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Smart Tax Planning

There have been a lot of recent developments for student loan borrowers, some of which may impact their 2023 tax filing.
Here’s what to know.

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For many borrowers, the tax deduction is back

There may be one bright spot for student loan borrowers whose bills resumed last October. Their 2023 tax bill could be a little lower.
The student loan interest deduction allows qualifying borrowers to deduct up to $2,500 a year in interest paid on eligible private or federal education debt.
Before the Covid pandemic, nearly 13 million taxpayers took advantage of the tax break. Yet most borrowers couldn’t claim the deduction on federal student loans during the period student loan bills were on pause, from March 2020 to October 2023. (With interest rates on those debts temporarily set to zero, there was no interest accruing for borrowers to claim.)
Interest on federal student loans began accruing again in September of last year, and the first post-pause payments were due in October. That means borrowers could have interest on three or four months’ worth of payments to deduct for 2023, which may reduce their tax liability, said higher education expert Mark Kantrowitz.

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Depending on your tax bracket and how much interest you paid, the student loan interest deduction could be worth up to $550 a year, Kantrowitz said. The deduction is “above the line,” meaning you don’t need to itemize your taxes to claim it.

There are income limits, however.
For 2023, the deduction starts to phase out for individuals with a modified adjusted gross income of $75,000, and those with a MAGI of $90,000 or more are not eligible at all. For married couples filing jointly, the phaseout begins at $155,000, and those with a MAGI of $185,000 or more are ineligible.
Borrowers’ eligibility for the student loan interest deduction may also be reduced if their employer made payments on their student loans as a work benefit, said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.
Your lender or student loan servicer reports your interest payments for the tax year to the IRS on a tax form called a 1098-E, and should provide you with a copy, too. If you don’t receive the form, you should be able to get it from your servicer.

Forgiven debt may be taxable at the state level

After the Supreme Court blocked President Joe Biden’s sweeping student loan forgiveness plan in June, his administration has explored all of its existing authority to leave people with less education debt. 
Since Biden has been in office, almost 3.9 million borrowers have gotten their student loans cleared, totaling $138 billion in relief.
That debt forgiveness has largely gone to borrowers enrolled in income-driven repayment plans and those pursuing the Public Service Loan Forgiveness program. Disabled borrowers and students from schools of questionable quality have also benefited.

Canceled student debt is normally treated as additional earned income by the IRS. However, the American Rescue Plan Act of 2021 shielded forgiven education debt from federal taxable income until Dec. 31, 2025.
Most borrowers won’t have to worry about state taxes, either, as only a handful of states may impose levies on forgiven education debt. Experts recommend inquiring with your state to learn if you need to report your erased debt.
Some borrowers who made payments on their debt after they were supposed to receive forgiveness are being sent refunds by the U.S. Department of Education. These payments are not taxable, Kantrowitz said. More

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As a tax reporter for CNBC and a certified financial planner, I focus on tax strategy all year, including how certain moves may affect long-term plans.
Here’s how I’ve tackled tax planning in my portfolio, and how my strategy has changed over the past decade.

Seksan Mongkhonkhamsao | Moment | Getty Images

Roughly 10 years ago, I began shifting careers from concert promoter to personal finance journalist. Back then, I thought about taxes exactly once per year — when it was time to file my annual return.
Now, as a tax reporter for CNBC, I focus on tax strategy all year, including how retirement contribution decisions may affect long-term plans. It helps that I am one of a handful of working journalists to have earned the certified financial planner designation.

Over the years, I’ve learned tax planning can’t happen in a silo because today’s decisions often have future consequences.
Certain tax moves are “like a balloon,” Ashton Lawrence, CFP and director at Mariner Wealth Advisors in Greenville, South Carolina, once told me. “If you squeeze it at one end, you’re going to inflate it somewhere else.”

More from Women and Wealth:

Here’s a look at more coverage in CNBC’s Women & Wealth special report, where we explore ways women can increase income, save and make the most of opportunities.

