THE WEEK ON WALL STREET
Stocks fell broadly last week as investors looked past upbeat Fed comments and focused on disappointing corporate reports and weaker-than-expected economic data.
The Dow Jones Industrial Average lost 2.20 percent, while the S&P 500 Index fell 2.06 percent. The Nasdaq Composite Index dropped 3.35 percent. By contrast, the MSCI EAFE Index, which tracks developed overseas stock markets, gained 0.19 percent for the week through Thursday’s close.
FACT OF THE WEEK
On August 5, 1861, President Lincoln signed the Revenue Act, imposing the first federal income tax. Strapped for cash to pursue the Civil War, Lincoln and Congress agreed to impose a 3 percent tax on annual incomes over $800.
As early as March 1861, Lincoln had begun to take stock of the federal government’s ability to wage war against the South. He sent letters to cabinet members Edward Bates, Gideon Welles and Salmon Chase requesting their opinions as to whether or not the president had the constitutional authority to “collect [such] duties.” According to documents housed and interpreted by the Library of Congress, Lincoln was particularly concerned about maintaining federal authority over collecting revenue from ports along the southeastern seaboard, which he worried, might fall under the control of the Confederacy.
MARKET MINUTE
Volatile Week of Trading
Stocks were under pressure early in the week as investors appeared to focus on the Fed’s meeting, which ended on Wednesday. It was a big week for Q2 corporate reports, with five of the ten largest names in the S&P 500 (by market capitalization) reporting numbers. But attention was mainly on the Fed’s meeting.
Stocks rallied on Wednesday when Fed Chair Powell indicated a September interest rate cut was “on the table."
But selling picked up on Thursday as investors' attention quickly shifted to disappointing corporate reports and weak economic data. Friday morning's disappointing June jobs report raised even more concerns about the economy's strength. The Nasdaq ended the week in correction territory, down more than 10 percent from its recent all-time high.
Economic Concerns
Fresh economic data suggested weakening manufacturing, construction, and employment outlooks. On Friday, the Labor Department’s July jobs report showed a sharper-than-expected job growth slowdown and an unemployment uptick to 4.3 percent—the highest rate in 2½ years.
At Wednesday’s Fed press conference, investors welcomed Powell’s unusually candid and upbeat comments. However, as the week progressed, investors started questioning whether the Fed was misreading the economy and moving too slowly in adjusting interest rates.
FINANCIAL STRATEGY OF THE WEEK
You know the old adage, "Nothing in life is certain but death and taxes." Add to that a third certainty: college education costs will continue to outpace inflation. Ouch.
There are numerous tax-efficient strategies that could help fund your child's or grandchild's college education while at the same time reducing your taxes now (and the taxes your beneficiaries owe later when transferring wealth). Here are four college funding strategies that may be appropriate for your situation:
1. 529 Plans: Contributions to a 529 education savings plan are considered gifts, and a married couple can gift up to $36,000 ($18,000 for a single person) using the annual gift tax exemption in 2024. 529 plans allow you to pull forward up to five consecutive years' worth of annual gift tax exemptions into a single calendar year. Also, you can pull forward annual gift tax exemptions every five years as part of your wealth transfer plan. (Before implementing this strategy, be sure you understand how using 529 plans may impact your future tax liability.)
2. UTMAs: The UTMA (Uniform Transfer to Minor Act) is a custodial account set up by a parent or grandparent with the child as beneficiary and the parent as the custodian. Once assets like cash or stocks are gifted into the child's UTMA, the assets move out of your estate and reduce your taxable estate. The UTMA gift goes towards your annual gift tax exemption of $18,000 for individuals ($36,000 for married couples) and deducts from your lifetime gift and estate tax exemption.
One thing to be aware of is that UTMA accounts are viewed as assets belonging to the student (rather than parents), so UTMAs with significant balances may limit the student's eligibility for financial aid. The federal financial aid formula expects students to contribute 20% of savings, versus a maximum of 5.6% of savings for the parents.
3. Custodial Roth IRAs: If your child or grandchild is working and has income, a parent or grandparent can contribute (up to the child's income) to a custodial Roth IRA during that calendar year. A parent or other adult must open the Roth IRA account and become the account's custodian until the child is 18.
4. Cash: The annual gift tax exclusion in 2024 allows you to give $18,000 as an individual (or $36,000 as a married couple) in cash or other assets each year, tax-free, to help fund your child's or grandchild's college education. Also, while limiting your tax liability, you can pay directly to their higher-education institution.
Understanding the lifetime exemption
The IRS allows a lifetime tax exemption on gifts and estates, up to a specific limit, adjusted yearly to keep pace with inflation. The Tax Cuts and Jobs Act of 2017 (TCJA) created a significant opportunity to tax-efficiently transfer wealth to the next generation and beyond. The exclusion amount for 2024 is $13.61 million for an individual and $27.22 million for a married couple (and is subject to further adjustment for inflation through 2025). For those desiring to make the significant gift of a college education, the lifetime exemption is an opportunity to transfer wealth to younger generations at a much-reduced transfer tax cost.
Give our office a call to discuss your goals for funding a college savings account. We're here to help you make the best decisions about providing this wonderful gift to your child or grandchild.