Monthly Archives: January 2018

The Tax Code Made Me Do It

tax 2018

January 21, 2018

Changes to the tax regime have become a popular subject of conversation with the passage of the Tax Cuts and Jobs Act in late 2017.  Investors have been eager to learn how changes might benefit various asset types.  The centerpiece of these changes is a lower corporate tax rate, which should give some boost to corporate earnings.  Another investment-related change enables US corporations to bring home cash parked overseas at a reduced rate.  Individual taxpayers should generally have more disposable income, giving potential to lift consumption and thus the economy.  With 70% of US GDP driven by consumption, reduced tax rates from 2018 to 2025 for working Americans will likely fuel faster growth, although the economists cannot agree by how much.

Beyond these heavily-discussed headline changes, there are many lower profile changes that could have a significant impact on the behavior of individuals and corporations.  For example, a recent WSJ article observed that allowing corporations to immediately deduct new equipment purchases in full is anticipated to accelerate the use of robotics in manufacturing.

The change that will directly affect the most people is the increase in standard deductions for individuals.  For a married couple filing jointly, the standard deduction nearly doubles to $24,000 in 2018.  Higher standard deductions erode the advantage of itemizing, reducing the number of taxpayers who benefit.  Some may even batch deductions together in particular years and itemize less often.  While mortgage interest remains deductible, it is capped for new homebuyers.  Property taxes remain deductible, but only up to a new $10,000 limit, toward which state and local income tax also counts.

Higher earners, or those living in areas with high taxes or property values, will face an increase in the cost of homeownership. These changes will tend to make the relative cost of renting more attractive, which is of potential benefit to the owners of apartment properties. This could be most pronounced in higher tax states, and among higher end apartment properties.

Charities who rely on the middle class for contributions have reason to be worried.  The tax benefit of charitable contributions will be diminished or erased for those who no longer itemize their deductions.  As an alternative to traditional methods (i.e. “writing a check”), other more sophisticated charitable giving techniques may gain popularity. For example, with appropriate guidance from a tax advisor, those required to take taxable IRA distributions may see advantages in directing their annual required distributions IRA to a qualified charity.  If handled properly, this could enable the taxpayer to take both the new, higher standard deduction and avoid recognizing income that would otherwise be taxed.

Given the complexities of recent tax changes, we can be fairly sure that few taxpayers (corporate or individual) are acting in full knowledge of the impact of the new law.  Some will profit from being first to understand the benefits, and associated behaviors, prompted by the revised rules.  For most people, though, it will take some time for the dense fog of uncertainty generated by the tax changes to clear.

Cam Simonds


Q4 2017 Letter

January 2018

It is our custom each January to reflect on the year that has ended and look forward to what we aim to accomplish in the coming year. We are particularly reflective this year as we look back not only one year, but on our firm’s first decade in business. While many things have changed over 10 years, our core values and guiding principles remain the same.

When we founded the firm in the Fall of 2007, we intended to build something distinct and enduring. It started rather modestly, with some loyal client families and an unwavering commitment to serve them well. The young firm was tested early with the arrival of the Great Recession. We were able to navigate this difficult period by relying on sound time-tested principles, thoughtful strategies and discipline.

The firm grew organically over time, propelled by warm introductions and referrals from our clients. This organic growth enabled us to broaden and deepen our capabilities. One area where growth has been most beneficial is private investments. This includes private real estate, private debt, and private equity. These opportunities are often more nuanced and complex than opportunities in the public markets. Our continued growth allows us to be thorough in evaluating private investments and enhances our standing in negotiations with both current and potential private investment partners.

Another area where scale has been helpful is in the use of technology to provide an enhanced portfolio monitoring and reporting platform. Furthermore, we discuss investment opportunities on an almost daily basis, and our Investment Management Committee meets on a monthly schedule. We have rigorous due diligence processes in place to evaluate potential and existing investments. We work in teams to service each family relationship. We honor diversity of experience and opinion. All of this contributes to an enduring culture of service. The whole is indeed greater than the sum of the parts.

q4 2017Source: Federal Reserve Economic Database, S&P Dow Jones, and NHCO (latest available data)

As we look forward to 2018 and beyond, we will be following several trends and themes. One area of particular interest will be the Tax Cuts and Jobs Act of 2017. For a married couple, the estate tax exemption doubles from approximately $10.9 million to $22.4 million. The standard deduction nearly doubles from $12,700 to $24,000 under the new law. At the same time, State and Local tax deduction will now be limited to $10,000. We will be looking closely for planning opportunities and strategies that make sense in this new environment.

On the investment front, markets continue to advance while experiencing historically low levels of volatility. On some measures, this was the least volatile year in the stock market since 1965. The S&P 500 finished the year up 21.8% while international stocks were up 25.6% and emerging market stocks were up 37.3%. Economic growth has been strong and widespread. Corporate earnings have advanced both here and abroad. The S&P 500 has risen for 14 months in a row. Many analysts have been predicting a return of market volatility. So far, we have not seen it, but it would be naive to assume this environment will not change at some stage.

We continue to see potential in international and emerging markets for long-term investors. International markets are somewhat cheaper than domestic markets on some measures. Emerging markets will offer growth and diversification over long periods.

Markets have always been unpredictable and no one knows what the future holds. In light of this uncertainty, we will continue to be driven by our core values and time-tested principles. We will continue to focus on long-term strategic thinking. Planning carefully around expected cash flow requirements remains integral. Continued priorities will be to maintain globally diversified portfolios and be vigilant about the adverse impacts of taxes and fees, while rebalancing away from what is more expensive towards what is more attractively valued. We will continue to scour the public and private markets for attractive investment opportunities. These are the activities that have served our clients well over the years.

We are pleased to announce that Shelley Castaldi has joined the firm as Family Office Coordinator. Shelley is from London and holds a Bachelor of Science in Business & Financial Economics from the University of Leeds in the UK. She has previously worked in a variety of administrative roles. We are delighted to welcome Shelley to the team.

As always, we welcome your thoughts, and appreciate the confidence you have placed in our firm. We are grateful for the opportunity to work with you and your family, and we wish you a happy, healthy, and successful 2018.

Nicholas Hoffman & Co.