Changes to the Filing Deadline

One thing to note before we get into the nitty-gritty: After two straight years with an April 18 deadline, this year returns to the more traditional April 15 deadline.¹  (Remember, though, that filing earlier is almost always better than filing later.  We’ll get you your tax documents as soon as they become available.)

For those who need to file for an extension, the due date is October 15.¹   

Changes to Federal Tax Brackets²

As it often does, the IRS has adjusted the 2023 tax brackets based on inflation.  These adjustments are even greater than usual this year as the country continues to contend with higher-than-normal prices.  While tax rates have not changed, bracket ranges increased by roughly 7%.  That’s good news for those whose wages have gone up to keep pace with the rise in prices, because it means they won’t necessarily get bumped into a higher bracket.  And some people may even find themselves dropping down a level, even if their pay stayed the same.   

Changes to Capital Gains³

The income threshold for long-term capital gains rates has also gone up. 

Changes to Deductions

As you know, when you file your taxes, you can either claim a standard deduction or dive into the details and itemize your deductions.  (Since the passing of the Tax Cuts and Jobs Act back in 2017, most people choose the former.)  Per the IRS, the standard deduction is “a specific dollar amount that reduces the amount of income on which you’ve been taxed.”⁴

Due to inflation, the IRS has also increased the standard deduction for your 2023 taxes.  For singles, the standard deduction is now $13,850, up from $12,950.  For married couples filing jointly, it is $27,700 up from $25,900.  For heads of households, the standard deduction is $20,800, up from $19,400.⁵

Remember, you can’t take the standard deduction if you also itemize deductions.  And for married couples filing separately, both spouses must take the same type of deduction. So, if one spouse chooses to itemize, the other spouse must as well.

Changes to Alternative Minimum Tax (AMT) Exemption Levels⁵

When Congress passed the Tax Cuts and Jobs Act back in 2017, the number of Americans who owe the AMT has been drastically reduced.  But in case you fall under this category, the exemption levels for 2023 are as follows:

These exemption levels begin to phase out at $578,150 for single individuals, and $1,156,300 and $1,505,600 for married couples filing jointly. 

***

«Salutation», I hope you found this information helpful.  Obviously, it’s not a completely exhaustive list of every change for the 2023 tax year.  But it is an overview of some of the most important ones.  If you have any questions or concerns, please let me know.  My door is always open!     

Sources

¹ “2024 tax filing season set for January 29,” Internal Revenue Service, https://www.irs.gov/newsroom/2024-tax-filing-season-set-for-january-29-irs-continues-to-make-improvements-to-help-taxpayers

² “2023 Tax Rate Schedules,” Internal Revenue Service, https://www.irs.gov/publications/p17#d0e50213

³ “Capital gains and losses,” Internal Revenue Service, https://www.irs.gov/taxtopics/tc409

⁴ “Standard Deduction,” Internal Revenue Service, https://www.irs.gov/taxtopics/tc551

As a financial advisor, I’m a big believer in checklists.  They help me stay organized, keep my priorities straight, and ensure that everything I need to do for you gets done. 

One of the items on my personal checklist this month is to send a checklist to you. 

It’s 2024!  A new year means new opportunities, new adventures, new goals to achieve.  But doing all that requires some housekeeping.  There are certain financial steps I highly recommend you take early in the year in order to make the rest of 2024 as enjoyable and stress-free as possible.  So, to that end, I am including a short “Q1 Financial Checklist” with this letter. 

The well-known surgeon Atul Gawande said in his book, The Checklist Manifesto: “Checklists cannot be lengthy.  A rule of thumb is to keep it between five and nine items, which is the limit of working memory.”  With that in mind, I’ve chosen seven items that are especially important. 

The tasks on this list are all things that should be taken care of in the first quarter.  Don’t worry – they’re not difficult!  In fact, you may have handled most of them already.  Some may not even apply to you.  But each task is important in its own way.  Put them all together, and you will find yourself more financially organized…and several steps closer to your financial goals. 