Here’s how I’ve tackled tax planning in my portfolio, and how my strategy has changed over the past decade.

Pretax vs. Roth retirement contributions

One of the biggest questions from investors is whether to save money into a pretax or after-tax Roth account.
While pretax contributions can reduce adjusted gross income, you’ll owe regular taxes on withdrawals in retirement. By contrast, there’s no upfront tax break for Roth contributions, but the money grows tax-free. 

Generally, pretax contributions benefit higher earners, while after-tax savings make sense in a lower bracket, experts say. Of course, factors such as matching contributions, each plan’s investment options and fees, along with legacy goals, can affect the decision.

Early in my career, I focused on Roth savings, which made sense with lower income and decades until retirement. But it’s tough to predict future brackets, so I’ve shifted to tax diversification across investing accounts.
I’ve prioritized my employer match with pretax and Roth 401(k) deferrals, while also making Roth individual retirement account contributions. I’ve also funneled extra money into my taxable brokerage account, which incurs capital gains taxes on earnings yearly, but can be tapped before retirement.

There’s also a small nest egg in my health savings account, which I added to during my years of self-employment. I’ve invested the balance and hope to make tax-free withdrawals for medical expenses in retirement.

Tax diversification offers flexibility

The goal is flexibility. With a mix of tax-deferred, tax-free and taxable savings, I’ll have different accounts to pull from, depending on my yearly tax situation.
JoAnn May, a CFP and certified public accountant at Forest Asset Management in Berwyn, Illinois, told me, “ideally, it’s nice to have clients with all types of accounts” for different types of assets.

Indeed, your asset location can trigger a surprise tax bill, as I learned from capital gains in a brokerage account early on. Generally, income-producing investments, such as bonds or real estate investment trusts, are better suited for tax-deferred or tax-free accounts.
However, experts are quick to warn you shouldn’t “let the tax tail wag the investing dog.” Your portfolio should be a mix of investments based on your goals, risk tolerance and timeline — not solely based on tax savings.
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The SEC is poised to issue a final rule on Wednesday around climate disclosures.
It would give investors more transparency into the threat climate change poses to U.S. publicly listed companies, and how they contribute to a warming planet via emissions.
The U.S. would join other nations that have already required some level of climate reporting. California Gov. Gavin Newsom also signed a climate disclosure law in October.

Securities and Exchange Commission Chair Gary Gensler testifies before the Financial Services and General Government Subcommittee on July 19, 2023 in Washington. 
Win Mcnamee | Getty Images News | Getty Images

The Securities and Exchange Commission is poised to issue a final rule on Wednesday that would require companies to beef up disclosures around climate risks — a level of transparency that should help investors assess a company’s value in a warming world, said experts.
At a high level, the rule — initially proposed in March 2022 — would expand investors’ insight into the threat that climate change poses to publicly listed companies and how businesses contribute to a warming planet.

Climate disclosures would be made in annual filings companies make to the SEC, such as a Form 10-K, and in registration statements filed before an initial public offering.
“I think climate disclosures have largely become table stakes for the investment community,” said Lindsey Stewart, director of investment stewardship research at Morningstar.

Current climate disclosures are ‘uncommon’

Ships on the Panama Canal on August 21, 2023. The Panama Canal Authority had reduced maximum ship weights and daily vessel transits to conserve water amid historic drought. Shipping experts fear such events could become the new normal as rainfall shortfalls highlight climate risks.
Daniel Gonzalez/Anadolu Agency via Getty Images

Such data points are currently spotty.
Publicly listed U.S. companies make climate disclosures on a voluntary basis, and they remain “uncommon in all but a few sectors,” according to S&P Global.
Corporations will likely be required to disclose short- and long-term physical risks, such as the impacts of hurricanes, droughts, wildfires, extreme heat and sea level rise, Stewart said.

They’d also likely report “transition” risks from legal or regulatory changes, new technology and business practices that aim to adapt to a hotter world, he said.

