Revisions to the “Kiddie Tax”

There were major revisions to the “Kiddie Tax” in the last tax reform package.  It is worthwhile to look at everything “from scratch” on the topic beginning with the 2018 tax year (this year).

The Wall Street Journal had a recent article titled “The Winners and Losers from the new ‘Kiddie Tax'” that summarized the new tax law.

Per the article – “what is the Kiddie Tax”

The Kiddie Tax is a special levy on a child’s “unearned” income above $2,100. It typically falls on investment income such as dividends, interest and capital gains, and it doesn’t apply to a youngster’s earned income from mowing lawns or designing websites.

Per the article – “who does it apply to”

Today, the Kiddie Tax applies to nearly all children under 18 and many who are under 24, if they are full-time students and aren’t self-supporting.

Per the article – “What are the rates” (for 2018):

Ordinary Income (including short-term gains)

Up to $2,550 10%

$2,551 – $9,150 24%

$9,151 – $12,500 35%

$12,501 and above 37%

Long-term capital gains and qualified dividends

0 to $2,600 – 0%

$2,601 – $12,700 – 15%

$12,701 and above 20%

What Does This Mean?

There are comparisons to the old tax tables and discussions of who pays more or less, but that is more politics than immediately relevant.  This is the new tax model, and to the extent that it impacts your investment results, you should be aware of it.

From our purposes, this means that you can shield up to $2600 in long term gains and qualified dividends at a tax rate of zero.  This is positive, given the size of our portfolios.  Even the largest portfolios typically don’t have more than $1000 / year in dividends, and since gains net against losses and cancel each other out, you wouldn’t trigger gains enough to move into a higher tax bracket unless we made very significant sales (i.e. 1/3 or more of a portfolio) or transitioned an individual stock portfolio into an ETF portfolio like we did with Portfolio 2 in 2016 (this may come for portfolio 3 at some point in the future).

This tax methodology is also significantly simpler than the old model, since kids were often taxed at their parents’ rate in some situations.  This is no longer the case under the new tax law.


Stock “Sectors” are an Imperfect Science at Best

Recently I was reading stock market commentary at MarketWatch (owned by WSJ) discussing the (relative) fall in Tech stocks and the rise in “Consumer Discretionary” stocks. However, let’s look at the five stocks that comprise the largest movers in the index (which is driven by changes in market cap of its components):

– Amazon – Amazon is generally thought of as a “tech stock” by those in the business of Technology. Amazon Web Services (AWS) generates a rising share of its income and revenues and is the dominant cloud infrastructure provider. I do realize that Amazon has tentacles everywhere and frightens retailers and media companies and grocers and almost every industry it enters (or might possibly enter). But to say that the Tech indexes are relatively underperforming while Consumer Discretionary is over performing is confusing at best

– Netflix – Netflix also straddles sectors but would predominantly be thought of as a tech company. They are certainly bringing a data driven, frictionless experience to media around the world. Once again, saying “tech is down” because “Netflix is up” seems counterintuitive

– Comcast – I would say that Comcast is being valued mostly for its broadband infrastructure, which is primarily a tech play (they aren’t buying it for land line access). Just try to buy Comcast broadband without paying for cable TV…. they are bending over backwards to try to get you to take TV as an add on, while millenials are cutting the cord

There is no “right” answer here, but Tech is driving across stock market sectors and it seems confusing at best and disingenuous at worst to use these vague and (at best) 50/50 categorizations to make investment decisions.

Basic Investing Plan Updated June 2018

This is an update to my “basic investing plan” to take into account market shifts.  As always do your own research and make your own investing decisions.

This is a plan for a reasonably sophisticated investor; the goals include:

  • Diversity among investing classes
  • A few representative investment choices to allow for differing levels of risk
  • Aiming for very low costs
  • International options
  • Taking into account the impact of currency risk (rise and fall of the US dollar)

Fixed Income:

In my prior plan I recommended brokerage CD’s.  At the time (near zero interest rates), these were the only (almost) risk-less options to get a return above zero.  However, short term interest rates have shifted and it is now a viable option to leave money in money market accounts which should yield near 1.75%.  The current yield curve (as of June 2018) looks like this:

  • Base rate (no CD, leave in money market) – 1.75%
  • 1 year CD – 2.30%
  • 2 year CD – 2.80%
  • 3 year CD – 3.00%
  • 5 year CD – 3.30%
  • 10 year CD – 3.40%

ETF Options:

ETF’s are recommended due to their (generally) very low annual expenses and their tax efficiency (they do not generate gains unless you sell them).  The following ETF’s are good considerations for any portfolio:

Vanguard – Total US stock market (VTI)  – Provides exposure to all classes of US public stocks (over 3000 stocks).  They are “market weighted”, meaning that you are investing money based on the relative value of each stock.  This means that the top tech stocks (Apple, Microsoft, Alphabet (Google), Amazon and Facebook) comprise over 10% of the total investment (as of year end 2017).
VTI Top Ten

Vanguard – All-world except US stock market (VEU) – Provides exposure to all major non-US stock markets.  This index is also market weighted, and includes stocks from Europe, Asia (including China) and other major markets.


iShares – Large and Mid-Capitalization Non-US stocks, Hedged vs. US Dollar (HEFA) – moves in the US dollar can significantly impact the return of foreign ETF’s like VEU, above.  For instance, if the dollar rises 20% against a basket of foreign currencies over a period of time (which has happened multiple times, along with reversals), this rise could completely wipe out the underlying return of these stocks.  Essentially the VEU international ETF above is maybe half a bet on the US dollar vs. a basket of foreign currencies, and a bet on the underlying performance of these foreign stocks.  If you want to get the “pure” return of these assets, HEFA should be seriously considered for your portfolio.  This ETF has slightly higher expenses than the other ETF’s listed above, but this is due to the added hedge costs, and is still a reasonably 0.7%.

iShares – Gold Trust (IAU) – tracks the short term price of gold.  Can be viewed as a hedge against market volatility and (potentially) likely to hold its value in a time of inflation or a debased US currency.  Does not offer a return in terms of dividends or stock returns.

Grayscale – Bitcoin Investment Trust (GBTC) – as of mid June 2018, this is the only ETF (like) way to participate in the crypto space directly.  It has a 2% annual expense ratio.  This product trades like an ETF and can be bought or sold easily on an exchange.  There are unique tax implications to owning this investment – here is the document that they provided with 2017 taxes.  Not recommended unless you want to deal with additional complexity.

CD’s and Money Market Funds As of June, 2018

For many years’ the USA (and much of the developed world) offered very low interest rates on accounts with low risk (guaranteed accounts).  The policy was known as “ZIRP” or “zero interest rate policy”.

As a result of ZIRP, this author started exploring CD’s purchased through a brokerage, which offered a couple of percentage points more in return (than zero) with the same, virtually zero risk.  These brokerage account CD’s typically offered higher returns than you can get from your local bank or savings accounts.

Over the last couple of years, however, the USA has begun to raise interest rates.  Today, the VMFXX money market from Vanguard offers a return of 1.74% (with an expense ratio of 0.11%).  There is also an expectation of continued increases in the future, although no one knows for certain what will occur.

Since the “base” rate is now effectively about 1.75% (more or less), the CD forward “curve” looks like this:

  • Base rate (no CD, leave in money market) – 1.75%
  • 1 year CD – 2.30%
  • 2 year CD – 2.80%
  • 3 year CD – 3.00%
  • 5 year CD – 3.30%
  • 10 year CD – 3.40%

When you buy a CD, you essentially “lock up” your money for that duration.  If you have a 2 year CD, for instance, you can always buy or sell off that CD, but if interest rates go up you won’t receive back 100% of your investment.  For example, if you have a 2 year CD at a rate of 2.80%, and short-term interest rates move from 1.75% to 2.00%, for example, and you needed to sell your 2 year CD, you might receive 99 or 98 cents on the dollar (it could seem higher because you’d also be getting back interest accrued prior to your next payout, for example if you had a semi-annual payout).  These are really minor “losses” in the grand scheme, especially if you are dealing in the thousands or even few hundreds of thousands.

The future of our interest rate policy is (as always), essentially unknown.  Interest rate policy is also closely tied with the value of our currency, although this takes the entire conversation off into a far more complex direction.

