Q: I filled out my tax preparer’s organizer. As usual, my pile of documents included our property taxes, medical expenses, mortgage interest and donations, plus a few other things. But, I just got an email from my tax person saying I really didn’t need to gather all of that stuff. Why is that?

A: As they say, old habits die hard! It is true, if you are like most people, your effort to gather all of those receipts and statements to document your itemized deductions is probably no longer necessary. Since 2018, under the current tax law, they basically doubled the standard deduction. This effectively eliminated the need for most taxpayers to even think about claiming itemized deductions.

For example, for those who file as a married couple, the standard deduction for 2022 is $27,700. If you both happen to be over age 65, it jumps to $30,700. This dollar amount is the bogey to compare to your level of itemized deductions.

There are four main categories of itemized deductions to consider. You might not even come close to needing to itemize your deductions. The categories are the taxes you paid, your mortgage interest, your donations to charity, and your medical and dental expenses. If you are moderately good at math, you can probably tally them all up in your head to see if gathering up all of the necessary documentation is worth your effort.

First, add up the property taxes and state income taxes you paid last year. Remember, though, the maximum for this category is capped at $10,000. Next, add in the amount of mortgage interest you paid last year, if any. Then, total up your cash and in-kind donations made to charities. Finally, there’s one more complex category. Add up your medical and dental expenses. Do some mental math to see if they exceed 7.5% of your adjusted gross income. For example, let’s say your adjusted gross income is $100,000. Unless these expenses exceed $7,500, none of your medical and dental expenses will be tax deductible.

The bottom line is this. If you are married, don’t have a mortgage, or don’t give away a lot and you don’t have big medical and dental expenses, it’s highly unlikely your itemized deductions will exceed your automatic standard deduction. On the other hand, certain single filers, and even some married filers, might still end up itemizing their deductions. It only takes a little understanding to figure out if you can avoid the tax gathering work or not. According to recent stats, only about 10% to 15% of all taxpayers itemize their deductions. If you don’t fall into this group, welcome to the world of tax simplicity!

After last year’s pain, the start of 2023 has been nice. Stocks are up nearly 10% and bonds have bounced over 4%. The mood has quickly shifted from doom and gloom to optimism. Is this shift fully justified? 

For the past 18 months, almost everything has hinged on inflation. To vanquish the post-Covid surge in inflation, the Fed abruptly raised rates from zero to about 4.5% to 4.75%. After one more 0.25% expected interest rate hike, most investors now believe the Fed will finally pause. 

Why the pause? The outlook for inflation has really improved. According to the Fed’s preferred measure, we’ve seen a discernable decline in inflation from around 5.5% at its worst point last year to the latest reading of 4.4%. It’s likely heading lower still. But, it will take some time to get to the targeted 2% inflation rate the Fed wants. And, most expect it will take economic pain to get us there. 

With the hope for a Fed pause, investor focus has now clearly shifted to the health of the economy. Naturally, this is where things start to look fuzzy.

It’s awfully difficult to believe that cumulative rate hikes of about 5%, at such a quick pace, won’t push us into a recession soon enough. Interest rate hikes are seen as a blunt tool and they affect the economy with both “long and variable lags.” In normal language, they take time to really bite. 

Given this, investors have been bracing for the pain to come. But, lately, the optimistic idea that we can squash inflation without feeling real economic pain has once again taken root. The idea that the Fed can actually thread the needle is back in vogue, as it was last June. This optimism has translated into diversified balanced portfolios recovering roughly half of their losses from the market low in mid-October.

Other than simply breathing a sigh of relief when reviewing their monthly statements, how should investors react to this mood shift? 

Keep in mind that certain very reliable economic indicators, such as the “yield curve”, implies a looming recession of some depth. The 10-year Treasury now yields 3.4% as compared to the 3-month Treasury Bill yield of 4.5%. This upside-down relationship has a very good record as a recession predictor. If inflation proves to be stickier or the interest rate hikes start to kick in too strongly, the market rebound could easily reverse. 

In all humility, though, nobody really knows the short-term direction of markets. Nonetheless, after last year, taking a fresh look at your portfolio’s mix of stocks and bonds is in order. The time to do this review is from a position of strength. And, there’s absolutely no doubt things look quite strong right now!

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Q: Last year was ugly. I’ve looked over my year-end statements and I think I lost as much in bonds as I did in stocks. To stop the bleeding, I’m thinking about selling my bonds and moving into cash or even buying CDs. Does this move make sense? 

A: You’re right, last year was particularly bad for bonds. Arguably, it was one of the worst years in modern history for investors with balanced portfolios. The Fed’s moves on interest rates caused bonds to fall a whopping 10% to 15%. Adding insult to injury, stocks fell about 15% to 20% last year. Clearly, there was no great place to hide.

Looking forward, while nobody really knows what 2023 will bring, I think the pain you’ve felt in bonds is likely a thing of the past. The bond market has largely “priced in” the impact of the Fed’s current war on inflation. Rather than moving out of bonds now, holding tight is probably smarter. Changing your portfolio based on recent pain almost always turns out to be a mistake.

Q: I’m starting to receive some 2022 tax documents. I’m really confused about my IRA distributions, as shown on Form 1099-R. I donated money to charity directly from my IRA believing those distributions wouldn’t count as taxable income. But, looking over my IRA’s 1099-R, it appears my donations were taxable distributions, nonetheless. Did my brokerage firm make a mistake or did I do something wrong? 