If you need help or have questions about any of these, please let me or Amy know.  In the meantime, I hope you have a great first quarter…and a wonderful 2024! 

Even people who think they've ticked off all of the usual boxes on their estate-planning to-do lists may have overlooked an increasingly important component of the process: ensuring the proper management and orderly transfer of their digital assets. Just as traditional estate-planning relates to the management and transfer of financial accounts and hard assets, digital estate-planning encompasses digital possessions, including data stored on tangible digital devices (computers and smartphones), data stored in the cloud, and online user accounts.

Digital estate planning is, in many respects, more complicated than traditional estate planning. The field of digital estate planning is evolving rapidly, as are digital providers' policies on what should happen to digital assets that are left behind. Digital assets are also governed by a complex web of rapidly evolving laws, both at the state and federal levels. Precisely because of all the potential complications, it’s important to take a few minutes and get a plan in order. Here are several key steps to take.

1) Conduct a Digital ‘Fire Drill.’ A good first step in the digital estate-planning process is to conduct a digital fire drill, which tends to jog your memory about what digital assets you deem important. Consider the following questions. What valuable items would you lose if your computer was lost or stolen today? If you were in an accident, would your loved ones be able to gain access to your valuable or significant digital information while you were incapacitated? If you were to die today, to what valuable or significant digital property would you like your loved ones to have access?

2) Take an Inventory of Your Assets. The next must-do is to create an inventory of the digital assets you named during the fire drill. Document the item/account name as well as usernames and passwords associated with that item. Among the items to document in your digital inventory are: digital devices such as computers and smartphones, data-storage devices or media, electronically stored data, including online financial records, whether stored in the cloud or on your device, user accounts, domain names, and intellectual property in electronic format. This document would be chock-full of sensitive information, so keeping it safe is crucial. A printed document should be stored in a safe or safe deposit box, and an electronic document should, of course, be password protected.

3) Back It Up. We've all been schooled on the importance of regularly backing up digital assets, and estate-planning considerations make it doubly important to do so. Even if a specific device malfunctions, storing digital assets on another storage device or in the cloud helps ensure the longevity of those assets. Moreover, online account service providers may voluntarily disclose the contents of electronic communications, but they're not compelled to do so. If you want to help ensure that your loved ones have access to the information in your online accounts, backing it up on your own device is a best practice.

4) Put Your Plan in Writing. Experts also recommend formalizing your digital estate plan. That means naming a digital executor—someone who can ensure that your digital assets are managed or disposed of in accordance with your wishes after you're gone. If your primary executor is savvy with technology, there's probably no need to name a separate digital executor. But if not, or if you have particularly valuable or special digital property, such as intellectual property, experts advise a separate fiduciary/executor for digital assets. Depending on the type of property, the fiduciary may also need special powers and authorizations to deal with specific assets. This is for information purposes only and should not be construed as legal, tax, or financial planning advice. Please consult a legal, tax, and/or financial professional for advice regarding your personal estate planning situation.

You’ve worked hard, you’ve done a good job on saving, you invested wisely, and you managed your spending well. You have a good financial plan working, and now you have money (or other assets) to share. Now you’re wondering who to share with and how!

A lot of people do not donate money during their life because life has uncertainties. For example, a catastrophic health event could be extremely costly. When you pass away, your will or trust documents will instruct who, where, and how your estate will be distributed.

 If you are sure you have more than enough to cover all possible scenarios, you have options to consider. The current tax law allows you to gift $15,000 per person every year or $30,000 for a married couple. These gifts are non-taxable for you or for the recipients. If you stay inside the $15,000 limit, you will not have to file a gift tax return to report your gifts.

As the tax law stands today, you can give away up to $11.7 million based on the federal estate tax exemption without paying estate taxes. If you give any person more than $15,000 per year, you will use up some of this estate tax exemption. Just remember that this federal exemption amount will drop back to $5 million (plus inflation) in 2026 when the current tax law sunsets. However, Congress may pass new tax laws prior to 2026.

