Quarterly: Oct 17 Overcoming Our Cognitive Biases We started a series on decision-making back in June when we introduced the concept of Level 1 and Level 2 thinking from Daniel Kahneman’s book “Thinking Fast and Slow.” The main goal of the series (Better Thinking... , ...Better Decisions , The Fallacy of the Formula ) was to explore how cognitive biases are formed and how they influence our decision-making. The challenge with our cognitive biases is that they tend to influence us most at the extreme ends of the spectrum. And it’s at these extreme ends of the spectrum where we may need to ignore them the most, because all risky asset classes will experience long periods of underperformance. The S&P 500 Index has experienced three separate periods where it underperformed riskless one-month Treasury bills for more than a dozen years (1929-1943, 1966-1982, and 2000-2012). Any student of the market knows that longer periods of underperformance by risky assets are a necessity. If these periods never occurred, there would be no risk, and the risk premium would disappear. The periods of underperformance essentially create the equity risk premium that investors capture when they choose to take on the random and unpredictable risk of the equity markets. If The Markets Are Random and Unpredictable, How Should That Impact Our Decision-Making? Mean reversion is the theory that security prices return to their long-term averages over time. In every asset class, from bonds to stock to commodities, buying what is cheap leads to better outcomes because expensive stocks revert down to their mean over time while cheap stocks revert up to their mean over time. Unfortunately, that truth only holds up over longer periods of time. Expensive stocks can get more expensive in the short-term while cheap stocks can get even cheaper. Using the CAPE Ratio (the Cyclically Adjusted PE ratio from Robert Shiller) for the S&P 500, we can look back at periods of time when assets were expensive and times when assets were cheap. Source: Macrotrends, Multiple.com and Telos Asset Management Company The CAPE ratio is a valuation measure that uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle. The ratio is generally applied to broad equity indices to assess whether the market is undervalued or overvalued. Source: Macrotrends, Multiple.com and Telos Asset Management Company By inverting the CAPE ratio chart we can observe the direct relationship between price and future returns. The following chart lines up the annualized 10-year forward returns of the S&P 500 with the CAPE ratio at the start of the period. When the blue line is high, stocks are theoretically undervalued and their future return potential is high. When the blue line is low, stocks are theoretically expensive, and the potential for future returns is muted. Source: Macrotrends, Multiple.com and Telos Asset Management Company While these charts clearly prove that price matters, they do not address the value premium (the advantages of buying cheap stocks over expensive stocks). And unfortunately, there is little evidence that investors can accurately time the value premium or when the mean reversion will take place. That’s where patience and discipline come in. ​ ​ And How Do We Overcome Our Cognitive Biases? The key to overcoming our cognitive biases is to override them with a process that systematically allocates based on math and sound logic rather than human judgement. ​ Process-driven investing is nothing more than a long-term approach to putting capital at risk by owning a broad variety of asset classes, making periodic contributions and regularly rebalancing. The challenge with process-driven investing is that it requires an investor to focus on the investment process and not the short-term results. That can be extremely difficult when the short-term results don’t coincide with the long-range return objectives. Over the long term, however, overcoming our cognitive biases with a good process should deliver more reliable outcomes with better results.

