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Archive for December, 2016

This is going to be a boring financial post. But I’m typing it up so I can refer back to it next year. This post does not construe tax advice, it’s a strategy that I think works as best I understand it.

It’s the end of 2016 and I’m currently doing some financial planning, specifically around taxes. In year’s past, I always used to estimate my taxes on Jan 1. But this past year, I’ve been doing it since October.

Over the past few years, tax refunds for myself and the wife have not been all that good, so I’ve been trying to come up with creative ways to increase it.

Charitable donations

One way to do it is through charitable donations which reduce your taxable income. The way I used to think it worked is that for every dollar you donate to charity, you get to subtract that dollar from your income and that goes against your taxes.

So, suppose you make $75,000 per year, and during the year you pay 20% of your income in federal income tax (this excludes Social Security and Medicare deductions). This means you would pay $75,000 x 20% = $15,000 in federal income tax.

Then, suppose you give away $7500 to registered charities. I always used to think the calculation worked like this:

Tax owed = (75,000 – 7500) x 0.2 = 13,500

15,000 – 13,500 = 1500 refund

That’s the way I used to think it worked, more or less. But it’s not. Taxes are more complicated than that.

For one thing, you get what’s called a Standard Deduction, and let’s assume it is $10,000 per year. The amount of taxes you pay throughout the year seems to account for this Standard Deduction.

Next, you add up all of your deductions which include charitable donations, deductible interest, sales tax paid, etc. If the sum of all of those is greater than the Standard Deduction, you get to use that against your total income. Thus, you have to give enough charitable donations such that the sum of all of them plus a few more other little deductions is greater than what you would normally for the Standard Deduction.

In this example, $7500 is less than $10,000, so I would not get to write off anything against my taxes even though I gave $7500 to charity. It wouldn’t be enough to reduce my tax liability. I’d have to give at least $10,000.

It’s good to give money to charity, but as a part of tax planning they are not that effective at reducing our taxes unless we give a huge amount [1].

Capital gains and losses

The one place that I have found to be effective is in capital gains and losses.

If you sell a stock or piece of property at a loss, you can use that against your income. So, suppose I have a stock I bought for $10,000 and sell for $5000, that’s a $5000 loss. I can reduce my income, not by the full amount, but a max of $3000 (and carry forward the other $2000 the next year). This is how Donald Trump could have conceivably avoided paying income tax for nearly two decades when he took a $1 billion personal loss in the mid-1990’s.

Many years ago, I bought a bunch of ETFs that track the general market. I’ve bought US stocks, foreign stocks, bonds, and Real Estate Investment Trusts (REITs). Some of these positions are up, and some are down. You would think that after five years they’d all be up, but no – some are still worth less than what I bought them for (roll-eyes.gif). Sometimes diversification doesn’t work that well.

But, what I can do is this – I can sell the stock (ETF) and then buy it back, and then use the “loss” against my income. For example:

a) In June 2014, buy an ETF at $50/share, 100 shares

b) At the end of the year, in December 2016, sell the ETF at $40/share, all 100 shares. I have lost (50 – 40) x 100 = –$1000. I then claim a $1000 loss on my taxes, reducing my taxable income by this amount. This is efficient because it goes right against the taxable income, no deduction magic involved.

c) I then buy the stock back right away at $40/share. Because I’ve only incurred trading costs, if the stock goes up (over time, cross my fingers) and I sell it down the road, I still can think of my starting point as $50/share.

The catch in this plan is that the IRS won’t let you do step (c). They aren’t stupid; you can’t just sell a stock, take the loss, then buy it back simply for the purpose of taking capital losses on your taxes. Instead, they have something called the wash sale rule. You can’t sell something and buy something similar within 30 days and claim the loss on your taxes. If you want to claim the loss, you have to wait at least 30 days before buying back something similar.

So that’s what I do – at the end of the year, I sell some stocks to take the loss, and then I wait 31 days to buy it back. I make no other trades during this period.