Corporations would also be required to report their total greenhouse gas emissions, both created directly by a company and indirectly along its supply chain. The depth of that carbon reporting may be diluted from the SEC’s initial proposal in March 2022 due to blowback and to insulate the rule from legal challenges, experts said.
Overall, transparency around climate risk may be essential for investors to gauge if a company’s stock is worth holding or if its stock price is reasonable, experts said — for example, is it too expensive given high exposure to climate risk, or perhaps fairly priced considering it’s well positioned?
“Investors want to be able to accurately price those risks and opportunities as they look medium and longer term at their investments,” especially retirement investors who may have a timeline decades in the future, said Rachel Curley, director of policy and programs at the U.S. Sustainable Investment Forum.

Climate change is a ‘momentous risk’ to capital markets

A damaged gas station is taped off after Hurricane Idalia made landfall in Cedar Key, Florida, on Aug. 30, 2023.
Christian Monterrosa/Bloomberg via Getty Images

The U.S. now experiences a billion-dollar disaster every three weeks, on average; during the 1980s, that happened every four months, according to the Fifth National Climate Assessment, issued last year by the White House.
The economic toll due to factors like agricultural loss, tourism impact, falling real estate values, and property and infrastructure damage is expected to grow.
Allison Herren Lee, a former SEC commissioner who voted in favor of the SEC’s initial rule proposal in 2022 called climate change “one of the most momentous risks to face capital markets since the inception of this agency.”
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Many other nations — including Chile, China, Egypt, European Union member countries, India, New Zealand and the United Kingdom — already require climate reporting by public companies, according to the Climate Governance Initiative.
In October, California Gov. Gavin Newsom signed a law that requires large companies active in the state to give a detailed accounting of their greenhouse gas emissions, starting in 2026.

Challenges are ‘likely’

Congressional and legal challenges to the rule “are likely,” Jaret Seiberg, financial services and housing policy analyst at TD Cowen, wrote Thursday in a research note.
Last year, a group of House and Senate Republicans sent a letter to SEC Chair Gary Gensler criticizing the proposal, saying it “exceeds the [agency’s] mission, expertise, and authority.”

“Congress created the SEC to carry out the mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation — not to advance progressive climate policies,” according to its three signatories, Rep. Patrick McHenry, R-N.C., Sen. Tim Scott, R-S.C., and Rep. Bill Huizenga, R-Mich.

Carbon emissions accounting is contentious

Smoke from a coal-fired power station. 
Chris Ratcliffe/Bloomberg via Getty Images

One particularly contentious area involves the depth of greenhouse gas reporting, experts said.
The SEC proposal outlined three tiers of emissions disclosures: Scopes 1, 2 and 3.
Scope 1 emissions are direct. They’re caused by operating the things a company owns or controls: for example, by running machinery to make products, driving vehicles, or heating buildings and powering computers, according to the World Economic Forum.
Scope 2 emissions are indirect. They’re created by the production of energy that an organization buys, the WEF said. Companies can cut Scope 2 emissions by installing solar panels or using renewable energy rather than using electricity from fossil fuels, for example, it said.
Scope 3 emissions are also indirect but broader: They include emissions “up and down [a company’s] value chain,” according to Deloitte. For example, they may “be emitted by a company’s suppliers of raw material, or when a consumer uses a company’s products,” S&P Global wrote.

I think climate disclosures have largely become table stakes for the investment community.

Lindsey Stewart
director of investment stewardship research at Morningstar

The SEC proposal mandates reporting about Scopes 1 and 2 emissions.
However, companies would have some discretion to report Scope 3 emissions. They’d be required if investors would be reasonably likely to consider such information “material” or if a corporation set a carbon-reduction goal that includes Scope 3 emissions, Curley said.
For many businesses, Scope 3 emissions account for more than 70% of their carbon footprint, Deloitte estimates.
“Emissions-wise, Scope 3 is nearly always the big one,” it said.
However, Scope 3 emissions are “tougher to calculate and politically more contentious,” Seiberg wrote. He expects the final SEC rule to include Scope 1 and 2 emissions but exclude Scope 3; the latter will likely be left to a future rulemaking, he said.
U.S. companies may have to disclose such emissions according to California or international standards, experts said. More

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The price of bitcoin rose to start the week, edging even closer to its all-time high after the rally took a breather over the weekend.
The flagship cryptocurrency was last higher by 3.7% at $65,127.00, according to Coin Metrics. Earlier, it rose to as much as $65,606.17, its highest level since November 2021. Ether advanced 1% to $3,508.24.