2020 Strategies for a Lifetime of Tax Savings Join us as we share clear steps you can take to reduce your tax bill and cohesively address each area of your financial life. ​ Minimize the risk of rising tax rates Reduce your current tax burden Maximize the productivity of your assets to improve your future income stream Minimize the drag from your long-term tax liabilities with potential lifetime savings of more than $200,000 on a $500,000 retirement portfolio Provide a quiet confidence that your financial affairs are arranged to meet your long-term goals

Beware of Hedge Fund Managers Bearing Gifts Quarterly: Oct 17 "Do not trust the horse, Trojans. Whatever it is, I fear the Greeks even when they bring gifts." According to Greek mythology, the Greeks had struggled for nearly a decade to penetrate and conquer the city of Troy. In an act of trickery, they constructed a huge wooden horse, hid men inside it and pretended to sail away from the city. ​ Ignoring wise counsel, the Trojans opened the gates and unknowingly opened the door for the Greek army to enter their city. Shortly after the Trojans brought the horse into the formerly impenetrable area, the Greek army sailed back under the cover of night and stationed their men to attack. Once the Greek army was in place, the men crept out of the horse and opened the gates for the rest of the army to enter and destroy the city of Troy. ​ The term "Trojan Horse" has metaphorically come to mean any trick or strategy that causes a target to invite a foe into a securely protected area. We correlate this story to the appeal of hedge funds and private equity to a high net worth investor and the economic reality that is likely to follow. Diverging from our normal lines of discussion, we are going to explore the implications of the Tax Cuts and Jobs Act (the new tax code) on alternative investment income. ​ The tax implications on alternative investment income are staggering. The new US tax code raises the bar so high that most alternative investments will fail to pass the test for the average high-net-worth investor. ​ The term “high-net-worth investor” is a relative term. After all, nobody wants to be the one millionaire on an island of billionaires! Rather than defining high-net-worth by the size of someone’s balance sheet, we are going to define it as anyone with an annual income above $400,000, the beginning of the 35% tax bracket for married couples filing a joint tax return here in the United States ($200,000 is the beginning of the 35% bracket for a single filer). ​ For today’s discussion we are going to use the 37% tax bracket to define high net worth, so technically this would be a married couple with a taxable income above $600,000 or an individual with a taxable income above $300,000. A brief history lesson on our tax code and investment management fees: The “two and twenty” fee structure (2% management fee and 20% performance or carried interest fee) charged by hedge fund and private equity managers has always been a challenging hurdle for alternative investment managers to overcome. Prior to 2018, however, the US tax code took some of that sting out of the bite by allowing investors to deduct their investment management fees once they surpassed 2% of adjusted gross income. In other words, a tax payer with $1 million dollars in adjusted gross income could deduct the investment management fees that surpassed the $20,000 mark (the 2% hurdle). The new tax code however, has removed investment management fees from the list of itemizable deductions. The colossal impact of this change comes down to the fact that 100% of your investment income flows through to your personal tax return and your investment management fees no longer offset that income. It’s like the opposite of a tax-free municipal bond. Instead of receiving income on which the government will not tax you, you are required to pay tax on income you will never receive. Let’s take the example of a married couple making $700,000 per year from their employer plus another $150,000 of income from their alternative investments. To keep things simple, we will make the following assumptions: ​ The couple earns $700,000 in wage income from their employer The alternative investment is custodied in a traditional taxable account (ie. non-retirement account) The alternative investment generates $150,000 of investment income on $1,000,000 of invested capital Half of the investment income is taxed at the investor's ordinary income tax rate and half is taxed at the long-term capital gains rate The investment manager is paid $20,000 from the 2% management fee and $26,000 from the 20% performance fee ​ Description $150,000 Of Investment Income ($20,000) 2% Management Fee ($26,000) 20% Performance fee $104,000 Net to Investor Before Tax Tax Liability +$42,750 (Federal Income Tax) +$3,885 (Net Investment Income Tax) Cannot be deducted on Schedule A Cannot be deducted on Schedule A $46,635 Additional Tax Liability The investor receives $57,365 after investment management fees and federal income tax, and still has a state income tax bill to pay. This 5.7% return is a long way from the 15% gross return generated by the hedge fund manager. Keep in mind, we are just looking at the tax implications of alternative investment fee structures. Considering the fact that the HFRI Equity Hedge Index only returned 3.38% over the last five years (according to Hedge Fund Research, Inc. – 2/28/19), we haven’t even begun to address the impact of performance fees on net returns to investors. Potential Solution: Asset Location One potential way to address this problem is to put investments with high management fees into tax-deferred retirement accounts instead of traditional taxable accounts. The challenge with this option is that it puts the investor at risk of being subject to UBIT issues (unrelated business income tax). Because of the potential UBIT and ERISA issues, some managers and many custodians will not accept retirement assets in alternative funds. This asset location issue is a critical piece of the wealth preservation and accumulation puzzle. Unfortunately, this mission-critical issue is often missed by the wealth management community due to a lack of knowledge about our tax code. Conclusion The Tax Cuts and Jobs Act creates a very challenging hurdle for many alternative investments to overcome. Investors should be careful to analyze the net after-tax return on their investments and make sure they are being fairly compensated for putting their capital at risk.