There is risk. I could sell it at $40, wait 30 days, and then have to buy it back at $45. That would suck.

Still, I take my chances. It worked out in 2015 because I was able to repurchase at the same price (or even a bit lower); hopefully in 2016 I can do the same in February.

The drawback here is that I am draining all my capital losses now instead of in the future. That is, if I have more income in the future, I have almost no more stocks to sell at losses. I am taking my chances here as well. But at the same time, now that Trump is in power, his proposed tax plan reduces this risk for us because of increases in the Standard Deduction. I’ve done the math on it, and his tax plan is friendly to the wife and I [2].

This works when it is well-executed

In 2015, I executed on this perfectly.

In 2016, I made a blunder. Instead of selling 200 shares (for example) to take a loss, I bought 200 shares. D’oh! I did this twice. Double d’oh! In order to fix this, I then had to sell 400 – the 200 I wanted to sell originally, and then the 200 I just purchased.

Tax-wise, this complicates things. Suppose my buy/sell over time looks like this:

– June 2012 – Buy 75 shares at $50

– Jan 2013 – Buy 80 shares at $55

– Sept 2013 – Buy 70 shares at $48

– June 2014 – Buy 60 shares at $45

It’s now Dec 2016 and the price is $47. What’s my net gain?

My stocks use a First-In, First-Out model. So, if today’s price is $47:

– June 2012 = ($47 – $50) x 75 = –$225

– Jan 2013 = ($47 – $55) x 80 = –$640

– Sept 2013 = ($47 – $48) x 45 = –$45

Total loss = $910

That leaves me with:

– Sept 2013 – 25 shares acquired at $48

– June 2014 – 60 shares acquired at $45

But of course, I wasn’t paying attention and first bought 200 shares instead of selling, which means I have to sell 400. This screwed up everything, so here’s what I think the situation is:

June 2012 = ($47 – $50) x 75 = –$225

– Jan 2013 = ($47 – $55) x 80 = –$640

– Sept 2013 = ($47 – $48) x 70 = –$70

– June 2014 = ($47 – $45) x 60 = $120

That’s a running total of 285 shares, so now we dip into what I just bought, the 200 shares at today’s price of $47:

– Dec 2016 – ($47 – $47) x 115 = $0

That brings me a net loss of $815 instead of $910. It also means that my future basis for all sales from this batch (85 shares) is now $47.

Not a good thing. I need to pay more attention in the future.

And then there’s dividends

One of the simplest ways to earn money without having to do anything is through dividend-paying stocks. Normally, you think about stock gains as buying low and selling high. But another way to do it is through buying a stock that is stable and paying dividends. There’s a debate over which method is better, but I do find that I like seeing my account have money deposited in it automatically, whereas buy/sell-at-a-gain requires me to do more work (should I sell now? Later? When!). Ideally you’d get growth + dividends, but that’s rare for a single stock. It’s more common through an ETF or mutual fund.

But whereas buying and selling stocks at a gain don’t generate taxes until you actually sell, dividends always make you pay taxes. My broker doesn’t withhold taxes, so all dividends that I get throughout the year add up into my total income and I have to pay taxes on it come the following April. I don’t have to pay taxes in my retirement accounts (401k and Traditional IRA) but I do in my regular brokerage account.

Dividends are interesting because they break down into two types:

  • Qualified dividends, which are taxed at a lower rate. In our tax bracket, they are taxed at 15%. These are usually US-based corporations and some foreign-based corporations, and you must have held them for a certain period of time (e.g., you can’t have bought the day before).
  • Non-qualified dividends, which are taxed as ordinary income (if you are in the 25% or 28% tax bracket, that’s what it is taxed at). Everything that’s not qualified counts as Non-qualified.

Thus, as you can see, if you want to earn income that is taxed most favorably, you should try to get Qualified Dividends.