During your life, if you give away give away assets such as a personal home, investment property, and stocks and bonds, your cost basis in the asset transfers with the gift. Let’s say you bought a vacation home 50 years ago in an area that has appreciated rapidly. You would have to pay the tax on the gain if you sold the home. Once you gift the vacation home to your children, they will have to pay the tax on the gain when they sell the home.

The estate tax law currently allows a “step-up” in the cost basis of property or other assets to fair market value at your death. If you paid $50,000 for a vacation house that is now worth $1 million, your heirs could sell the property the day after they inherit it without any taxable gain on the sale.

Planning pays off. In any aspect of your life, and especially when it relates to your money. Plan first before you start gifting. Considering the emotional and relationship side benefits of gifting is just as important as the numbers. You and your spouse would want to see your children handle the gift wisely. You expected your Peter to pay down his credit card but ended up buying a new car. You hoped Sarah would spend some quality time with her family on vacations, instead they paid down their mortgage.

 Keep in mind, you can also pay college or medical expenses directly for anyone in any amount and not use up your estate tax exemption. You can even take the entire family on an extended cruise or a trip to The Bahamas. In this way, you can spend quality time with your family. At the same time, you are able to control and appreciate how the money is being used.

Have you ever received a gift you didn’t actually want?  Well, investors got just such a gift recently – the kind nobody wants.  I’m not talking about an ugly sweater or a pair of socks.  I’m referring to a new bout of market volatility, just in time for the holidays.  

(Quick recap in case you haven’t been following the news.  The Dow fell over 900 points the day after Thanksgiving – giving a whole new meaning to the term “Black Friday” – and then it slid a further 650 points on November 30.)¹  

So, what’s the cause of this winter wobble?  Three familiar characters from our ongoing pandemic drama: COVID-19, inflation, and the Federal Reserve.  In this message, I’ll recap what’s going on and then discuss what we as investors can do about it.  Let’s start with…

The Omicron Variant

On November 26, the World Health Organization announced the discovery of a new variant of COVID-19 designated as Omicron.  What we know: It was first discovered in South Africa, and it contains “an unusually large number of mutations” from the original virus.²  

Here's what we don’t know: Is Omicron more contagious?  Is it more virulent?  Can it evade the protection offered by vaccines?  Scientists are racing to find the answers, but until they do, the rest of us must wait.  

When it comes to the markets, what we know prompts investors to buy, but what we don’t spurs the impulse to sell.  The markets hate unknowns.  When faced with too many – especially on such an important subject – the reaction tends to be fear and panic.  That’s especially true here. You see, any answers scientists come up with will inevitably lead to more questions.  For example, if Omicron is more contagious, will it lead to fresh lockdowns and restrictions?  Will that derail the economic recovery?  If so, would that also overturn the bull market?  

Another unknown: How will Omicron affect our second character, inflation?  

Inflation

As you know, inflation has risen sharply in 2021.  While inflation doesn’t directly impact stocks as much as, say, bonds, it can still spook investors.  That’s because higher inflation typically leads to higher interest rates – more on this in a moment – which can cut into corporate profits.  Inflation can also increase the cost of doing business, such as hiring new employees or purchasing new equipment.   This eats into profits further still.

With Omicron, experts are trying to figure out what the new variant will do to inflation.  There are three possibilities.  

First, if Omicron were to cause an economic slowdown – and remember, that’s still a big “if” at this point – then that would likely dampen inflation.  (Remember, inflation increases when demand outpaces supply.)  But if demand were to fall, inflation would, too.  Unfortunately, an economic slowdown is not the remedy anyone would choose to fight inflation.

The second possibility is the exact opposite: Omicron could make inflation worse.  Imagine that Omicron doesn’t require a new wave of restrictions here in the States.  In that case, the economy probably wouldn’t be affected too much.  But there’s more to the world than the United States.  If other nations – those with a lower percentage of vaccinated citizens, say – were to get hit hard by Omicron, it could further snarl supply chains.  Given that supply is already struggling to keep up with demand, that would be like trying to put out a fire with gasoline.  

