25,806.63. The Nasdaq Composite COMP, -0.02% shed 1.21 points to 7,576.36.

What drove the market?

Trading was somewhat subdued as investors awaited more concrete developments following reports that U.S. and Chinese negotiators were close to completing a trade deal although strategists believe the news has been largely reflected in prices by now.

China on Tuesday lowered its economic growth target for 2019 to between 6% and 6.5%, acknowledging a deepening slowdown. Premier Li Keqiang, at the opening of the annual session of China’s legislature, outlined plans to support the economy, including an increase in deficit spending, new tax cuts, lowering fees for businesses, and a 30% boost in bank lending to small and private companies.

The Benefits of Qualified Charitable Distributions

Given that the new tax law eliminates many itemized deductions, qualified charitable distributions (QCDs) can serve as a worthy tax-planning strategy.

The use of qualified charitable distributions (QCDs) is poised to increase thanks to the Tax Cut and Jobs Act (TCJA). QCDs were first made available in 2006 as part of the Pension Protection Act. Although QCDs were popular, they were not made permanent by Congress until 2015 as part of the Protecting Americans from Tax Hikes Act. A QCD is the distribution of up to $100,000 annually from an IRA by an account owner aged 70½ or older directly to an eligible charity. The TCJA nearly doubled the standard deduction, while eliminating many itemized deductions, making tax season the ideal time to review the numerous valuable benefits offered by the QCD strategy.

A charitable contribution is itself an itemized deduction, so most taxpayers will no longer receive the full deduction value—unless all other itemized deductions exceed the standard deduction amount. In addition, a charitable deduction is not available when using the new increased standard deduction. However, a taxpayer can utilize the standard deduction and QCD strategy in the same tax year. In other words, fewer taxpayers will itemize, thus fewer taxpayers will be able to take advantage of the deduction for charitable giving. If, due to the new tax regime, the value of a charitable contribution does not offer the same value as in prior tax years, consider other options, such as a QCD.

What does an individual who made a QCD in 2018 need to know?

Some but not all retirement account’s allow a taxpayer to make a prior year (2018) transaction. For example, an individual can make a 2018 IRA contribution through April 15, 2019. In addition, a business owner on extension can fund his or her SEP IRA through October 15, 2019. However, for taxpayers looking to make a QCD for 2018—that window closed on December 31, 2018. In other words, you are never allowed to make a prior year QCD. Instead, QCDs must be taken in the calendar in which the taxpayer plans on reporting it.

For those individuals who made a 2018 QCD, it’s vital the transaction is communicated to the tax professional. Why? QCD is not specifically reported on Form 1099-R. There is no specific or special code to report a QCD. Without proper communication, the tax preparer will most likely report the QCD as any other IRA distribution and thus include the amount as taxable income.

For 2018 tax reporting, there will be a way to record QCD on the new, revised Form 1040. The IRA owner can report the full amount on line 4a for IRA distributions; on line 4b for the taxable amount, enter zero if the full amount was a QCD with “QCD” written next to it on the 1040 form, according to tax expert Ed Slott.

What does an individual need to know before making a QCD in 2019?

To be QCD eligible, an individual must be age 70½ or older. This is different from rules for required minimum distributions (RMDs), where an individual is eligible to take his or her first RMD in the year he/she reaches age 70½. QCD eligibility specifically requires an individual to have already reached age 70½.
QCDs require advanced planning precisely for those individuals that prefer to take their RMD earlier in the year. Why? Because of the “first dollars out” rule; here, the first dollars distributed from an IRA during the year count toward satisfying the annual RMD.

Example: “First dollars out”

Max, 78, likes to take his RMD early in the year. On February 1, as is his custom, he takes an IRA distribution of $50,000, representing his 2019 RMD. Later in 2019, Max decides after meeting with his new advisor that he would like to make a QCD. Unfortunately, Max cannot retroactively reclassify his previous February distribution as a QCD. Instead, his distribution is reported as an RMD and reported as taxable income on Max’s 2019 return. Notably, Max can still do a QCD, but it will not satisfy his RMD.

Therefore, it’s strongly recommended that QCDs be discussed with an advisor (or tax professional) and completed early in the year.

Although QCDs have been around for a number of years, there is a lot of misinformation circulating. A single innocent mistake can cause a taxpayer to lose QCD eligibility, thus having to report taxable income—that should have been tax free if the rules were properly followed. To help properly implement the QCD strategy, here is a list of commonly asked questions and answers.

Around the web:

A fine February: Although the S&P 500’s February gain wasn’t nearly as big as January’s 7.9% surge, it was another strong month, as the index added nearly 3.0%. The S&P 500’s cumulative two-month gain of 11.1% was the fastest early-year start for the market since 1991, according to S&P Dow Jones Indices.

Bull market birthday: The U.S. equity bull market is about to celebrate its 10th birthday. The bull started after the S&P 500 sank to its financial crisis low point on March 9, 2009. Since then, the index has posted an annualized 17.7% total return, according to S&P Dow Jones Indices.

Chinese’s expanded footprint: China’s domestic stocks will have a far bigger weighting in the global equity market as a result of a decision announced Thursday. Index provider MSCI Inc. plans to more than quadruple the weighting of mainland Chinese stock shares in its widely tracked MSCI Emerging Markets Index.

Other Notable Indices (YTD)
Russell 2000 (small caps) 17.04
EAFE International 9.62
Emerging Markets 9.10
Shiller Annuity Index 4.97

The views presented are not intended to be relied on as a forecast, research or investment advice, are the opinions of the sources cited, and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.