Elliot H. Kallen

Financial Planner, Wealth Manager, Registered Principal
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Horse Sense Economics as Stocks Break Another All time High

According to the Federal Reserve Bank’s latest Beige Book, modest to moderate gains in the U.S. economy are just ahead. “Consumer spending appears to be rising across a majority of Districts, led by increases in non-auto retail sales and tourism,” said the U.S. central bank’s report.

Published every six weeks, the Beige Book summarizes economic data collected by the 12 Federal Reserve Districts. In the 32-page mid-July report, many Districts noted softer consumer spending, particularly in auto sales, which declined in six Districts.

But it’s likely auto sales were merely reverting to their long-term mean rate, after surging way above their long-term norm in the long comeback from The Great Recession. Here’s the evidence.

The proof is in June’s report showing total retail sales, which, compared to a year earlier, grew by 3.2%.  =That’s stronger than the 3.1% peak achieved during the last economic expansion! While auto sales can be volatile, total retail sales are nonetheless doing just fine.

Meanwhile, Fed Chair Janet Yellen, in Congressional testimony, reiterated that she expects to continue the gradual upward course of rates in the face of growing economic strength —even as inflation declined sharply in recent months.

The so-called “headline” inflation rate that is almost always cited in the financial media, the Consumer Price Index, started a nosedive in February, and on June 30th was at just 1.6% —plunging from 2.8%.

Ms. Yellen has been quoted in the press saying wage-inflation is on the way and, as a labor economist, she should know. Wage inflation is evident in the Core CPI, which indexes the monthly expenses consumers pay but excludes food and gasoline. Lower gas expenses have masked wage inflation evident in the Core CPI rate. A strong labor market and rising imports are likely to make the disinflation temporary.

Consumers are not overly optimistic. When consumers become giddy, it could be a signal of trouble ahead for the stock market. Optimism is not approaching the peaks of the tech-stock bubble. For a bull market to continue, optimism can’t be so widespread. You always need skeptical bears on the sidelines that may eventually capitulate, change their minds and purchase stocks.

In early July, 63 economists gave The Wall Street Journal their forecasts for five quarters, and the consensus prediction was that the U.S. would grow an average of 2.5% quarterly. The 2.5% quarterly forecast is a small revision downward; it stemmed from a reduction in the forecast for the quarter that just ended on June 30th.

A handful of economists, politicians and pundits say a 2.5% growth rate is not that good and that 3% growth, or more, is possible. But the math driving America’s economy makes growth higher than 2% unsustainable. Demographics and productivity — the key factors — cannot reasonably be expected to make a 3% growth rate sustainable.And don’t turn your nose up at a 2.5% growth rate.

Economic horse sense tells us 2.5% is pretty darn good growth! In fact, it would significantly outpace the non-partisan Congressional Budget Office’s 10-year projection of less than 2%.

The key growth engine in a diversified portfolio, the Standard & Poor’s 500 index, has been hitting new all-time highs repeatedly for months. Unexpected bad news could plunge stock prices by 10% or 15% at any time, but the outlook for economic fundamentals that drive stocks prices remains bright.

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Join us for 2nd Annual Client Appreciation Golf Event!

Join us for 2nd Annual Client Appreciation Golf Event on Monday, August 21, 2017at the Callippe Preserve Golf Course!

Help us raise awareness and support for A Brighter Day, which unites stress and depression resources with teenagers, and will reach upwards of 500 teens in only our second year.

  •     10:30 AM Registration
  •     11 AM Putting contest
  •     12 Noon Shotgun with a Scramble Format
  •     Every golfer will be a winner! Prizes to be awarded at the end
  •     4:30 PM to 6 PM will be networking & prizes giveaway time
  •     Heavy Hors d’oeuvres will be served!
  •     50/50 raffle for “A Brighter Day”

Callippe Preserve Golf Course, 8500 Clubhouse Dr., Pleasanton, Ca 94566

Please RSVP to Yvette Mays at 925-314-8501 or This email address is being protected from spambots. You need JavaScript enabled to view it.

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Advanced Financial Strategies for CPAs Event a Big Success

On June 22, Prosperity Financial principals Elliot Kallen and Chuck Ballweg hosted an Advanced Financial Planning event strictly for CPAs and Lawyers. Speakers included Simeon Hyman, Senior Director at Proshares and Ryan Chapman, Regional Vice President at the Blackstone Group.

Discussion topics include "Avoiding Landmines in Today's Bullish Environment" and the "Barbells of Alternative Investments".

Thanks to our speakers and all the professionals who attended. Look for more upcoming events coming soon!

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Count Off 3 Tax Breaks For Higher Education

Going to college these days costs a pretty penny—and then some. But you may be able to defray some of the costs if you qualify for tax breaks such as the two tax credits for qualified higher education expenses or the tuition-and-fees deduction. The recent Protecting Americans from Tax Hikes (PATH) Act breathes new life into these tax breaks and may provide more options.

The catch is that all three breaks—the two credits and the tuition-and-fees deduction—are phased out at relatively modest income levels. What's more, even if you qualify for one, two, or all three of these benefits, you can claim only one on your current tax return. Here's a brief synopsis of the three breaks:


1. American Opportunity Tax Credit:The American Opportunity Tax Credit (AOTC), previously known as the Hope Scholarship credit, has been extended and modified several times. With the last extension, the AOTC was scheduled to expire after 2017, but now the uncertainty about this tax break has ended. Under the PATH Act, the enhanced AOTC is a permanent part of the tax code.