The problem comes with diversification – you can’t just buy US stocks, you need to own some bonds, foreign stocks/ETFs, and REITs. Unfortunately, REITs’ dividends are classified as Non-qualified, so are bonds, and much of foreign ETFs are, too (at least I think so) [3].

So to optimize, you really should own your non-qualified dividend-paying securities in retirement accounts that are tax-deferred or tax-free; and qualified dividend-paying securities in accounts that are subject to paying taxes.

I did that a couple of years ago because I read the advice online in an article, but without really understanding why. Now I understand why. It turns out that my accounts are not fully optimized because I’ve instead chosen to reduce fees instead of taxes.

Still, the point is, dividends are a good way to earn income that is taxed less than regular income, plus it has no Social Security or Medicare tax.

On my previous years’ tax returns, it looks like all of it is being taxed as Ordinary (Non-qualified) dividends, but my current research suggests that about 2/3 of it should have been taxed as Qualified (15%) and 1/3 taxed as Non-qualified (28%). If I am right that I overpaid, that would reduce my tax liability even more. This is something I need to talk to the accountant about.

Getting rid of some other stocks

A long time ago, I bought shares in Apple. They split 7:1 a few years ago, and I had 98 shares. Apple was a great stock for a long time, increasing in value all the time. However, over the past two years the stock has lost its luster.

I’ve held onto it for three reasons:

1) I hope [4] it will keep going up, it’s Apple after all

2) I’m sitting on a big capital gain I will have to pay taxes on

3) It pays a decent dividend

Yet I’ve been thinking about selling it for a while and picking up some more REITs, there’s a particular stock I want to invest in.

I haven’t invested in it because I am afraid to – I almost bought in the summer when it was at $66, now it is at $55 – a loss of 16%! I think it’s currently on sale and is probably going to go up.

This new stock is a single stock, a REIT that currently pays a 4.26% dividend, far higher than Apple. But it’s only one stock, and that means it’s not diversified. A REIT ETF is VNQ (where I already have shares) and it pays a 4.1% dividend. Less, yes, but less risk.

But after doing the math above, it makes sense to buy a single stock that’s not a big part of my portfolio because it will be taxed as a Qualified Dividend (I think), whereas the more diversified REIT would be taxed as a Non-qualified dividend, and therefore 10-13% higher. That’s a big deal.

So, here’s what I did:

– I bought two more shares in Apple, bringing the total to 100

– I sold a covered call on Apple, expiring in February.

My hope is that the call option is exercised so it gives me spare capital to buy this other stock, otherwise I probably won’t sell Apple. The drawback of this approach is that it means my shares in Apple are hedged, and therefore any dividend Apple pays me count as Non-qualified (if the shares are exercised by then, it won’t matter).

* * * * * * * * * *

I know all of this is complicated. But taxes and investing are complicated.

 


[1] This is not accurate for other people, because other people get to deduct their mortgage interest and property taxes against their income. The wife and I cannot do this, we can only deduct it against our rental income.

[2] For the record, Hillary Clinton’s tax plan would make almost no difference other than costing us a couple extra hundred dollars. Bernie’s was extremely unfriendly, and would have cost us an extra 12-14 thousand dollars.

Donald Trump’s tax plan will increase the Standard Deduction from $12,600 for a married couple filing jointly to $30,000 for a married couple filing jointly. However, it will also get rid of Exemptions which are added on after you take Itemized Deductions or the Standard Deduction. Still, under the current tax code we can deduct 20,700 from our taxes whereas under Trump we would be able to deduct 30,000.

This means it would be even harder for charitable donations to reduce overall tax liability.

[3] It looks this way for me when I go back over my old statements.

[4] In investing, ‘hope’ is a four-letter word.

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Last month, I was watching the last episode the year of Last Week Tonight with John Oliver. His final segment was a tribute to the year 2016 as a year-in-review, but it was good riddance to 2016 as the video was a bunch of people swearing at the past year.

