comic

By Trista DeAngelis

"I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half of the money." – Arthur Godfrey

Tax season. It’s a painful reminder of a good problem to have. And to add to the stress, taxpayers and accounting professionals alike need to keep track of several important deadlines. The following is a summary of these milestones and the expected timeframes to receive the various documents needed to file your own tax return (along with a little WCF commentary).

*Disclaimer: The following schedule is what you can expect in a typical year. As you review the various dates below, please note:

  • The 2019 tax return filing deadline (normally due April 15th) has been postponed to July 15th, 2020 due to the COVID-19 crisis. If you owe federal (and most states’) taxes from your 2019 tax return, you have until July 15th to pay your taxes penalty-free.
  • The 2020 deadlines to pay Q1 and Q2 estimated tax payments (normally due April 15th and June 15th respectively) have also been pushed back to July 15th.

Please do not hesitate to reach out if you would like further clarification.

January 15

(Individuals) Q4 estimated tax payments are due. Individuals, including sole proprietors, partners, and S Corporation shareholders, who receive income that is not subject to withholding, generally have to make estimated tax payments quarterly. Contact WCF if you’d like help with this!

January 31

(All Employers) W-2 copies must be delivered or posted electronically. The W-2 reports the employee’s annual wages and the amount of taxes withheld from their paychecks.

(All Businesses) Annual information statements (Form 1099) are due to recipients of certain payments made during the previous year. Generally, individuals and any entity that is not a corporation should receive a 1099 for services performed.

February 15

(All Businesses) Consolidated Form 1099s should be postmarked by this date. The consolidated 1099 will contain all reportable income and transactions for the year. February 15th is typically the earliest date you can expect to receive your 1099s from Charles Schwab and other similar custodians.

*April 15

(Individuals) Income tax returns and payments are due. You can file Federal and State forms to extend the filing deadline six months to October 15th. Prepare in advance to file an extension if you are a limited partner or hold certain alternative investments, such as commercial real estate deals or funds. K-1s typically take longer to prepare than all other necessary tax documents.

(Individuals) Q1 estimated tax payments are also due April 15th.

*June 15

(Individuals) Q2 estimated tax payments are due. Remember, we’re here to help.

September 15

(Individuals) Q3 estimated tax payments are due.

(Partnerships) K-1s are due to all members of partnerships (such as limited partners of alternative investments, including commercial real estate deals). The K-1 reports each partner’s share of the partnership’s earnings, losses, deductions, and credits. This is the latest date you can expect to receive your K-1s from limited partnerships.

October 15

(Individuals) If you received a 6-month extension to file your income tax return, it is due now.

 

comic

By Jeremy Runnels

How does this sound? You give me $1 today, and I will give you 99 cents a year from now. Crazy, right? You may be surprised to learn that many people in a large part of the world are currently saying “yes” to that offer.

People are paying banks to hold their money.

The money is losing money, or in other terms, earning negative interest. And it’s not just short-term bonds that are being offered at negative interest rates. Germany recently issued zero-coupon bonds for 824 million Euros that will only repay 795 million Euros when the bonds mature in 30 years - a willing loss.1 As of this writing, about $11 trillion of negative-yielding debt exists worldwide (this is down however from $17 trillion in mid-2019.)2

Negative interest rates seem counterintuitive to everything we learned about saving and earning interest. You might be asking, why would a bank charge me to hold my money? How could financing be cheaper than paying with cash?

Central banks around the world, including the United States Federal Reserve, support their respective economies through monetary policy. One vital tool in monetary policy involves adjusting interest rates. Lower interest rates mean that the costs to borrow money are reduced, incentivizing investment and subsequently providing economic stimulus. In the years after the Great Recession, most countries have not experienced the economic rebound that we have witnessed in the US. As a result, some central banks around the world have dared to take the drastic measure of reducing interest rates below 0%. In 2012, facing economic collapse, Denmark became the first country to submerge into negative interest rates. Japan and the European Central Bank later followed suit.3

But why would someone park their money somewhere earning negative interest? Here are two reasons. First, some people believe that yields will become more negative, increasing the value of their bond. Second, geopolitical risks may prompt some people to pay for the perceived safety of government-issued debt.

Negative interest rates have been used around the world as a desperate attempt to stimulate local economies. Despite this intention, sub-zero rates are not exactly having the effect that central banks were hoping for. However, in the absence of a robust economy, normalizing rates could further dampen their respective economies. Since negative interest rates are a new phenomenon, we are unable to observe all the consequences yet. Economics is not an exact science; only time will tell how this all shakes out.