Both coins are coming off their best week in almost a year (bitcoin gained about 21% and ether 16%) but paused their run over the weekend as the market digested two days of steep outflows from the Grayscale Bitcoin ETF that were offset by inflows into other “newborn” bitcoin ETFs.

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Bitcoin is edging toward its all-time high

“With the birth of these 9 new ETFs the big moves now tend to take place during the normal trading week rather than the weekends,” said Antoni Trenchev, cofounder of crypto exchange Nexo. “What we’re seeing today … might well be a rerun of early last week when bitcoin surged $10,000 in the space of a couple of days. We’re in that sort of environment when a day or two of sideways consolidation can precede explosive price action thanks to the voracious demand of these new spot ETFs.”
Investors have been extra eager to see bitcoin approach its all-time high. At $65,000 it’s sitting about 6% off its November 2021 intraday record of $68,982.20.
Some analysts have suggested that while it could keep rising in the short term, bitcoin may may cool in the next few weeks, as unrealized profit margins approach extreme levels. Bitcoin’s realized price is sitting at just about $42,700, according to CryptoQuant.
Nevertheless, long-term investors are confident that the combination of increasing demand for bitcoin through the new U.S. exchange-traded funds and a tighter supply expected after the April halving event will push the price of bitcoin to a new all-time high.

Crypto has also been getting a slight bid from the stock market, where the tech-heavy Nasdaq Composite reached an all-time high on Friday, becoming the last of the major stock indexes to hit a record close this year. David Duong, head of institutional research at Coinbase, said that although March could be a month of sideways grinding for bitcoin, the cryptocurrency is benefitting from an AI- and blockchain technology-driven productivity boom he expects is here to stay.
Large-cap cryptocurrency moves Monday were more modest, although prices of smaller coins, particularly meme coins, have swelled. Dogecoin jumped 5%, while Shiba Inu coin surged 15%. Analysts point to their performance as evidence that retail investors, who have been absent for much of the recent crypto rally, are starting to return to the crypto market.
Crypto equities rode the bitcoin wave. Coinbase and Microstrategy rose 6% and 9%, respectively, in premarket trading Monday. In the mining group, CleanSpark jumped more than 8%, Marathon Digital traded about 7% higher, Iris Energy advanced 5.5% and Riot Platforms added 4%. More

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Having a strong budget can help you build financial wellness.
“A budget is a picture of what your money is doing,” said Tiffany Aliche, also known as The Budgetnista.

A young woman in her early 20s riding a chopper cycle.
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Having a strong budget can help you build financial wellness.
“A budget is a picture of what your money is doing,” Tiffany Aliche, also known as The Budgetnista, told CNBC during a Women & Wealth livestream.

“It’s the foundation where you build your financial house. You have to understand what your money is doing,” said Aliche, a personal financial educator and author of “Get Good with Money.”

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Here’s a look at more coverage in CNBC’s Women & Wealth special report, where we explore ways women can increase income, save and make the most of opportunities.

By examining what you spend and setting a budget, you may find the cash to build other financial safeguards, such as an emergency savings fund and retirement contributions.
“You’re supposed to give each dollar a job,” said Sophia Bera Daigle, a certified financial planner and the founder of Gen Y Planning in Austin, Texas.
It might also be good to think of your budgets from an annual perspective. Taking on a new, big expense like a car or house, or even experiencing the occasional emergency, can affect your monthly spending, said Daigle, who’s also a CNBC Financial Advisor member.