A: No, the brokerage firm didn’t make a mistake. And, no, you didn’t make a mistake. Form 1099-R is simply a summary of all of the money that came out of your IRA last year. Brokerage firms include a tally of every dollar that left your IRA, regardless of whether it was a charitable donation or not. 

Why aren’t your donation checks subtracted out? Because brokerage firms aren’t in the business of verifying whether you gave to a “qualified” charity or not. This leaves it up to you or your tax preparer to subtract your qualified charitable donations, or QCDs, from your total distributions as shown on your Form 1099-R. 

Q: For 2022, it turns out I’m in a much lower tax bracket than usual. As a result, I overpaid by a lot with my estimated tax payments last year. Since I’ve already paid in more than enough taxes, can I do a Roth conversion before I file my 2022 taxes?  

A: I’m sorry, you can no longer do a Roth conversion and have it apply to last year’s taxes. Unlike making a regular IRA, Roth IRA or even an HSA contribution by the filing deadline in mid-April, any Roth conversions had to be completed by the end of the calendar year. Unfortunately, this highlights the need to sit down and do your tax planning near the end of the year.   

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Fresh starts are nice. That largely explains our natural drive to celebrate the New Year with such hope and joy. After a year like 2022, and especially for retired investors, I’d say a fresh start is well deserved!

Before looking forward, let’s first run the numbers for 2022. With stocks declining about 20% and with bonds dropping about 13% for the year, there were very few places to hide. Given the dual decline in both stocks and bonds, the primary risk management tool of asset allocation failed to deliver. The end result? Last year was one of the worst on record for conservative investors with balanced portfolios.

Today, on the other hand, a broadly diversified bond portfolio made up of a combination of US Treasuries, mortgages and corporate bonds now sports a yield-to-maturity of about 5%. From an income perspective, bonds are now putting up a real fight against stocks. With interest rates having been pinned down by the Federal Reserve for much of the last 15 years, this hasn’t been the case in a long, long time. 

For those sitting with a lot of cash in the bank or parked in a money market fund, it might be enticing to just do nothing and keep that money safe. That’s especially true with short-term cash now earning around 4%. But, remember, if the economy slows next year as expected, short-term rates could just as easily decline once again. In other words, that 4% yield on cash could be short-lived. Looking at following a careful process of investing some of your excess cash in bonds is worthy of consideration.

The last two months of inflation reports are showing a breaking of the inflation fever. While inflation will be slow to fully recede, a careful reading of the tea leaves points to the Fed now starting to shift their focus to the economy. It’s about time, because many investors worry that the Fed has already raised interest rates too high and too fast. Their big fear? A recession. In fact, this might be the most widely-anticipated recession ever. 

Nothing in financial markets is certain, of course. Even with bonds finally showing promise, the Fed has not yet fully vanquished inflation. If inflation so much as ticks higher, expect talk of more rate hikes than currently anticipated. And, even with so many investors openly predicting a recession, stock prices haven’t fully baked in that scenario. We’re not yet out of the woods.

Without sounding too mealy-mouthed, we’re still in a moment that calls for careful, but not crazy, risk taking. The ironic solution? Do what most absolutely didn’t work last year; try to embrace a balanced portfolio in 2023!

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

It simply wouldn’t be Christmas without a legislative gift from Congress. As I write this, one such bill is grinding its way through the House and Senate and is expected to land on the President’s desk for his signature before we ring in the new year. Weighing in at over 4,000 pages, it will most certainly land with an audible thud.

Professionally, my focus is on the key elements that affect near-term and current retirees. Starting on page 2,047 of this “all, but the kitchen sink” omnibus bill are the provisions known as the SECURE Act 2.0.

Similar to the original SECURE Act that became law a few years ago, SECURE Act 2.0 contains about a hundred provisions designed to enhance retirement saving. Key changes range from increasing the required minimum distribution age for IRA owners, to boosting the “catch-up” retirement plan contributions for near-term retirees, and requiring employers to automatically enroll employees into their retirement plans.

Beginning next year, the new age that triggers a required minimum distribution (RMD) from IRAs or other tax-deferred retirement accounts is increasing. It’s moving up in two stages. The new RMD age is increasing from age 72 to the magic age of 73. This new age milestone will stay in place for a decade. Eventually, starting in 2033, it’ll jump up again to age 75.

In addition, the penalty for failing to take out your RMD will finally be reduced from its currently massive level of 50% of your missed amount. Starting in 2023, the new penalty is set at a still very painful level of 25%. But, if you are able to fix your mistake quickly enough, the penalty could be further reduced to 10%. This is a welcome change.

Further, if you are fortunate enough to be able to support yourself for at least a little while with your non-Social Security and non-IRA income sources, this new RMD age of 73 now adds another year to your retirement “gap years” planning toolbox. The retirement “gap years” is the period of time between the end of your work life and the start of your Social Security and drawing from your IRAs. With SECURE Act 2.0, Congress has now added one additional planning year to analyze the possible tax benefits of both Roth conversions and realizing long-term capital gains at no federal tax.

As a wealth manager, I have to admit that Congress is truly the gift that keeps on giving in the form of job security!