The third possibility: Omicron turns out to be manageable and has little to no effect on inflation or the economy.  Keep an eye on this space!

In the meantime, though, these unknowns are giving our third character a major headache.  

The Federal Reserve

Ever since the pandemic began, the Federal Reserve has tried to prop up the economy by keeping interest rates near zero.  But with inflation on the rise, the Fed recently signaled plans to wind down their stimulus efforts.  Their reasoning?  The economy is strong, and inflation doesn’t seem to be going away, so it’s time to start raising interest rates.  (Higher interest rates tend to cool off the economy, because they prompt people to save their money instead of spending or borrowing it.  A cooler economy decreases inflation, and things gradually go back to normal.)  

The problem is the stock market has become accustomed to the Fed’s low interest, “easy money” policies.  Low interest rates mean that many securities, like bonds, simply don’t provide the same return on investment as they would in a high-interest-rate environment.  That drives more into the stock market to get the returns they need.  Higher interest rates could potentially reverse this trend.  That’s why investors don’t like any talk of the Fed “tapering” their stimulus program.  

On Monday, November 29, the Chairman of the Federal Reserve announced the possibility that tapering might happen even sooner than investors thought.³  That was too much for investors handle, preoccupied as they already were with the Omicron variant.

And now you know why the markets delivered a big, ugly pile of volatility on our doorstep.  There wasn’t even a bow on it!  

So, what do we do?  

I was thinking about how best to answer this question when I came across another headline: The start of the 2021 World Chess Championship in Dubai.  Then it hit me.  The best way to describe what we as investors should do is by comparing it to what the top chess players do.

The best chess players are masters at calculating possibilities.  (“If I move my Bishop here, he’ll have to move his Queen there, which means I can move my Knight...”)  In some ways, they think like computers, and indeed they often use computers to figure out the best moves to play.  

But no human can calculate everything.  There are occasions when the position is just too complex to predict every possible outcome.  In some cases, they literally don’t have time to calculate, and must make a move with only seconds on the clock.  In a sense, chess players, like investors, are always operating under uncertainty.      

When this happens, chess players rely on principles instead of predictions.  They make decisions they know to be fundamentally sound, even if they can’t calculate the result.  They don’t react emotionally.  They don’t guess.  They rely on years of training and experience, knowing that, more often than not, their overall strategy will see them through.  

Analysts, pundits, the Federal Reserve – they’re all trying to calculate.  But no one can calculate everything, which is why no one knows exactly what the future holds.  As a result, too many investors fall back on emotional guessing as they try to navigate unknowns.  Hence, the big selloff right after Thanksgiving.  

We’re not going to do that.  Right now, the markets are beset with unknowns.  Since we can’t calculate every possible outcome, we’re going to rely on principle instead of prediction.  We know that volatility is always temporary.  We know that none of these unknowns are actually new – investors have been wrestling with them for a year now.  (Just swap “Omicron” for “Delta”.)  And we know our long-term strategy has helped you get closer to your long-term goals.  In other words, we’ve put our pieces on good, sound squares – and we’ll continue to do so moving forward.  

That way, you’ll be giving yourself the kind of gift everyone wants: Financial confidence.       

In the meantime,  my advice is to enjoy the holiday season!  I hope it’s a wonderful one, filled with family and good cheer.  As always, let me know if you have any questions or concerns about your portfolio.  I’m always happy to talk with you!  

Happy Holidays!

¹ “Dow drops 650 points on growing omicron fears, Powell taper comments,” CNBC, https://www.cnbc.com/2021/11/29/stock-market-futures-open-to-close-news.html

² “SARS-CoV-2 Omicron variant,” Wikipedia, https://en.wikipedia.org/wiki/SARS-CoV-2_Omicron_variant

³ “Powell: The Fed May wind down its stimulus sooner than expected,” CNN Business, https://edition.cnn.com/business/live-news/stock-market-news-113021/h_59fd45577438f2211df2aedffcea26d9