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TO BE AWARE OF UNDER THE 2018 TAX REFORM At the end of last year President Trump signed the Tax Cuts and Jobs Act into law, signaling the largest tax reform in over three decades. We have received a lot of questions recently on how this law will affect our clients. With the tax season now behind us it is time to address how these changes will impact you in 2018. ​ There are many aspects to this law and there is no "one size fits all" explanation for how it will impact our clients. Some of our clients will win and some of them will lose under the new law. With that in mind we have outlined the five changes that we believe are most relevant to you. Personal exemptions historically represented a $4,000 reduction in taxable income for each dependent listed on the tax return. Under the new law these exemptions have been eliminated. However, to help mitigate the loss of these exemptions, the law also made changes to the child tax credit and has added a new credit for non-child dependents. ​ Starting in 2018 the Child Tax Credit has been doubled to $2,000 per child, $1,400 of which is refundable. The phaseout threshold for the Child Tax Credit has also been drastically increased to $200,000 for single filers and $400,000 for joint filers. This means that most taxpayers who were previously prevented from claiming the full Child Tax Credit will now be able to claim the entire credit. ​ Additionally, the law has introduced a new $500 credit for any dependents who are over the age of 17, allowing parents to continue to receive a tax benefit for children in college or other adults residing in their home. SUMMARY There are many moving parts in the new tax law, with a lot of them working to balance one another out. Some of our clients will see a decrease in their tax bill while others will see it increase. Overall, we do not expect any of our clients to see drastic changes, good or bad, with the new code. We expect the majority of our clients to see an increase or decrease in their tax bill of less than $1,000. If you would like to know how the tax reform will directly impact you, please call our office. Interested in a free review of your last three tax returns? Schedule a meeting to get started! Tax Brackets The number of brackets remains at seven. And the percentage charged at each of these brackets has been reduced, with the notable exception of the lowest bracket of 10% which remains unchanged. The majority of our clients who were previously in the 15% or 25% tax bracket will now find themselves in the 12% or 22% bracket respectively. You may have already noticed the impact of these new brackets when your employer adjusted your withholdings earlier in the year, increasing your take home pay. UNREIMBURSED EMPLOYEE EXPENSES The change that could have the greatest impact on our public servant clients is the elimination of the deduction for unreimbursed employee expenses. As the law currently stands, employees will no longer be able to deduct their union dues, work uniforms, tools, or any other expenses related to their employment. The only exception to this is the special $250 allowance for teacher's expenses which remains unaffected. ​ There is currently a bill in congress which seeks to reinstate the deduction for unreimbursed expenses. The "Tax Fairness for Workers Act" would not only bring back the itemized deduction for employee expenses but would go a step further and allow for specific deductions to be taken above-the-line, meaning they would not be subject to many of the limitations that currently restrict their use. It remains to be seen how far this bill will go but we strongly recommend that you keep track of your job expenses until a decision is reached. If the bill passes, this will cause job related expenses to have a greater impact on your tax return. ITEMIZED DEDUCTIONS AND THE STANDARD DEDUCTION One of the most promoted aspects of the new tax law is the nearly doubling of the standard deduction to $12,000 for single, $18,000 for head of household, and $24,000 for joint filers. While the standard deduction amounts are receiving significant increases, many of the allowed itemized deductions are either being handicapped or removed entirely: The deductions for state and local income taxes as well as property taxes are capped at a combined total of $10,000. This means that homeowners in high income-tax states are likely to lose a portion of this former deduction. The deduction for home mortgage interest remains but is limited to mortgages that do not exceed $750,00, down from the previous threshold of $1,000,000. All miscellaneous itemized deductions (including tax preparation fees, casualty losses and all unreimbursed employee expenses) have been eliminated entirely. The increased standard deduction amounts combined with the additional restrictions on itemized deductions increases the chances of the standard deduction being more beneficial than itemizing deductions in 2018.​ 1 ABOVE THE LINE DEDUCTIONS Above-the-line deductions are more beneficial than itemized deductions as they have far fewer restrictions. The new tax law retains many of these deductions including educator expenses, student loan interest, and contributions to Health Savings Accounts. Two deductions that have been changed are expenses for a job-related move, and alimony payments. ​ Starting in 2018 expenses for a job-related move will only be deductible by active members of the military. Starting in 2019 alimony payments will no longer be deductible. However, this will only apply to divorce agreements settled after the start of 2019. This means that alimony payments from divorce agreements that were already in place prior to 2019 will continue to be deductible. FIVE CHANGES 3 PERSONAL EXEMPTIONS AND THE CHILD TAX CREDIT 2 4 5 At Monotelo, we exist to make a difference with meaningful and actionable financial solutions that positively impact our client's lives. If you have questions about what steps you can be taking to prepare for your retirement years, call us at 800-961-0298

