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Market-Moving News[i]

Weekly Market Recap

Check out JP Morgan's full update here.  The U.S. labor market, while having cooled from its red-hot state, has settled into a relatively healthy position. Following a month of hiring disruptions due to hurricanes and strikes, businesses added 227K jobs in November. However, the uneven nature of recent job growth has led many to question the true health of the labor market.

2024 employment growth has been concentrated in a few key sectors, primarily health care and government, which have contributed 41% and 21% of this year’s job gains, respectively. Health care’s hiring dominance seems less concerning as the sector is still addressing pandemic-related backlogs. However, employment growth dominated by the public sector, which tends to see increased hiring later in the economic cycle, may be viewed as a warning sign. That said, there are important nuances to consider. Keeping in mind that government employment currently accounts for 14.7% of total payrolls, its 21% share of total job growth, 90% of which has come at the state and local level, appears less troublesome. Moreover, the sector’s share of payrolls remains below its pre-pandemic (2014 – 2019) average of 15.3%, suggesting its recent outsized growth reflects the continued uneven normalization of the labor market post-pandemic. Outside of these two sectors, sluggish manufacturing activity has been a headwind. Still, some cyclical sectors, including construction, leisure and transportation have seen solid job gains this year.

Despite data volatility, recent employment conditions and positive real wage gains have supported a resilient consumer and U.S. economy. With job openings back near pre-pandemic levels, this isn’t a labor market that is likely to boom, but it shouldn’t bust either. Steady economic growth and solid corporate profits should support a moderate pace of hiring in the year ahead.

The Week Ahead: Dec 9-13[ii]

• Wholesale Inventories
• Consumer Price Index
• Core CPI
• Monthly U.S. federal budget
• Initial jobless claims
• Producer price index
• Import price index

Philosophy Quote of the Week[iii] 

Spendthrifts of Time

“Were all the geniuses of history to focus on this single theme, they could never fully express their bafflement at the darkness of the human mind.  No person would give up even an inch of their estate, and the slightest dispute with a neighbor can mean hell to pay; yet we easily let others encroach on our lives – worse we often pave the way for those who will take it over.  No person hands out their money to passersby, but to how many do each of us hand our lives!  We’re tight-fisted with property and money, yet think too little of wasting time, the one thing about which we should all be the toughest misers.”

 Seneca, On the Brevity of Life, 3.1-2

Today there will be endless interruptions:  phone calls, emails, visitors, unexpected events.  Booker T. Washington observed that ‘the number of people who stand ready to consume one’s time, to no purpose, is almost countless.’

A philosopher, on the other hand, knows that their default state should be one of reflection and inner awareness.  This is why they so diligently protect their personal space and thoughts from the intrusions of the world.  They know that a few minutes of contemplation are worth more than any meeting or report.  They also know how little time we’re actually given in life – and how quickly our stores can be depleted.

Seneca reminds us that while we might be good at protecting our physical property, we are far too lax at enforcing our mental boundaries.  Property can be regained; there is quite a bit of it out there – some of it still untouched by man.  But time?  Time is our most irreplaceable asset – we cannot buy more of it.  We can only strive to waste as little as possible.

Tax Tips[iv]

Tax Tips About Hobbies and Home Offices from the Internal Revenue Service (IRS)

Hobbies grow you and drive you to passionately increase your collection – be it of stamps, coins, flowers or any other object of interest.  If you enjoy any hobby like stamp collecting, fishkeeping, gardening, sculpting, horsemanship and the like, and your hobby is also a source of income, then you must report the income you earn from your hobby on your tax return.

The rules for how you report the income and expenses depend on whether the activity is a hobby or a business.  There are special rules and limits for deductions you can claim for a hobby.