Similarly, on other friends’ Facebook wall, I see a lot of people complaining about the year 2016 and how it was a dumpster fire, a complete train wreck.

Well, I don’t align with that at all. The reason people complain about 2016 is for three reasons:

1. Brexit

This happened in June, and it got the political year off to a shaky start. Yet, if you were one of the 52% of British people [1] who voted for it, you’re quite pleased with this result so you don’t think this is a problem at all.

2. Donald Trump getting elected President of the United States

This came as a shock to many, including myself, and I wasn’t happy about it. But I’m now only slightly negative-neutral.

But if you were one of the 46% of Americans [2] who voted for Trump, you’re not disappointed at all in this result. In fact, you’re quite happy.

3. A bunch of musicians and entertainers who were famous in the 70’s and 80’s died

Yes, there were lots of entertainers who passed away this year, but that happens every year. We all get older, it’s an inevitability. I don’t have any particular affinity to any of these singers or actors, other than Alan Thicke. And I bet that a lot of people have the same view as me, too. They’re just not that attached to famous celebrities.

But for me, 2016 wasn’t all that bad. What can I name off the top of my head?

Even though we got a second cat last year, the fighting lasted a long time. Now, Esmerelda and Ruby get along…most of the time.

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In terms of travel, the wife an I visited Germany this past year, along with a quick side trip to Luxembourg, and also to Austria.

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And then later on in the year, we went to France:

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We also made a trip to the Canadian Rockies in the summer:

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We made a trip up to Kelowna, B.C., to visit relatives:

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– We also did a handful of quick trips to places within a day’s drive of where we live

– Besides that, we also had my aunt and uncle come down and visit us in March, and again in June, and then my parents came out to visit in October.

– Financially, we did okay this year. We paid off the mortgage on the condo I bought in 2008, meaning that we are completely debt free as of this past September. That means my rental property is now cashflow positive.

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– I maxed out my 401k this year for the first time, and my company also now matches it 50 cents on the dollar. I also contributed the max amount to my traditional IRA. That means for the first time ever, I contributed the maximum amount to my deferred contribution retirement plans [3].

– The wife and I celebrated our five year anniversary. We’re still together!

(The below picture was taken in Kelowna, a couple of weeks before our actual anniversary).

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– I didn’t have any hip surgeries this year. That’s a good thing (the one drawback of the year is that my neck is more sore than it was at the start of the year).

– We had plenty of good food this year, trying out a couple of new restaurants and having a great culinary experience in Paris, and Germany. We discovered a Polish restaurant in Seattle, and an amazing Afghan restaurant here in Bellevue. I also discovered rainbow hummus at my favorite Turkish restaurant.

– I discovered I really like German beer

– I got my US citizenship in January!

– I went hiking at Mt Dickerman which is in the north/central Cascade mountains. Last time I did this hike in 2011, I nearly died. This time around I took a friend and I found it wasn’t that difficult… although maybe that’s because he was going slow.

– Professionally, while I didn’t get a promotion (yet again), I did get quite a few things accomplished and am seen as a leading expert in my field.

I also volunteered to become a backup board member of M3AAWG (an anti-abuse working group), and take on the vice-chair role of the Auth Indicators Working Group, and group dedicated to #MakeEmailGreatAgain.

– The wife did a bunch of hiking without me in eastern Oregon

– The wife’s dad (my father-in-law) did a round-the-world cruise. 104 days to visit a ton of places

* * * * * * * * * *

So you see, while everyone else is complaining about how awful 2016 was, my experience not only did not align with that, it was the exact opposite.

I’m not sure how 2017 can top 2016, but I wasn’t sure how 2015 could have been topped, either.

But we’re going to give it a shot.