Set up user access in Chase Bank for accountant view-only access: ​ 1. Navigate to the account management section after logging in to your Chase Bank account. ​ 2. From there, select the "Access and Security Manager" option. 3. Next, choose "Add Authorized User." 4. You will then be prompted to input the necessary information for the new user. Enter the first and last name of your Monotelo accountant, as well as the email address and phone number. First & Last Name: John Smith Email: john@monotelo.com Phone number: 800-961-0298 5. Then, on the next page, select only limited access, remove travel, and full access. Hit submit. 6. You can select the appropriate permissions for the new user. In this case, your Monotelo accountant only needs to see activity and check images, documents, and statements. 7. After you select the appropriate permissions, you should review and confirm the information entered and then submit the request. 8. Chase Bank will then email your accountant at the provided email address with instructions on accessing your account at Chase. 9. Your accountant should check their email for the invitation and follow the instructions to accept it. The invitation may expire after 24 hours, so your accountant should accept it immediately. 10. Once your accountant has accepted the invitation and set up their login credentials, they can access your account with view-only access. Congratulations! You have successfully set up user access in Chase Bank for your accountant with view-only access.

5 THINGS YOU CAN DO RIGHT NOW to Help Improve Your Retirement Years When most people think about retirement planning, they focus on growing their money, but they often overlook other critical issues. Eventually you will be shifting gears to preserve what you saved over the years. Taking a few simple steps today can help equip you for the time when that shift takes place. 1. THE INCOME PLAN Build a plan so that you don't run out of money for yourself and your spouse during your lifetime. ​ While this is easier said than done, you can start by figuring out how much money you'll need to cover your living expenses. This would include fixed expenses (mortgage, rent payments, insurance premiums, etc.), variable expenses (food, clothing, car maintenance), outstanding debt (car payments, student loans, credit cards, etc.) and any predictable large purchases (a second home, a new addition, vacations, etc.). ​ Your guaranteed sources of income, such as Social Security or a pension, will be used to pay those expenses. If they aren't enough, you will need to find other income sources. 2. THE PROTECTION PLAN While the odds of your house burning down are less than 3%, most people wouldn't consider going without fire insurance for their home. ​ It's equally, if not more important to address the risk of "burning down" your income plan. For example, the chances are fairly high that you or a spouse will have some kind of long-term care need. These expenses tend to be high and tend to carry on for extended periods of time. As a result, you need to consider this risk. ​ Another risk to consider is the risk of a pension payment getting reduced. For those who plan to retire on a significant pension, this is a very real and present risk that should be addressed in your plan. 3. THE APPRECIATION PLAN Once you have addressed the income and protection needs, it's time to address how to continue growing your money. Conservative, aggressive, moderately aggressive.... You need to identify your capacity to take risk. Once you have properly identified your risk tolerance, you can then begin to focus on portfolio appreciation. ​ The reason this step is crucial is that you do not want to sell at market bottoms when your emotions get the best of you. This happens when you set your portfolio to take more risk than what your emotions can handle, and this is a recipe for disappointment. 4. THE TAX PLAN Keeping your taxes as low as possible should be front and center, and there are a variety of ways to do this. ​ One example would be to focus on asset location, as opposed to asset allocation. Asset location focuses on WHERE you choose to do your retirement saving (IRA, 401K, 403B, Roth IRA, whole life insurance, etc.), while asset allocation focuses on WHAT you choose to invest in inside the account. Asset location matters because this will have a direct impact on the tax implications when you need to access your money saved for your retirement years. 5. THE ESTATE PLAN Some estate planning may also be in order to protect yourself from taxes - particularly in states that have an estate tax, as the exemption levels are usually much lower than the federal level. ​ Taking care of loved ones in the future can also be a primary concern for many. Consult with an attorney to understand the legal documents necessary to ensure the efficiency of your estate, including a health care power of attorney, financial power of attorney, health care directives, wills and trusts. At Monotelo, we exist to make a difference with meaningful and actionable financial solutions that positively impact our client's lives. If you have questions about what steps you can be taking to prepare for your retirement years, call us at 800-961-0298