Here are five tax tips you should know about hobbies:

1. Is it a business or a hobby?

A key feature of a business is that you do it to make a profit.  You often engage in a hobby for sport or recreation, not to make a profit.  Ensure you base your determination on all the facts and circumstances of your situation.  For more information about business rules, see Publication 535, Business Expenses.  The IRS uses nine factors to determine the difference between a business and hobby:

• You carry on the activity in a business-like manner
• The time and effort you put into the activity indicate that you intend to make it profitable
• You depend on income from the activity for your livelihood
• Your losses are due to circumstances beyond your control, or are normal in the startup phase of your type of business
• You adjust your methods of operation to improve profitability
• You (or your advisors) have the knowledge needed to carry on the activity as a successful business
• You were successful in making a profit in similar activities in the past
• The activity makes a profit in some years, and how much profit it makes
• You can expect to make a future profit from the appreciation of the assets used in the activity when you determine whether your activity is a hobby

2. Allowable hobby deductions

Within certain limits, you can usually deduct ordinary and necessary hobby expenses.  An ordinary expense is one that is common and accepted for the activity.  A necessary expense is one that is appropriate for the activity.

3. Limits on hobby expenses

Generally you can only deduct your hobby expenses up to the amount of hobby income.  If your hobby expenses are more than your hobby income, you have a loss from the activity.  You can’t deduct the loss from your other income.

4. How to deduct hobby expenses

You must itemize deductions on your tax return in order to deduct hobby expenses.  Your expenses may fall into three types of deductions and special rules apply to each type.  See Publication 535 or contact your tax professional for help!

5. Use IRS Free File

Hobby rules can be complex and IRS Free File can make filing your tax return easier.  IRS Free File is available until October 15.  If you make $73,000 or less, you can use name-brand tax software.  If you earn more than $73,000 you can use Free File Fillable Forms, an electronic version of IRS paper forms.  Free File is available only through the https://www/irs.gov/ website.

Home Office Deductions

If you work from home, you should learn the rules for how to claim the home office deduction.  Since 2013, when the Home Office Act was signed, a simpler option was created to figure the deduction for business use of your home.  The new option may save you time because it also simplifies how you figure and claim the deduction.  It can also make it easier for you to keep records.  It does not change the rules for who may claim the deduction.

Here are six tips from the IRS about the home office deduction:

1. Generally, in order to claim a deduction for a home office you must use part of your home exclusively and regularly for business purposes. Also, the part of home used for business must be
   • Your principal place of business, or
   • A place where you meet clients or customers in the normal course of business, or
   • A separate structure not attached to your home. Examples might include a studio, garage or barn.
2. If you use the actual expense method, the home office deduction includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid could qualify.  If you own your home, part of the mortgage interest, taxes and utilities you paid could qualify.  The amount you can deduct usually depends on the percentage of your home used for business.
3. You may be able to use the simplified option to claim the home office deduction instead of claiming actual expenses. Under this method, you multiply the allowable square footage of your office by a prescribed rate of $5.00.  The maximum footage allowed is 300 square feet.  The deduction limit using this method is $1,500 per year.
4. If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited.
5. If you are self-employed and choose the actual expense method, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. You claim your deduction on Schedule C, Profit or Loss from Business, if you use either the simplified or actual expense method. See the Schedule C instructions for how to report your deduction.
6. Since 2018 employees can no longer write off Employee Business Expenses. You should work with your employer to get a reimbursement for out-of-pocket expenses, you might spend to complete your job.  Even if the employer reduces your pay for any reimbursement you would still be better off.  There are no taxes for the amount reimbursed by your employer.  Even the employer wins since there are no payroll taxes on the amounts reimbursed!

Remember – always contact your tax professional for help!  That’s what you pay them for!

Last Chance Planning Checklist:  Investments & Insurance[v]

China Llanos

Digital Content Writer & Editor, J.P. Morgan Wealth Management

About half of Americans were covered by life insurance as of 2024.  When you think of life insurance, your first thought may be about supporting your loved ones in the event of your death, but some life insurance policies can become a financial asset for you to use during your life, just like an IRA or mutual fund. These life insurance policies allow the owner to build cash value over time and provide access to cash value. In some cases, you can take a withdrawal, and in others, you can borrow against your policy; and if you do it right, you can avoid a tax liability, too.

Of course, not all life insurance policies are created equal. If you’re shopping for a policy that’s right for you and want to make sure you’re choosing one that can serve as an asset, you should only consider policies that have a cash value. Typically, only permanent insurance policies fall under this umbrella – term insurance policies, which are generally less expensive and valid for a set number of years, don’t offer the ability to grow money in an account that you can tap into.