Three steps to start a budget

1. Make a list of expenses: The first thing to do is write a list of all the things you spend money on within a given month, said Aliche. “That’s step one.” Consider expenses that are fixed, such as your rent or car payment, and those that are variable, such as groceries and utilities. It can also help to list out expenses you don’t pay every month, such as annual memberships or quarterly taxes.

2. Check your records: Next, see how those estimates match up to what you actually spend. Pull up your recent debit and credit card statements, and add up how much money you spent in a recent month.
3. Figure out how your spending matches with your income: Once you know how much you spend on a monthly basis, find the difference from how much you earn. Aliche calls this “the tears and tissues” step because many people realize they are overspending.

A lot of people hold onto the financial mistakes they made in their life, said Aliche. Don’t let the “tears and tissues” budgeting step derail you.
“Shame shields solutions,” she said.
To progress, lean on your community for emotional support and accountability. Figure out how to adjust your spending to bring your budget in line and give you room to meet your goals.
Also, “understand that money is a team sport,” said Aliche. You need a “board of directors” to help you reach your goals, such as an accountability partner, an accountant and a financial advisor.
SIGN UP: Join the free virtual CNBC’s Women & Wealth event on March 5 at 1 p.m. ET, where we’ll bring together top financial experts to help you build a better playbook, offer practical strategies to increase income, identify profitable investment opportunities and save for the future to set yourself up for a stronger 2024 and beyond. More

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The major averages are leaping to fresh highs, but attractive stocks with good growth prospects are still available for the picking.
Wall Street analysts remain focused on the long-term prospects of stocks with solid growth potential. Investors can gain insights from the opinions of top analysts, who make recommendations after thorough research.

Here are three stocks favored by the Street’s top analysts, according to TipRanks, a platform that ranks analysts based on their past performance.
Nvidia
Chip giant Nvidia (NVDA) is this week’s first pick. The company impressed investors with blockbuster quarterly results and better-than-expected revenue guidance, thanks to the huge demand for its products due to the artificial intelligence frenzy.
In reaction to the stellar results for the fourth quarter of fiscal 2024, Goldman Sachs analyst Toshiya Hari reiterated a buy rating on NVDA stock and boosted the price target to $875 from $800. “Nvidia delivered against what was seemingly a very high bar with Data Center once again serving as the key growth driver,” he said.
Hari anticipates that strong generative AI infrastructure spending and new product launches will power continued outperformance. The analyst expects Nvidia to benefit from robust demand and new product introductions, including the H200 GPU, ethernet-based AI networking solution Spectrum-X and the next-generation Data Center GPU platform B100.
The analyst is modeling a greater than two-times year-over-year increase in Nvidia’s fiscal 2025 data center revenue. That’s even after the segment generated a greater than three-times surge in its top line in fiscal 2024. His optimism is backed by sustained growth in generative AI infrastructure spending by large cloud service providers and consumer internet companies, as well as increased AI development and adoption by enterprise customers and sovereign states.