Save as PDF Read more articles Share 1 2 HOW TO SAVE HOW TO SAVE FOR YOUR CHILD'S COLLEGE EDUCATION The cost of a college education is rising by three to four percent a year, so it is never too early to start saving for your child’s future college tuition. Before you start saving however, make sure to consider the options that will maximize your savings while minimizing your tax burden. ​ 529 Plans A 529 plan allows you to contribute to a tax-advantaged account in order to fund college tuition. While contributions to a 529 plan do not provide a federal tax deduction, you may qualify for a deduction on your state tax return for your contributions. Additionally, you can pull out your contributions and earnings from the account tax free when you use them for qualified education expenses. Qualified education expenses include tuition, fees, books, supplies, and equipment required for enrollment. If your child is enrolled at least half-time (6 or more credit hours per semester), room and board are also considered to be qualified expenses. ​ 529 plans come in two varieties: Prepaid tuition plans and college savings plans. ​ Prepaid Tuition Plan With a prepaid tuition plan you can pay for your child’s tuition ahead of time, based on the current rates. For example, if your child is 8 and one year of qualifying college tuition is $10,000 today, you can contribute $10,000 to the fund today and your child’s first year of tuition will be fully covered when they start college in ten years - regardless of the cost of tuition at that time. You are not required to prepay a full year at once, you can pay into the fund over multiple years but each year the required amount will increase. With a prepaid tuition program, you do not need to worry about how well the fund is performing, or about tuition costs. The fund bears the risk, not you. ​ College Savings Plan A college savings plan operates more like a traditional investment account such as an IRA or 401K. You contribute funds to the plan that grow over the years until you are ready to withdraw them to cover education expenses. While a college savings plan does not provide the same guarantee as a prepaid tuition plan, it provides more flexibility on how the funds are used. It also has the potential to provide a greater return on investment than the prepaid tuition plan where earnings of the account will be no greater than the rise in tuition cost. Roth IRA as a Last Resort If your child is about to enter college and you do not have a 529 plan in place to cover the tuition, you can pull funds from your Roth IRA without incurring the early penalties and taxes that you would normally face when taking early distributions. We caution against using a Roth IRA to cover your child’s college expenses, because the Roth IRA is one of your best retirement tools. It is however a valid option. If you choose to tap into your Roth IRA to cover education expenses you need to meet two requirements to avoid taxes on the distributions: ​ Wait Five Years: You need to wait at least five years after first funding your Roth IRA before you withdraw any of the earnings of the account. Qualified Expenses: You must use the entire distribution for qualified education expenses. Be sure that you do not take out more than what is needed to cover these qualified expenses. ​ Failure to meet these two requirements will result in you paying the normal tax rate on the earnings of your account, effectively eliminating the tax benefit of your Roth account. Additionally, you will pay a 10% early withdrawal penalty on any distributions that don’t meet these requirements. ​ Takeaway A 529 plan provides a tax-efficient way to save for your child’s college education. A Roth IRA can also provide tax-efficient savings for education, but your goal should be to not touch your Roth until you retire. You should consider all the options with the following priorities: ​ In an ideal world, you would first max out your Roth IRA contribution of $5,500 per year (if you are married your spouse can contribute another $5,500 per year to their Roth). You would then contribute to a 529 college savings or prepaid tuition plan. (You should not contribute to a 529 plan if you have not already maxed out your Roth IRA as the 529 Plan creates more restrictions). If you cannot contribute to a Roth IRA due to income limitations, you can still contribute to a 529 plan. ​ ​ Be sure to reach out to Monotelo if there are any questions about how to fund your children’s college education or the tax implications of an existing account. We are here to help you keep more of what you earn. Read more articles Share Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

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Real Estate Agents At Monotelo we start every relationship with a tax conversation. We work hard to free up cash flow by helping you minimize your federal tax liability. That's because every dollar you pay the federal government is one less dollar available for you to reinvest back into your business, or one less dollar available for you to reinvest into your future. Learn More This video provides a brief summary on how we reduce the tax liability for our real estate agents. Why Monotelo? Tax Tips and Strategies Strategies that you can implement in your business to simplify the filing process while reducing your tax burden. How We Work With Clients The biggest enemy to the accumulation of wealth is the 23-43% cut the government is going to take on your income. That is why we start every relationship with a tax conversation. Monotelo White Papers Read about some of our previous cases, the challenges we faced, and the solutions we developed to help our clients make better financial decisions.