[1] Technically a voter in the United Kingdom, not just a British person since Britain is only England, Scotland, and Wales

[2] Actually, 46% of people who voted. Voter turnaround was less than 60% of the voting-eligible population

[3] Not counting the magic of doing a backdoor Roth

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This past year, the wife and I were in Salzburg, Austria, for a couple of days. We went there while we were making our way through Germany.

One thing I learned while we were there was the historical background of the Christmas carol “Silent Night.” You know the words, it’s that Christmas carol that romanticizes the night of Jesus’ birth.

Silent Night was composed in 1818 by Franz Gruber, in a small town 11 miles north of Salzburg, although the lyrics were written in 1816. That’s a critical year in Austrian history for two reasons:

  1. First, the Napoleonic Wars had completed raging through Europe only the year before, ending in 1815.

    Napoleon had marched through Europe multiple times, and Salzburg had switched sides four times between competing armies. Each time it did, the invading army ransacked parts of it, and deported many national treasures out of the city. Relics were taken back to other cities like Paris and Munich. It is only recently over the past 50 years the Austrian government had been able to recollect some of them and put them on display.

    No doubt about it, Salzburg took a pounding during those wars. When your city gets beaten up as much as Salzburg, it can demoralize the residents.

  2. Second, environmental pressures yielded a bad set of crops that year.

    1816 is known as
    the Year Without a Summer because of severe climate abnormalities that caused average global temperatures to decrease by 0.4–0.7 °C (0.7–1.3 °F). This resulted in major food shortages across the Northern Hemisphere.

    The root cause was a volcanic eruption of Mt Tambora in the Dutch East Indies. The resultant cool temperatures and heavy rains caused failures of wheat, oats, and potato harvests all around Europe. This led to food shortages and famines, and the BBC estimates that it led to 200,000 deaths in Europe.

So it’s these two factors combined – a ransacked city and famine around the land – that is the background for the song.

You might think a carol would be composed that reflects the turmoil of the time, and it does… but you have to look really hard. Rather than decrying the circumstances of the time period, Silent Night says “Yes, I know that things are tough, but we can be calm. Look at the miracle that has occurred! Even in the midst of all this turmoil.”

So, the carol’s lyrics are repudiation of the bleakness of the time.

When I first heard that story, I thought “Man, why did I never notice it before?” I didn’t have the song memorized, not past the first verse anyway. But when I looked them up, even then it doesn’t jump out at you. I’ve reproduced them below along with color-coding what can be a repudiation of the despair. Obviously, most of the song will have some theological significance, but other parts have clues:

Silent night, holy night,
All is calm, all is bright
Round yon virgin mother and child.
Holy infant, so tender and mild,
Sleep in heavenly peace,
Sleep in heavenly peace.

Silent night, holy night,
Shepherds quake at the sight;
Glories stream from heaven afar,
Heavenly hosts sing Alleluia!
Christ the Savior is born,
Christ the Savior is born!

Silent night, holy night,
Son of God, love’s pure light;
Radiant beams from thy holy face
With the dawn of redeeming grace,
Jesus, Lord, at thy birth,
Jesus, Lord, at thy birth.

A “silent night” where a child “sleeps in heavenly peace” seems paradoxical if your city has no resources and no food. But I think that’s the point of the song.

If you read up on Silent Night on Wikipedia, you won’t read anything like what I just told you.

And now you know.

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For most of my life, until the year 2012 when I was 33, I didn’t drink coffee. That changed after we went to Bali and I had some flavored coffee (that I think was mostly sugar). But since then, after getting a home coffee maker, I’ve started drinking it.

We started off drinking coffee from Trader Joe’s but in the past couple of years switched to one of three brands from Whole Foods – Café Ladro, Café Lusso, and Anchorhead coffee. We grind the beans at home, right before brewing.

That makes for some good coffee.

So, I’m okay with coffee now, but one type of coffee I don’t like is Starbucks coffee.