1. Davies, Paul J., and Patricia Kowsmann. “Germany for First Time Sells 30-Year Bonds Offering Negative Yields.” The Wall Street Journal. Dow Jones & Company, August 21, 2019. https://www.wsj.com/articles/germany-for-first-time-sells-30-year-bonds-offering-negative-yields-11566385847
2. Bloomberg.com. Bloomberg. https://www.bloomberg.com/graphics/negative-yield-bonds/
3. Blanke, Jennifer, Signe Krogstrup, Social Development, African Development Bank Group, Research Department, and Imf. “Negative Interest Rates: Absolutely Everything You Need to Know.” World Economic Forum. https://www.weforum.org/agenda/2016/11/negative-interest-rates-absolutely-everything-you-need-to-know/

By Jeremy Runnels

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

The U.S. tax system is riddled with complexities that baffle the greatest of minds (even Albert Einstein’s!). This brief overview is geared toward providing you with a cursory view of Uncle Sam’s role in your pocketbook.

Let’s break it down to this key question: How does the U.S. tax system work?

The Federal income tax is progressive and utilizes marginal tax brackets.

  • The more money you make, the more tax (as a percentage of income) you will pay.
  • Each bracket represents a bucket that needs to be filled up before you can move on to the next. The highest tax bracket you reach is called your marginal tax rate.
  • Moving into a higher tax bracket does not rob you of the benefits of the lower brackets. It simply applies a higher tax rate to each additional dollar of income you earn over the previous threshold. Making more money and paying a higher marginal tax rate still puts you in a better economic position.

In the U.S., the Federal income tax system is pay-as-you-go. As you earn income, you pay taxes on that income.

  • Most workers receiving W-2 income withhold federal income taxes from their paychecks based on the information they provided on their W-4 (that confusing form you filled out on your first day with HR). Depending on the number of dependents you claim, Uncle Sam will either take more or take less money from your paycheck.
  • If you receive income through a 1099, taxes aren’t automatically withheld. Instead, you are probably (or should be) putting money aside for Federal income taxes. 1099 employees or those without earned income pay their estimated tax owed on a quarterly basis.

When you file your Federal tax return before April 15th, you settle with the government for the previous year.

  • The government starts with your gross income and then subtracts deductions to reach your taxable income.
  • Next, your taxable income flows through the tax brackets mentioned above to arrive at your total tax owed.
  • Lastly, the government compares your total tax owed to what you withheld from your paycheck and/or paid through quarterly estimated payments.
    • Refund = you paid more tax than you owe.
    • Tax bill = you owe more tax than you paid.
  • You may also file an extension which allows you to extend your filing date up to 6 months (October 15th). However, your tax liability is still due on April 15th, and penalties can be applied if you don’t meet that deadline with payment.

Individual income taxes are the single largest category of revenue for the federal government, and Americans pay billions of dollars every year having their tax liability determined and their returns filed with the IRS. Taxes are complicated – there's no doubt about it. Our progressive tax system creates a common misconception that making more money will penalize you with higher taxes, but falling into a higher marginal tax bracket will likely still place you in a better economic position.

By Joe Ferreira

This is the 3rd part of a series. If you have not read the others: “Diversification or Di-WORSE-ification" and “Ancient Greek Investment Advice”, I recommend you do so before starting this one.

Chances are you’ve heard the phrase “Two wrongs don’t make a right”. Generally, this is very wise advice. But is it possible sometimes, just sometimes, a little bad could do some good?

As you probably assumed, this post won’t be a philosophical discussion about ethics or Sicilian vigilante justice. So let’s jump to the chase. What does this have to do with investing? The answer is a relatively unknown paradox called Shannon’s Demon.

First, let’s set the stage. You own a portfolio with two investments (not very diversified!). What happens if over time both investments lose money? Your immediate impulse is probably to say the portfolio would also lose money. Normally, you would be right. But is that always the case?

In reality, that portfolio could still produce a positive return despite both underlying investments losing money. How is that possible? The two key elements are correlation and rebalancing.

We covered rebalancing conceptually last time. We touched on correlation briefly in the first part of this series, but we will expand upon it now. 

Correlation is how closely the performance of one asset is tied to another. If two assets are perfectly positively correlated, they would perform exactly the same.  If one is up 5%, the other would be up 5%. Correlation can work the other way as well. If two investments are perfectly negatively correlated, they would be a mirror of each other. If one is down 5%, the other would be up 5%.

A diversified portfolio contains investments that do not have perfect positive correlation. Although ideally you want everything you own to always go up in value, we know investing isn’t that simple. All investors must deal with volatility (asset values going up and down). But volatility can be used for good if you have the discipline to rebalance in the face of it.

Now for Shannon’s Demon. The graph below shows the performance of two negatively correlated stocks and a portfolio split evenly with 50% in each stock. The portfolio rebalances (i.e. sells some of one and buys some of the other) the stocks back to 50% at the end of each time interval.

Shannon's Demon

As you can see, both stocks lost money over the full period. In this example, if you had just bought and held both stocks, you would have lost about 33% of your money. However, if you had rebalanced after each time interval, your portfolio would have been up 15% - quite the difference!

Like all great magic tricks, there is no sorcery at work. In this case, pure math can defy logic and come up with a pretty interesting result. So the next time someone tells you “Two wrongs don’t make a right”, ask them if they’ve ever heard of Shannon’s Demon.