The maximum annual credit is $2,500. Significantly, the AOTC is available for each qualified student in your family—so if you have two kids in school at the same time, for example, you may qualify for a maximum credit of $5,000. Also, thanks to another recent improvement, you can claim the AOTC for up to four years of study for each child. Previously, the credit was allowed for only two years.

One complication here is that semesters often span two calendar years, beginning in the fall of one year and continuing through the spring of the next. Because the AOTC can be claimed in only four tax years, you have to pay special attention to timing on your tax return, which generally is based on a calendar year.

Your ability to claim the AOTC is based on your modified adjusted gross income (MAGI). For 2016, the phase-out range is between $80,000 to $90,000 of MAGI for single filers and $160,000 to $180,000 for joint filers. Once you exceed the top limits, you can't claim the AOTC.

2. Lifetime Learning Credit: The Lifetime Learning Credit (LLC) features a maximum credit of $2,000 that is applied on a per-taxpayer basis—you can claim it only once, even if you have more than one student in college.

Another potential drawback to the LLC is that it is phased out at income levels even lower than the AOTC. The phase-out range in 2016 is between $55,000 to $65,000 of MAGI for single filers and $111,000 to $131,000 for joint filers. For these reasons, the AOTC is usually more helpful than the LLC—and remember, you have to choose one or the other.

3. Tuition-and-fees deduction: Finally, you may be able to claim a deduction for tuition and related fees that you pay to a college for your dependent children. This deduction has expired and been extended numerous times in the past. The PATH Act preserves it again, but only through 2016, though it could be extended once more.

On your 2016 tax return, you may claim a deduction of $4,000 or $2,000, depending on your MAGI for the year. For single filers, the $4,000 deduction is available for a MAGI up to $65,000 and $2,000 if you earn between $65,000 and $80,000. Similarly, joint filers can deduct $4,000 for a MAGI up to $130,000 and $2,000 if their MAGI is between $130,000 and $160,000. You can't take this deduction if you exceed the upper thresholds.

Who can claim these tax breaks? Generally, if parents pay college expenses and claim a student as a dependent on their tax return, they are eligible. However, in cases where the student isn't claimed as a dependent, he or she may be in line for the tax break. You may need professional tax advice to get this one right, especially if you're divorced.

Which should you take—one of the credits or the deduction? It depends on your circumstances, but a credit, which reduces your tax bill dollar for dollar, is usually better than a deduction, whose value depends on your tax bracket. As shown in the attached chart, if you're in the 25% tax bracket, a $2,000 tuition-and-fees deduction is effectively worth $500. Compare that to a maximum AOTC credit of $2,500.

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Seven Good Reasons To Create And Fund A Trust

Who needs a trust? Maybe a better question is: Who doesn't? Trusts can be an essential part of an estate plan for anyone who owns significant assets. Reasons for establishing and funding a trust may range from gaining protection from creditors to saving on taxes. A trust can also create a legacy.

There are many different types of trusts, some of which are revocable—you retain certain rights over trust assets—while others are irrevocable, requiring you to cede all control. And some trusts are complex while others are simple. Although every situation is different, consider these seven potential benefits of have a trust.

1. Avoiding probate. Assets distributed according to the provisions of your will must go through a process known as probate, governed by state law. In some states, this can be extremely lengthy and costly, especially if your will is contested. What's more, your will is open to public inspection—anyone can find out what you're giving to which beneficiaries. Assets transferred to a trust, however, are exempt from probate. When you die, the trustee of a trust can quickly—and privately—distribute your worldly goods to the beneficiaries you've chosen.

2. Protecting assets from creditors. Irrevocable trusts are often used to protect personal assets from creditors. That could be helpful if you (or your beneficiaries) work in a profession in which you might be sued or if you have large debts. But keep in mind that an irrevocable trust is permanent—you can't change your mind.

3. Deterring spendthrift family members. If you would like to leave assets to a someone—perhaps a young child or grandchild—you might be concerned about what will happen when that young person gets his or her hands on the money. A trust can include restraints that may deter profligate spending. For instance, you might set up a trust to dole out amounts at regular intervals, with a lump sum coming when a minor is mature enough to handle the wealth. Or you might impose specific requirements for gaining access to the funds—for example, completing a college degree.

4. Authorizing "dead-hand" control. This basically means that the conditions that a trust imposes will remain in effect after you've passed away. So, for example, that youngster might not finish college until years down the road. But maintaining this kind of control may not have the desired effect, or the trust could be subject to legal challenges if its conditions violate public policy.

5. Shifting responsibility for your investments. Usually, when you're investing for yourself, you shoulder most of the responsibilities. But transferring assets to a trust and placing them under the control of a trustee can relieve you of that burden. The trustee, who must meet certain fiduciary standards, then becomes responsible for managing the portfolio of trust assets and other property in the trust. Establishing a trust may also be a way to consolidate some investments.

6. Meeting charitable intentions. You can use a trust to direct donations to a charity both while you're alive and after your death. With a charitable remainder trust (CRT), your family can receive regular payments during your lifetime, with the remainder of the assets going to the charity when you die. A charitable lead trust (CLT) reverses that equation, providing current income to a charity and then directing the assets that remain at your death to your beneficiaries. In either case, establishing the trust is likely to reduce your taxes.

7. Saving estate taxes. A properly structured trust can maximize the available estate tax benefits on both federal and state levels. Federal law allows an unlimited marital deduction for transfers between spouses and a generous estate tax exemption ($5.45 million in 2016) for other transfers. Trusts can also utilize your generation-skipping exemption as well as providing future tax protection of your heirs.

There are other reasons why you might utilize a trust, but these seven are among the most common. What about you? Consult with your estate planning advisors to see which type of trust, or combinations of trusts, might best suit your needs.

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Market DataBank: 4Q 2017

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