Save as PDF Read more articles Share According to the IRS' most recent Data Book, the IRS audited nearly 1.4M tax returns in 2014, approximately 0.8 percent of all individual tax returns filed in calendar year 2014 and 1.3% of corporation income tax returns filed in that same year. IRS examinations (otherwise known as audits!) are done to determine if income, expenses, and credits are being reported accurately. Of the exams that take place, the most common method is a correspondence audit (examination by mail), but the IRS also does field exams (face-to-face audits). ​ ONE QUESTION WE HEAR ASKED QUITE OFTEN IS WHAT CAUSES THE IRS TO AUDIT A RETURN? While there is no simple answer to that question, the IRS uses several different methods to select their audits: random selection and computer screening, and related exams. RANDOM SELECTION AND COMPUTER SCREENING Sometimes returns are selected based solely on a statistical formula. They will compare your tax return against "norms" for similar returns. The IRS develops these "norms" from audits of a random sample of returns. RELATED EXAMINATIONS The IRS may also select your return when it involves issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit. "CAN YOU MAKE THAT A LITTLE MORE SIMPLE FOR ME???" We would break down the audit triggers into two categories: Individual 1040 Triggers and Business Triggers. ON THE INDIVIDUAL SIDE: ​1) Not reporting all income 2) Making more than $200,000 a year 3) Claiming "Hobby" activities as a business activity 4) Filing a schedule C or E with your tax return 5) Excessive business deductions on your schedule C 6) Large schedule C losses ON THE CORPORATE SIDE: 1) Unusually low salary of an S-Corp Officer 2) Large meal and entertainment expenses 3) Claiming 100% business use of a vehicle We are also asked about the risk of filing an amended return. According to the IRS website: "Filing an amended return does not affect the selection process of the original return. However, amended returns also go through a screen process and the amended return may be selected for audit." ADDITIONAL AUDIT NOTES Should your account be selected for audit, the IRS will notify you by mail, they never initiate an audit by telephone. They will provide you with a written request for the specific documents they want to see. The law requires you to keep all records you used to prepare your tax return for at least three years; so be sure to keep all records for three years from the date the tax return was filed. Generally, the IRS will not go back more than three years. The IRS tries to audit tax returns as soon as possible after they are filed. Accordingly most audits will be of returns filed within the last two years. An audit can be concluded in three ways: NO CHANGE: an audit in which you have substantiated all of the items being reviewed and results in no changes.​ AGREED: an audit where the IRS proposed changes and you understand and agree with the changes. DISAGREED: an audit where the IRS has proposed changes and you understand but disagree with the changes. If you agree with the audit findings, you will be asked to sign the examination report or a similar form depending upon the type of audit conducted. If you owe money, there are several payment options available. If you disagree with the audit findings you can request a conference with an IRS manager. The IRS also offers mediation or you can file an appeal if there is enough time remaining on the statute of limitations.​ WHY AM I BEING SELECTED FOR AN AUDIT? Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.