March 24, 2015

TDG News: Important Last Minute Tax Tips

• IRS Is Sending out Identity Verification Letters to Possible Identity Theft Victims: Some taxpayers are being deceived by hackers through fake emails, known as phishing scams, where a user is coerced into providing personal information such as names, addresses and Social Security numbers. Remember the IRS will never email you asking for information. They always correspond via paper mail. If you receive emails from the IRS DO NOT click anything. It is a scam.

• "Where's My Refund? ": Taxpayers can check the status of their tax return and refund through the "Where's My Refund?" page on www.irs.gov or the smartphone application IRS2Go. Initial information will normally be available within 24 hours after the IRS receives the taxpayer's e-filed return or four weeks after a paper return is mailed to the IRS.
• Deadline for 2014 IRA Contributions: April 15, 2015 is the last chance to make the maximum contribution of $5,500 ($6,500 for people 50 years of age or older) to your Traditional or Roth IRAs for tax year 2014. There are income limitations on contributions.
• What to know if you Plan On Filing an Extension: The IRS reminds taxpayers who are unable to complete their tax returns on time that they can file for an automatic six-month filing extension online. There is no extension to pay your 2014 tax liability so be sure you have paid in an adequate amount to avoid possible penalties and interest.
• College Tuition Payments: Tuition paid for yourself, your spouse or any dependent you claim on your 2014 tax return may be used for a deduction up to the maximum of $4,000. There are some limitations with regard to income level so be sure to see if you qualify.
• Deducting your Charitable Donations: Donations need to have been made by December 31, 2014 in order to receive a tax deduction for the 2014 tax year and if you donated $250 or more then you must receive a written record from the charity.

The Fed's Steady Return to Normalcy

Financial markets gave the Federal Reserve a standing ovation last week. At least, that was Barron's interpretation. What did the Fed do to deserve it?

"...the Fed did what everyone expected, signaling that it could raise interest rates at any meeting starting in June. Yet, Yellen and team still found a way to assure the market that it wouldn't do anything rash, insisting that the labor market would need to strengthen further, and that inflation would have to be heading for its 2 percent target before they make a move. Even then, the projected path of interest-rate hikes would be slow and steady - and unlikely to undermine the market."

Stock markets in the United States weren't the only ones heading toward, or surpassing, new highs. The Fed's reassurances about the pace at which it would normalize monetary policy pushed markets across the Eurozone higher, too. Reuters reported global investors were feeling confident a weaker euro could goose the region's economy.

There is some optimism about shorter-term market potential. Experts cited by Barron's suggested the chance for a stock "melt-up," which would lift the Standard & Poor's 500 Index (S&P 500) higher, were pretty good.

However, others believe the longer-term outlook for stocks, as a whole, may temper investors' enthusiasmBarron'sexplained earnings growth for the S&P 500 is well below its 30-year average, dividend yields are well below their 20-year average, and the index's valuation isso high that it is projected to subtract 2.6 percent annualized from returns. Put it together and investors are likely to earn just 0.4 percent after inflation."

One thing is for sure: It's awfully difficult to predict the future with any accuracy. Barron's warned about the quirks of market forecasts, offering an example from a decade ago. "In January 2005, expected returns were just 0.4 percent, yet the S&P 500 gained 5.6 percent annualized during the next 10 years."

Data as of 3/20/15	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	2.7%	2.4%	12.6%	14.5%	12.6%	5.9%
10-year Treasury Note (Yield Only)	1.9	NA	2.8	2.4	3.7	4.5
Gold (per ounce)	2.7	-1.4	-10.8	-10.6	1.5	10.6
Bloomberg Commodity Index	2.0	-4.6	-25.3	-11.7	-5.5	-4.8
DJ Equity All REIT Total Return Index	5.4	6.8	28.4	15.3	15.8	9.7

The Dollar's Double Edge Sword

It may seem like a good idea today... If anyone needs more evidence that focusing on short-term corporate performance can be detrimental to longer-term outcomes, look no further than the effect of the strengthening U.S. dollar on companies outside the United States that issued debt denominated in U.S. dollars. The Economist explained:

"Dollar borrowing is everywhere, but the biggest growth has been in emerging markets. Between 2009 and 2014 the dollar-denominated debts of the developing world, in the form of both bank loans and bonds, more than doubled, from around $2 trillion to some $4.5 trillion, according to the Bank for International Settlements (BIS)... Recent months have seen... an Indian property developer... a South African power generator, and... a Turkish firm that makes TV dinners, sell dollar-denominated bonds. By borrowing dollars at several percentage points below the prevailing interest rate in their domestic currency, CEOs have pepped up profits in the short term."

As it turns out, dollar-denominated debt may not work out so well in the long run. In recent weeks, the value of currency in many countries has declined relative to the U.S. dollar which has been strengthening. As a result, the amount of interest owed on bonds issued and loans taken in U.S. dollars has increased significantly when measured in local currency terms. Unless a company has U.S. dollar earnings to help offset the expense, the higher cost of its debt can hurt the company.

The New York Times cited a leading electric utility in India that is selling facilities and renegotiating debt after its debts increased thirty-fold in just a few years. In Brazil, some sugar producers have declared bankruptcy, in part, because of U.S. dollar debt and falling sugar prices.

The Times also pointed out, "...the rising dollar and falling emerging-market currencies cut both ways for the economies in question. Even as companies that gorged on dollar debt run into trouble, falling currency values make exporters more competitive on global markets." In January, the International Monetary Fund projected economic growth in emerging countries will increase from 4.3 percent in 2015 to 4.7 percent in 2016.

Weekly Focus - Think About It

"If you obey all the rules you miss all the fun."

—Katharine Hepburn, Actress

Best regards,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management

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