Hari ranks No. 61 among more than 8,700 analysts tracked by TipRanks. His ratings have been successful 68% of the time, with each generating an average return of 24.3%. (See Nvidia’s Stock Charts on TipRanks)
Abercrombie & Fitch
Next up is clothing retailer Abercrombie & Fitch (ANF). Earlier this year, the company raised its forecast for the fiscal fourth-quarter and full-year net sales, as well as its operating margin guidance. The revised outlook reflected net sales growth across regions in the holiday sales quarter, led by continued strength in the Americas.
Ahead of the company’s Q4 results on March 6, Jefferies analyst Corey Tarlowe increased his price target to $149 from $120 and reaffirmed a buy rating on ANF stock. The analyst noted that while issuing the upgraded outlook in January, the company said that its women’s business is expected to deliver the strongest-ever Q4 performance.
Tarlowe highlighted that Abercrombie & Fitch continues to gain market share both domestically and worldwide. Citing Euromonitor data, the analyst said that in the U.S., the brand moved up four spots to the 20th position for apparel, compared to 2022. Similarly, demand for ANF’s jeans and outerwear categories helped it climb two spots to the 55th position worldwide in 2023.
Tarlowe added that while the company’s Hollister brand was under pressure last year, it recently returned to growth. The analyst expects market share gains for the Hollister brand in the days ahead.
Commenting on the fiscal 2025 outlook, Tarlowe said, “We expect ANF will provide strong yet beatable guidance, which could be a positive catalyst for the stock.” Overall, the analyst sees further upside to ANF’s market share, sales and earnings.
Tarlowe ranks No. 473 among more than 8,700 analysts tracked by TipRanks. His ratings have been successful 68% of the time, with each generating an average return of 15.5%. (See ANF’s Financial Statements on TipRanks)
Walmart
This week’s third stock pick is big-box retailer Walmart (WMT), which delivered better-than-expected fourth-quarter results. The solid performance was driven by upbeat holiday season sales and strength in the company’s e-commerce channel.
Following the print, Goldman Sachs analyst Kate McShane reaffirmed a buy rating on WMT stock and raised the price target to $193 from $180.
She noted that Walmart’s operating income growth accelerated in the fourth quarter, fueled by the company’s alternative revenue sources, including advertising, marketplace and fulfillment services. Lower fulfillment costs also enhanced operating income.
McShane highlighted that Walmart expects its top-line growth to be supported by its international business. In particular, the company anticipates that continued strength in India, Walmex (WMT’s unit in Mexico and Central America), and China will drive about 75% of its international growth over the next few years.
“We see top-line support from continued market share gains, store investments (remodels and new stores/clubs), and growth of alternative revenue streams,” said McShane.
Overall, she is bullish on Walmart and thinks that it is well-positioned to continue to drive strong earnings growth, thanks to its increasing market share due to the value deals and convenience offered by the retailer. The analyst also expects the company to improve its profitability, driven by the growth of higher-margin businesses and productivity benefits.
McShane holds the 884th rank among more than 8,700 analysts tracked by TipRanks. Her ratings have been successful 62% of the time, with each generating an average return of 5.2%. (See Walmart Stock Buybacks on TipRanks) More

In 2024, up to $168,600 in earnings are subject to Social Security payroll taxes.
Millionaires are set to hit that threshold in March and won’t pay into the program for the rest of the year.
Here’s why some lawmakers and high-net-worth individuals think that should change.

Ezra Bailey | Getty Images

Most Americans can expect to pay Social Security payroll taxes throughout 2024.
But for top earners with gross annual wage income of $1 million, March 2 marks the date at which they will stop paying into the program, according to the Center for Economic and Policy Research.

The reason why those higher earners stop paying into the program a little more than two months into 2024 can be explained by the taxable maximum: the limit on earnings that are subject to the Social Security payroll tax.
In 2024, that threshold is $168,600. Therefore, workers with wages equal to, or larger than, that amount stop paying into the program once they reach that point.

How the Social Security payroll taxes work

Social Security payroll taxes require workers to contribute 6.2% of their pay to Social Security, which is matched by their employer.
Those who are taxed on the full $168,600 threshold will pay $10,453.20 to the program in 2024, with their employer also paying that same amount, according to the Social Security Administration.
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The taxable maximum is adjusted each year based on changes in the national average wage index. The portion of workers earning more than the taxable maximum has been around 6% since the 1980s, according to the Bipartisan Policy Center.
Yet, the percentage of total national earnings above the taxable maximum has increased, since income for top earners has grown faster than average wages, the Bipartisan Policy Center found. In 1977, the taxable maximum covered 90% of total national earnings. As of 2022, that had decreased to 82%.
Social Security faces a looming funding shortfall. Without action from Congress, the program may only pay full benefits until 2034, at which point there will be a benefit cut of at least 20%, according to the program’s trustees.
To fix that, Congress may choose to raise taxes, cut benefits or a combination of both.