Even before I started drinking it, I would occasionally have Caramel Machiattos from Starbucks, or other sugary drinks. But since I don’t really drink sugary drinks anymore, all I want now from them is a regular drip coffee.

But the problem is that it doesn’t taste good. Neither the light, medium, or dark roast is pleasant, it’s all too bitter.

Why?

I finally did a web search for “What makes coffee bitter?” I found one article that gives three reasons:

1. Putting too much water through the coffee beans. I can’t imagine Starbucks doing this, they have machines that measure it.

2. Using the wrong grind size. I can’t imagine Starbucks doing this, either. They have machines that do it all (unless they are doing it on purpose to save money).

3. Using water that is too hot. Oh, yeah, this is it. Every Starbucks coffee I get is too hot. I have to wait several minutes before drinking it, or add milk or cold water to it to make it drinkable from the moment I receive it. I contrast this to my home coffee, and I can drink it almost straight off the pot.

So if every Starbucks coffee is too hot for me, and water that is too hot makes coffee bitter, and I find Starbucks coffee too bitter, that must be why.

I don’t understand the rationale for making coffee too hot, but that’s my hypothesis.

* * * * * *

I don’t buy coffee from restaurants much, if at all. I just have a drink in the morning. The only time I do is when I am traveling and can’t brew it myself in the morning.

I prefer home brew to store bought most of the time. I think the wife does, too. After we started home brewing, she pretty much stopped going to Starbucks.

That’s weird, because I live in Seattle and Starbucks started here, so I guess I am not that loyal a customer.

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(I’m currently writing this three weeks after the fact)

I recently turned 38 years old.

I know that some people lament getting older, and of course, no one likes it because your body starts getting aches and pains; there’s a cult-of-youth in our society; and it means you are one year closer to death.

But, it also means you are still alive, your mind got a little more mature, you got to experience a bunch of new things (hopefully), and you (hopefully) became a little wiser. It’s actually not all that bad.

For my birthday, the wife and I went out to an estate sale. That’s something we started doing this past year, and we’ve picked up a few things like little paintings, a chair, and a bookshelf. The prices are competitive if you go late in the day towards the end of the sale.

We didn’t get anything that day, but we did see these interesting carvings:

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That may be difficult to see, but they are small carvings of dragons. I might have bought them and given them to a friend… if they weren’t going for $400.

Nope.

Later on that day, the wife and I headed down into Seattle to Café Turko, a Turkish restaurant located in Seattle’s Fremont neighborhood.

We discovered this place after returning for Turkey. We were like “Are there any Turkish restaurants in the city?” And there were! We’ve only checked out this one, but we liked it a lot.

The wife asked me where I wanted to go out to eat for my birthday, and there were a few places that ran through my mind. But in the end, I went with Café Turko.

Before the meal, we got appetizers – Rainbow Hummus. This is where they give you warm pita bread (I love warm pita bread) with four different types of hummus: regular, beet hummus, olive hummus, and sweet potato hummus. It is super-good, I can’t recommend it enough.

Then we ordered the main course. I can’t remember what I got, or what the wife got, but it was also good.

What I like about this place is that the food is not overly covered in sauce, but instead the meat, rice, and salad are flavored with spices.

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Finally, for dessert, we had Turkish coffee. If you haven’t had it before, it’s super strong coffee. My mother once likened it to putting a spoon in it, and the spoon standing straight up. We have ours with cardamom; and while it is strong, I like it. It’s not a large cup of it, just a little shot glass-sized cup (I guess this is one of the few times I buy coffee, but in my defense it’s Turkish coffee which is something I would never brew at home).

We went to Café Turko somewhat early in the evening (getting there at 4:30 pm) so we got out of there reasonably early. I can’t remember what we did after that, we may have come home and watched a movie, or perhaps went out to see a movie.

One of those two things.

But as you can see, my birthday was pretty low key. But I like low-key things. It’s not a lot of pressure, and you can take things as they happen.

So, a pretty good 38th birthday.

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