The life insurance policies that can serve as an asset

Permanent life insurance policies enable you to invest in conservative investments like mutual funds or exchange-traded funds (ETFs). You can choose how you want to diversify your investments, allowing you to curate your policy to meet your risk tolerance and goals. Because of this, permanent life insurance can serve as a hedge against market risk.

There are two main types of permanent life insurance that can be used as an asset: whole life insurance and universal life insurance.

Whole life insurance. This is the most common type of permanent life insurance, which, in addition to a death benefit, offers the policy holder the ability to accumulate cash value. This works because a portion of the premium you’ll pay every month gets put into a cash value account. Think of it as an insurance policy with a saving account-like component. Your cash value will accumulate over time at a minimum guaranteed rate indicated by your policy. Just make sure you read the fine print of your policy to understand what that is. Also noteworthy, the premiums on these policies typically won’t increase over the life of the policy.

Universal life Insurance. Universal life policies function similarly to whole life – they allow policy holders to grow an asset by accruing interest over time that can be borrowed against. Keep in mind that, with universal life policies, the premiums aren’t set, which means they are subject to change, and there’s also no guarantees on the rate your money will earn over time. Under the universal life umbrella is something called “variable universal life insurance,” which enables policy owners to invest their earnings into the accounts of their choosing (including mutual funds), so you have the potential to earn more over time.

How to use your life insurance as an asset

There are several ways to use your life insurance as an asset. As you contribute to your policy over the years, you earn the ability to borrow against what you’ve saved. Also, all your earnings are growing on a tax-deferred basis. Here’s a look at some of the ways to maximize your asset’s potential.

Take a loan from your policy. You can borrow against the cash value of your permanent life insurance policy. Just read the fine print if you go this route. The interest rate can be fixed or variable, and it is set by the insurer. Also, if you take a loan against your policy and it’s not paid off at the time of your death, any outstanding balance that you owe gets subtracted from what your beneficiaries inherit.

Use your policy as collateral for a loan. In some situations, you can use your life insurance policy as collateral for a loan, which can make it easier for you to get approved or perhaps get you a better rate on the loan you’re taking out. (Essentially, your life insurance policy is serving as an asset to prove your trustworthiness as a borrower.) But keep in mind that, if you die before paying it back, whatever you still owe will come off the top before your beneficiaries see their benefit.

Withdraw funds. Rather than taking a loan that must be paid back, you can also simply make withdrawals from your policy that are yours to keep – just note that, if your withdrawal is an amount great enough to dip into your investment gains, you’ll need to pay taxes. (And like a loan, the amount you withdraw is money that won’t be paid to your beneficiaries later, because your withdrawal decreases the value of the policy.)

Option for “accelerated” benefits. Some policies enable you to receive your benefits during your lifetime should an unexpected or extreme medical emergency arise, such as cancer, a heart attack or kidney failure. Most policies with this option allow you to withdraw anywhere from 25%–100% of your policy’s value.

Surrender the policy (cash out). To say that you’re “surrendering” a policy is simply another way of saying you’re canceling your coverage. When you do this, you get back the cash value you put in, less any fees your insurance company may charge. Just study the fine print carefully, because in some cases those fees may be quite high. (Think of it like an early withdrawal from a retirement account – you know there will be penalties.) With that said, if you no longer want to maintain your policy and have other more pressing needs for that money, surrendering can be a solid option.

[i]https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/insights/market-insights/wmr/weekly_market_recap.pdf.  Accessed 12.10.2024.   See page 2 for important disclosures.

[ii]https://www.marketwatch.com/economy-politics/calendar.  Accessed 12.02.2024.

[iii] Holiday, Ryan.  The Daily Stoic:  366 Meditations on Wisdom, Perseverance, and the Art of Living.  Kindle edition, page 365.  Accessed 12.10.2024.

[iv] Hockensmith, Robert F.  52 Ways to Outsmart the IRS, Weekly Tax Tips to Save You Money.  Kindle edition, page 211-215.  Accessed 12.10.2024.

[v]https://www.jpmorgan.com/insights/investing/investment-strategy/how-to-use-life-insurance-as-a-financial-asset. Accessed 12.10.2024.