How Congress may raise taxes on the wealthy

A recent Data for Progress poll finds 71% of all voters — Democrats, Republicans and independents — would prefer that Congress address the Social Security shortfall by raising taxes on wealthy Americans.
Democrats on Capitol Hill have proposed requiring the wealthy to pay more into the program.
That includes the Social Security 2100 Act — led by Rep. John Larson, D-Conn., with 183 Democrat co-sponsors in the House — that would reapply the payroll tax on those making more than $400,000 per year, as well as tax unearned investment income.
Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., are also leading a proposal that would make income more than $250,000 subject to the Social Security payroll tax, while also applying a 12.4% tax to business and investment income.

The Democrats’ proposals would notably make benefits more generous while extending the program’s solvency.
“The revenue that it produces is substantial,” Larson said of his proposal to lift the cap on the Social Security payroll tax for high earners making more than $400,000, in keeping with President Joe Biden’s pledge not to impose new taxes for people under that threshold.
The tax increase would affect a smaller segment of wealthy Americans, while making it possible to enhance benefits for the first time in 50 years, Larson said.
“Every town hall I have I usually start off by saying, ‘Well, first of all, raise your hand if you’re making more than $400,000,'” Larson said. “I’ve yet to have a hand go up in any room that I’ve been in.”
In order for Congress to raise payroll taxes, Republicans would also have to approve the change, which would be a “difficult ask,” notes Emerson Sprick, associate director of economic policy at the Bipartisan Policy Center.

Some wealthy Americans willing to pay more

Some wealthy Americans — such as former BlackRock managing director Morris Pearl, who serves as chair of the board of the Patriotic Millionaires, a group of high-net-worth Americans — agree they should pay higher taxes.
While working at BlackRock, Pearl remembers only paying into Social Security in his initial paychecks of the year.
Now he lives mostly on investment income, which is subject to lower tax rates and not taxed for Social Security.

That investment income is subject to capital gains and only taxed when realized. Those capital gains tax rates are lower than those for income produced from working, he noted.
“People like me who get investment income should pay at least the same tax rates as people who work for a living,” Pearl said. “There’s actually no justification. I’m paying a lower tax rate than people who actually work all day.”
Patriotic Millionaires is advocating for people who make more money to pay higher tax rates than people who make less money, he said. The group includes more than 200 high-net-worth individuals.Don’t miss these stories from CNBC PRO: More

Skyline of Tokyo, Japan.
Jackyenjoyphotography | Moment | Getty Images

Company: Mitsui Fudosan Co Ltd (8801.T)

Business: Mitsui Fudosan is a Japan-based company engaged in the real estate business. It has five business segments. First, there’s the leasing unit, which is engaged in the leasing of office buildings and commercial facilities. Second, the allotment sale segment is involved in the sale of condos and houses for individual customers, as well as rental housing and office buildings for investors. There is the management segment, which includes property, brokerage and asset management. Mitsui Home is involved in new construction, reform and renewal businesses. Finally, the segment labeled “others” participates in the operation of hotels, golf courses and resort facilities, as well as the loan guarantee business.
Stock Market Value: 3.869 trillion yen (4,144.00 yen per share). The stock also trades in the U.S. as an American depositary receipt under the ticker MTSFY.

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Mitsui Fudosan shares in Japan over the past year

Activist: Elliott Management

Percentage Ownership:  2.5%
Average Cost: n/a
Activist Commentary: Elliott is a very successful and astute activist investor. The firm’s team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEOs and COOs. When evaluating an investment, Elliott also hires specialty and general management consultants, expert cost analysts and industry specialists. The firm often watches companies for many years before investing and has an extensive stable of impressive board candidates. Elliott has historically focused on strategic activism in the technology sector and has been very successful with that strategy. However, over the past several years its activism group has grown and evolved, and the firm has been doing more longer-term activism and creating value from a board level at a much larger breadth of companies.

What’s happening

Behind the scenes

Elliott looks for three main criteria in an activist investment: (i) a high-quality business (ii) that trades at a discount to fair value and (iii) has a pathway to catalyze change and create shareholder value.