In a time of ZIRP for an extended period (we had it from 2008 to 2015), buying products like CD’s was essentially the only way to get any sort of risk free return on interest at all.  With short term interest rates at 1.75% and (likely?) heading upward, now there are more options on the table, including doing nothing and taking the short term rate or locking up funds for the near term or even medium term.

All of this income is taxable.  Thus the effective rate that you receive is lower, depending on your tax rate.  Tax rates did come down a bit with the 2017 tax changes, with most folks in the 12% / 22% / 24% range.  Thus if you get 2% your return is effectively around 1.5% – 1.6% after taxes.

This blog will also look into the current state of iBonds, another product that is essentially risk free that we reviewed in the past, in an upcoming post.


Capital Gains Rates in 2018

Taxes changed significantly with the new tax act for 2018.  Here we will briefly talk about short and long term capital gains under the new law.  This is meant to be a summary please do your own research if you have a significant portfolio or complexity.  Here is a good summary from the Motley Fool.

At a very high level:

  • stocks / ETF’s held > 1 year are considered long term gains / losses and taxed at more favorable (lower) capital gains rates
  • If they are held less than one year, they are treated as ordinary income, which is generally higher

For single filers in 2018, capital gains rates are 0% up to $38,600, 15% $38,600 – $425,800, and 20% over that.  The brackets are higher for joint filers.

Short term gains are treated as ordinary income; these brackets range from 10% to 24% in the likely relevant range.

There are different rules / impacts for minors (“Kiddie Tax”) which we will cover (at a high level) in a different post.


Auditors for Major ETF Families

For some individuals who work for large accounting and financial professional service firms, they are not able to purchase shares of stocks in the companies that are audited by the firm.  Since there are essentially only four major worldwide audit / consulting firms (E&Y, Deloitte, KPMG and PWC), you will encounter issues with investing depending on which firm you work for.  The exact rules depend on your level and the type of work that you are doing and vary by firm – however, it is worth keeping this in mind as you join one of these firms.

I am not saying that these rules make sense per se or justifying them in any way, especially since all of the major ETF firms offer roughly equivalent products (the expenses vary a bit, and some offer unique products such as hedged ETF’s), but these rules exist and often as an employee you have no choice but to comply.  The theoretical reason for this is that as an employee of a large firm doing an audit you may have a financial incentive that outweighs your professional judgement; this seems implausible for areas like an S&P 500 index but that is outside the scope of this blog.

Here are the audit firms that audit the large ETF firms as of mid 2018:

  • Blackrock / iShares – D&T
  • Vanguard – PWC
  • State Street Advisors – E&Y
  • Invesco – PWC
  • Charles Schwab – D&T

Recent Stock Activity – Updated as of the end of March

Earlier in the year we had a mini-correction of sorts. Since then, many of the stocks in the portfolio have recovered, but some haven’t. I went through the recent stock performance of all the stocks in the portfolio and here are a few that were highlighted.  Recently updated again…

  • Appian (APPN) – Appian creates low-code software for corporations.  They went IPO in 2017 and had a big run up; since then their shares have been volatile.  Our portfolios bought in at about $23-24 / share and now it is at $25, although it briefly hit over $40 / share (which is why the current price is about 60% of its 52 week high).  Watching for now
  • Comcast (CMCSA) – Comcast has been on a 5 year + run but recently hasn’t bounced back from the recent dip and is about 20% below its’ peak.  Comcast lives in a very complex regulatory and technological environment that is difficult to summarize without being an expert in that field (which I’m not).  Watching for now
  • Dow Dupont (DWDP) – Complicated chemical company about to split into multiple units.  Had some senior resignations and is down about 20%.  Watching for now
  • Elbit (ESLT) – Israeli defense contractor recently picked up Uzi machine gun maker from Israeli government.  Down about 20% recently.  Watching for now
  • Facebook (FB) – a whole series of publicity gaffes and issues with privacy have damaged the stock recently
  • General Motors (GM) – GM had been on a good run lately and has a 4% dividend which is also helpful.  They recently took a 20% hit and haven’t bounced back. On watch
  • Juniper (JNPR) – Juniper is a networking company that was a potential takeover candidate (there was talk of this in the market and the stock went up).  In general I feel that this company will either be bought out or be damaged by the move to the cloud and the rise of players like AWS.  It is down about 15% from its peak and may be time to sell (although it could also shoot back up if it became a serious takeover candidate)
  • Procter and Gamble (PG) – Procter and Gamble is a storied company with a reputation for being well run.  They are down almost 20% from their peak and haven’t come back.  Like GM they have a nice dividend of 3.5%.  The question is – is P&G going to be hurt badly by companies like AMZN or do they have enough brand firepower to thrive long term (they definitely will survive in some form).  Will watch this but hate to give up on what seems to be a well run company
  • Tesla (TSLA) – Tesla is a wild-card company whose valuation is dependent on Elon Musk’s awesome salesmanship.  Recently it has taken a 30%+ hit for a number of reasons including delays in their newest car lines.  May want to sell
  • Wal-Mart (WMT) – Wal-Mart is also down about 20% from its peak, for various reasons, including never-ending competition from Amazon.  They also are now looking to buy Humana which is interesting

