A native son sure hit the jackpot last week. Pinterest, the popular social media site, successfully completed its initial public offering on April 18th. One of the social media company’s co-founders, Evan Sharp, hails from York! Better yet, he’s a York Suburban high school graduate, the fine school district that it is educating our associate Heather’s children.
Sharp graduated high school in 2001, earned a degree in history from the University of Chicago and then chose an entirely different career path in software design.
He met his business partner and co-founder Ben Silberman in New York and they started Pinterest together in 2010 as a side project.
Pinterest bills itself as a digital tool to organize your online life and to bookmark / share ideas with like-minded souls. I admit to not understanding the utility of using Pinterest over Facebook or other social media sites, but it is now the rage, especially among social media savvy woman. Nearly seventy percent of Pinterest’s 250 million users are women, who prefer to be called “pinners”
Sharp is credited with designing the core Pinterest technology platform. He now serves as the company’s chief product design executive and was recently appointed to its board of directors.
Pinterest’s IPO was enthusiastically received by Wall Street. As a nosy capitalist, I took a stab at calculating Sharp’s current net worth. In March, Forbes estimated his net worth at $1 billion, so with the successful IPO, he’s on his way to multi-billionaire status. At the tender age of 36, that’s epic success.
And no gold digging prospects here: Sharp is married and now living in San Francisco. He was interviewed in the financial press a couple years ago and stated that he was raised in “rural Pennsylvania”.
Come on Evan, York is not “rural” and please don’t whiff on such golden opportunities to draw attention to and perhaps even promote your hometown.
Sharp did visit York last year as part of an official Pinterest business tour; let’s hope he chooses to remain connected to his hometown in the future.
Personal debt planning had been rather straightforward for a very long time. Now, with the new federal income tax law in full force, it has been turned on its head.
The traditional personal financial planning rule of thumb regarding debt is to avoid high interest rate credit card debt (that maxim actually has not changed) and instead use mortgage debt financing – both floating and fixed rate - as much as possible to exploit the income tax advantages.
Home equity had become a mainstream tool to finance non-home stuff like college expenses, car / boat purchases, vacations, start-up business capital, you name it - all with tax benefits. With the exception of borrowing to purchase tax-exempt bonds, home equity debt could be used for any purpose and the mortgage interest on the first $100,000 of home equity debt was fully tax-deductible.
No longer. As of 2018, interest on home equity debt not drawn to improve the underlying real estate is now non-deductible. Interest expense on purchase mortgage debt of up to $750,000 (maximum of two homes) remains tax deductible. Don’t get nervous, the old rule of $1 million maximum purchase mortgage debt was grandfathered.
Complicating debt planning is the new standard deduction, which ranges from $12,000 to $25,700 for 2019 depending on your age and marital status.
If you can no longer itemize deductions on your tax return – and many have fallen into this category - the mortgage interest deduction is, for all intents and purposes, lost. The effect of this change could be a material increase in the after-tax cost of your mortgage debt.
Further complicating matters has been the sharp rise in short-term variable interest rates over the past year. Many home equity lines of credit are priced based on the Prime rate - which now sits at 5.25% - plus a spread, so the gross borrowing rate has risen to a saltier 6-7% without a corresponding tax deduction.
Moreover, cash out refinancing of home equity is no longer deductible unless the cash proceeds is used for home improvements.
For adult children still repaying student loans, loan interest remains deductible under the new tax law up to $2,500 per year and subject to a maximum income test. Tax deductibility notwithstanding, minimizing student debt altogether is the best proactive debt planning move, especially for undergraduates pursuing a non-technical degree.
Federal student loan forgiveness rules were left unchanged, but that is a future income tax trap in its own right. Loan forgiveness becomes taxable income to the borrower. Cumulative student loan principal and interest repayments plus income taxes paid on forgiven student debt may prove to be a sweet deal – for the government.
An obscure interest deduction was left intact: investment interest. Loan interest incurred to invest in securities, which typically takes the form of a margin loan, can offset ordinary taxable investment income, which works like a tax deduction. Before your wheels turn too fast, margin loans on IRAs don’t work.
It bears mentioning that the current personal tax law is scheduled to sunset after 2025 and the tax law is likely to materially change no later than 2026.
Until then, the new tax law means that financial decisions like where to direct your savings no longer defaults to invest; paying down debt could be the smarter move.
Tax deductible or not, still think twice about prepaying low-cost fixed-rate mortgage debt. There is no shortage of investments with superior return prospects than borrowed money locked in at a 4% fixed interest rate or less.
The takeaway is to view the new tax law as a motivator to pare down non-deductible debt and tidy up your personal balance sheet as appropriate.
Until next time, be well….Tim