Mitsui Fudosan is certainly a high-quality business. It is Japan’s preeminent real estate company. The quality of its buildings in terms of location and rent pricing are superb. Even as a commercial real estate company, Mitsui Fudosan does possess some brand power, which translates to premium pricing power. It has such a strong brand for quality that tenants pay a premium to be in their buildings.
You do not need to do a ton of analysis to see that Mitsui Fudosan is also trading at a significant discount to fair value. Since January 2014, the company’s stock price has gone virtually nowhere. Over the same time, the Nikkei is up over 120%, and Mitsui Fudosan’s net asset value has almost tripled. The company has historically traded at a premium to its real estate value. Now it trades at a 33% post-tax discount. The value of its real estate, post-tax, is 5,700 yen per share, versus the stock trading at 3,850 yen. Plus, it has an 800-billion-yen stock portfolio, which includes a 550-billion-yen position in Oriental Land Company, or OLC, and successful fee-based real estate businesses (asset management, property management and brokerage) that brings its net asset value to 7,103 yen per share, implying an 84% discount in the price of the stock.
The sources of this underperformance are likely unsurprising to those who have been monitoring recent activist campaigns in Japan from the likes of Elliott, ValueAct and Palliser, as well as the government and Tokyo Stock Exchange’s actions in recent years. Mitsui Fudosan is grappling with a low valuation and return on equity in absolute terms and relative to peers. Shareholder confidence is only further hindered by its governance practices. Mitsui Fudosan’s 800-billion-yen stock portfolio currently accounts for about a fifth of its market cap, but significantly dilutes the company’s ROE as it generates only 7 billion yen per year in dividend income. OLC accounts for about 70% of Mitsui Fudosan’s 800-billion-yen portfolio of cross-shareholdings, which debatably could make it the company’s largest asset. This is not only an inefficient allocation of capital, but also a risky one, to have such a great share of Mitsui Fudosan’s assets in a single publicly traded company that is one of the most expensive stocks in the TOPIX 100 on both a price-earnings basis and an enterprise value to earnings before interest, taxes, depreciation and amortization basis. The Tokyo Stock Exchange has been encouraging companies to improve ROE and get above a one times book value valuation. Right now, Mitsui Fudosan has 0.65 times price to adjusted book value (for real estate companies) and the lowest ROE among its peers.
This can be remedied by a board that practices better capital allocation and corporate governance – a board that gets back investors’ confidence that shareholder return will match portfolio growth. There are three things Mitsui Fudosan can do right away to create value for shareholders. First, it can sell its stake in OLC, which it has already started doing, but given the engagement by Elliott, not at a satisfactory pace. This is somewhat like Palliser Capital’s engagement at Keisei Rail, where the firm has called for a reduction of that company’s non-core 22% stake in OLC. Second, Mitsui Fudosan can sell 500 billion yen of non-core real estate holdings. Third, the company can use the proceeds to buy back shares and invest in new real estate developments as it creates the most value by redeveloping versus holding onto these assets. This will give Mitsui Fudosan a higher return on equity, which will lead to a lower cost of capital and a higher price to book value.
This campaign is very similar to Elliott’s engagement at Dai Nippon Printing, another Japanese company, where the firm called for share repurchases to improve ROE and the accelerated disposal of certain real estate holdings and the company’s portfolio of cross-shareholdings. Shortly after the announcement of their engagement, Dai Nippon announced the largest share repurchase in its history: 300 billion yen or 30% of the company’s market cap.
Despite Mitsui Fudosan’s corporate governance situation – receiving very low governance scores from Institutional Shareholder Services, having only one-third of the board comprised of independent directors and having a strange two-year term structure – there is some optimism to be had here. There is no large controlling shareholder of Mitsui Fudosan, a relatively low amount of cross-shareholdings (approximately 8%), and current president and CEO Takashi Ueda has been vocal in his commitment to boosting shareholder returns and capital efficiency, as well as his desire to churn real estate assets.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.  More