Using Google Sheets and Pivot Tables


It is helpful to structure the google sheet in a manner that can easily be turned into a pivot table.  This table uses the following fields from the “all stocks” tab:

  • Ticker is self explanatory (i.e. GE = “General Electric”) – the unique exchange identifier for the stock.
  • Portfolio is the unique portfolio – there are 8 in total – they are numbered 1 to 8
  • If we were in a traditional “database” format, then the combination of the Ticker & the Portfolio number would be the “primary key” – all the other items are either values (price and shares) or attributes calculated from those values or the stock itself
  • Shares are entered into the spreadsheet; they rarely change except if there is a stock split (I have a few of these every year)
  • The price is a formula using google sheets
  • The sector, country, yield, and dividend level come from the “all stocks” page
  • The “momentum” is calculated based on the price level compared to the 52 week high
  • The annual income is calculated by taking the “amount” (which is price times number of shares) times the “yield”.  This is a useful figure and recommended for portfolios
  • Note that there are some exceptions – these are cash which has no attributes and must just be entered; and also CD’s which have an interest rate and a static value.  These items are in orange since they are entered manually


With the values in this format, you can now create a “pivot table” (which works just like the pivot tables in excel) which we then in turn will create the analytics pages for each portfolio which come next. Note that since these analytics are “pivot tables”, when you update the underlying data the tables automatically update without manual intervention.

Using My Consolidated Formula Model in Google Sheets

I moved the portfolios to Google Sheets to take advantage of Google’s ability to use financial functions like “price” by ticker so that my stock quotes could be updated with live data when you click on the spreadsheet. These sheets can also be shared with anyone (and it is free unlike Office 365).

I have been working with these sheets for a while to 1) simplify how they work 2) build them in such a way that I can “copy and paste” into other google spreadsheets 3) link the sheets together so that I only have to do selected work one time.

We are going to start with the “All Stocks” view because this page is crucial to understanding the entire model, including what can be linked to Google Sheets and what needs to be created and / or input from another source. Once this page is updated with key information, however, it can be used by all the other sheets and I only have to input data or do analysis one time and it automatically updates everything across all the portfolios.

The “ticker” symbol is used to derive values in google sheets using the “GoogleFinance” formula.  I manually added (one time since this page is essentially a central database for all the other portfolios).

For each stock I use the GICS classification system (used by Vanguard) which I describe here.  I map each of the stocks using this model as follows:

  • sector
  • industry group
  • sub industry
  • type (US or foreign)

“Yield” is something that the GoogleFinance formula doesn’t give you.  This is the dividend % for the stock and it is important information.  I look this up, manually, stock by stock, using google or yahoo finance or marketwatch.  Some of the ADR’s are harder to find.

I also classify stocks by “dividend level” based on yield which I made up and categorized stocks as follow:

  • >3.9% – very high
  • >2.7% – high
  • > 1.4% – medium
  • Less than 1.4% – low

I have a “description” field which is my all in summary of the stock.  This summary takes into account our original plan for the stock, its price against its 52 week high, potential as a takeover candidate, potential for a dividend cut, or any other information I feel is relevant.  I write this once for each stock in any of the 8 portfolios and propagate it through all the portfolios.

