Everyone knows Hertz, the rental car company. Remember their old OJ Simpson commercials featuring the iconic football player hurdling through the airport in a business suit like a running back? Well, Hertz survived the loss of their now infamous spokesperson decades ago, but apparently it will not survive COVID.
Hertz filed for bankruptcy protection last month and is now liquidating its vehicle fleet to pay creditors. Last February, right before the stock market crash, Hertz’s stock was trading over $20 per share. By May, its stock price had fallen to an all-time low of $0.40 per share at the time of its bankruptcy. This adverse price movement is logical since a bankrupt company’s stock will eventually become worthless.
Talk about a zombie company. With $19 billion in debt and unprofitable, Hertz was in bad financial shape heading into 2020 and the sudden economic crisis drove them to insolvency fast.
So the Hertz story is all over, right? Not so fast, that would be boring.
One of the hot new financial trends is the emergence of mobile no-commission stock trading and a growing legion of Millennial mobile phone investors. These precocious fintech investors can readily trade stocks on their mobile telephones for free via an app.
The leading mobile trading company is Robinhood. To their credit, the fast-growing start-up company explains the unique ways in which they generate revenue without trading commissions on their website.
Robinhood traders began piling into Hertz’s stock right after the May bankruptcy filing, driving the share price back up to over $5 per share in just a week! A roving band of phone traders did same thing with Chesapeake Energy, another bankrupt zombie company, recently pushing its stock price up well north of worthless, at least for a while.
After the bizarre stock price rally, Hertz was seriously contemplating issuing more stock while publicly conceding that investors would eventually lose all of their investment. In the end they wisely decided against it.
Hertz’s share price has since dropped sharply but is still trading at an inflated price to its ultimate value as it awaits the death knell. In fact, the company is about to be de-listed from the stock exchange.
My reaction to the Robinhood-Hertz story was amusing derision for these naive basement dwelling day-traders with little money nor understanding of investment risk - or even the basics of bankruptcy law - with a fetish for super cheap stocks like they were shopping at Dollar General. I liken it to their preference to drink bad low-budget beer.
Higher stock trading volumes due Millennial fintech investors is only part of the story, however. Evidently, there’s a growing faction of day traders who are actually bored gamblers (of all ages) who can’t visit casinos or bet on sports games due to the quarantine. Instead, they have turned to the stock market to satiate their gaming excitement need.
One trading website promotor referred to the stock market as a “fun casino” and promised to help new traders make a fortune day-trading via their mobile phones. Sure.
In the wild stock market rally since March, it makes you wonder how much of the upturn is being driven by these fintech traders. As Warren Buffet quipped “it’s only when the tides goes out that you can see who’s been swimming naked”.
Moving along, let’s look at a unique financial planning opportunity for 2020 presented by the CARES Act law passed last March – before 2020 slips away.
The mammoth bill included several tax breaks, one of which jumps out: Cash gifts to qualified charities are eligible for a 100% charitable deduction against adjusted gross income in 2020 only. Under the old tax law, only 60% of a charitable cash gift could be deducted, with the rest carried over to be deducted in future (up to five) tax years.
Note the “cash gifts only” stipulation. Gifts of appreciated assets are still subject to stricter deduction limits. Cash gifts to a charitable gift annuity in 2020 are considered 100% deductible whereas a cash gift to a donor advised fund is still subject to the 60% deduction rule. Cash gifts to charitable trusts are also ineligible for full deductibility.
Why does this subtle tax law change catch my fancy? Because charitably minded individuals can satisfy their charitable goals and use the enhanced tax deduction in creative ways. Consider:
A cash gift would create a dollar-for-dollar charitable tax deduction offset against Roth IRA conversion taxable income in 2020. Recall that future growth in a Roth IRA is never taxed. Higher income tax rates are coming, so the notion of converting some of your qualified retirement account assets into a Roth IRA makes sense, even if it means paying some income tax on the conversion.
Now, with the CARES Act, it’s even more compelling to effect a Roth IRA conversion without even paying income tax due to the offsetting charitable deduction. Capiche?Due to a recent federal income tax law change, many taxpayers have lost their ability to itemize deductions. The reasons were a higher standard deduction and the $10,000 limit on state and local tax deductions, starting in 2018. For 2020, large charitable cash gifts could push your combined eligible tax deductions above the standard deduction amount. If so, mortgage interest and state taxes could magically become tax deductible again.
Lastly, income tax bracket management. Lowering your taxable income dollar-for-dollar using charitable giving could reduce income taxed at higher rates.
However, you must do the math. For folks with high regular annual taxable income, taking a 100% tax deduction in 2020 in which some of it reduces taxable income in lower tax brackets may be counterproductive.A slice of the deduction could be more valuable next year by reducing income in higher tax brackets, especially if tax rates rise.
I’m a geek to even type this.
As always, seek out professional tax advice before making any charitable tax moves - and you know how to find me.
Until next time, be well…Tim