The price is derived by the GoogleFinance function and the 52 week high.  Then the stocks current price is compared to the 52 week high and shown as a percent.  The categories are:

  • If > 94% of 52 week high then “near high”
  • If > 90% of 52 week high then “doing OK”
  • If > 80% of 52 week high then “at risk” (and colored yellow by conditional formatting)
  • If less than 80% of 52 week high then “on watch” (and colored red by conditional formatting)

This is the single most important page and contains most of the logic used for analytics as well as the summary description of how that stock is doing “all in”.  In future posts we will review the other pages.

Using Google Sheets to Track Portfolios

Our portfolios took a hit in early February 2018 with the rest of the market.  Since then the portfolios have mostly rebounded as you can see below.  The results are slightly skewed between 2/9 and 2/25 because I found ~ $2000 in additional funds in portfolio 2 due to an error since IBB had split and I recently updated the cash counts for each portfolio which probably added another $1000 net across all 8.  But even with those items adjusted out, we are over $6000 above where we are right after the market drop.

These are long term portfolios and we expect variability, especially after a long bull market.

The portfolios are viewable within a consolidated portfolio tracker which is updated as the market moves via the formulas in Google Sheets. We also have analytics for each portfolio that shows pricing vs. 52 week high, dividend categorization, US / foreign, and sector data.

For each individual portfolio, they have their own google sheet which I just finished updating. Much of the analytics comes from the consolidated summary – I update a point of view on each stock there once and it “cascades” through all the sheets. I am now to the point where each sheet just has to update buys / sells, dividends, and cash balances and the rest comes from the main consolidated tracker.

Portfolio Eight Updated Feb 2018, and It’s Tax Time

Portfolio 8 is 3 1/2 years old.  The beneficiary contributed $1500 and the trustee $3000 for a total of $4500.  The current value of the portfolio is $5409 for a gain of $909 or 20%, which is 9.5% / year over the life of the portfolio adjusted for the timing of cash flows.  Go here for portfolio detail or use the link on the right.

We had 2 sales this year, Tata Motors (TTM) and Gilead (GILD).  Total long term gains from sales were $55 and dividends were $50.  The portfolio has done OK recently and bounced back from February market activity.

Portfolio Seven Updated Feb 2018, and It’s Tax Time

Portfolio 7 is 3 1/2 years old.  The beneficiary contributed $1500 and the trustee $3000 for a total of $4500.  The current value is $5991 for a gain of $1491 or 33%, or about 14% / year when adjusted for the timing of cash flows.  Go here for portfolio detail or go to the link on the right.

During 2017 we sold Spirit Airlines (SAVE) for a long term capital loss of $84 and had dividends of $40.  The portfolio is doing well, with holdings in BABA (Alibaba) and MA (Mastercard) doing very well.  The portfolio has mostly recovered from early February market activity.

Portfolio Six Updated Feb 2018, and It’s Tax Time

Portfolio Six is 5 1/2 years old.  The beneficiary contributed $3000 and the trustee $6000 for a total of $9000.  The current value is $10,716 for a gain of $1716 or 19%, which is 5% / year across the life of the portfolio.  Go here to see detail, or use the link on the right.

We had $157 in dividends and a sale of TTM for a long term gain of $35.  The portfolio has bounced back from February market activity and is doing OK.

Portfolio Five Updated Feb 2018, And It’s Tax Time

Portfolio Five is 8 1/2 years old.  The beneficiary contributed $4500 and the trustee $9000, for a total of $13,500.  The current value is $16,640 for a gain of 23%, which is 4.1% / year adjusted for the timing of cash flows.  You can see portfolio five details here or go to the link on the right.

This year we sold 2 stocks, TTM and SAVE, for a short term tax loss of ($78) and a long term gain of $24.  We also had $291 in dividends.

The portfolio is generally doing pretty well and came back a bit from the early February market activity.  We are watching JNPR because it may be in play as a takeover candidate.

Portfolio Four Updated February 2018, and It’s Tax Time

Portfolio Four is 8 1/2 years old.  The beneficiary contributed $4500 and the trustee $9000, for a total of $13,500.  The current value is $18,309 for a gain of 36%, which is 6% / year adjusted for the timing of cash flows.  Go here for details or use the link on the right.

For tax purposes, during 2017 we sold 2 stocks, Devon (DVN) and Spirit Airlines (SAVE) for $465 in long term capital losses, and earned about $297 in dividends.

The portfolio is doing pretty well and has bounced back from recent market losses.