Q: My husband and I are interested in giving our children some money for the holidays. We figure it’s better to do it now while they need it. But, we’ve heard there is a limit to how much we can give and we don’t understand the tax implications of our gift to our kids or to us.

A: A gift of cash is tax-free to your kids. Keep in mind, if you give appreciated stock, any unrealized capital gain is shifted to them and they’d owe capital gains tax upon the sale of the shares.

In 2023, you can give up to $17,000 (increasing to $18,000 in 2024) to any person without having to report it on your tax return. Now, if you give more than $17,000 to anyone, you will need to file Form 709 to report the amount over the annual gift limit. And, the amount over the limit will count against your current tax-free lifetime gift “allowance” of about $13 million. You can multiply that by two as a married couple.

As you can see, most people don’t have to worry about taxes on gifts; giving or receiving. The only thing is whether or not you need to file a Form 709 to keep track of amounts over the annual gift limit.

Q: We have rental property that loses money each year from a tax perspective. But, when I look at my past tax returns, our rental loss doesn’t seem to show up. If I remember correctly, our tax preparer said it’s because we make too much money. If that’s the case, will we ever benefit from those tax losses?

A: It sounds like you are running into the limit on passive activity losses due to your income level. The tax code loves complexity, but I hope this explanation will simplify it a bit for you.

If your modified adjusted gross income or MAGI is below $100,000, you are allowed to deduct up to $25,000 of your rental losses. But, if your MAGI is above $100,000, $1 of your rental losses get “held in suspense” for every $2 of income above the limit. As you’ll see, by the time your MAGI reaches $150,000, the entire $25,000 passive loss deduction is disallowed and is effectively held in “suspense” for later use.

So, when will you ever get to use those suspended rental losses? When your MAGI dips below $150,000, you’ll get to use some of them. And, regardless of your income, if and when you decide to sell the rental, your suspended losses will be unlocked. So, they are not “lost” losses, they are just suspended deep in your tax return on Form 8582.

Jason P. Tank, CFA, CFP® is the owner of Front Street Wealth Management, a purely fee-only advisory firm in Traverse City. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Another year will soon enter the history books. If I had to pick one word to best describe the stock and bond markets in 2023, I’d choose the word, vicissitudes. Fittingly, this word was often used by Warren Buffett’s mentor, Benjamin Graham, in his seminal book, The Intelligent Investor. Vicissitudes; a change or variation in the course of something. 

About a year ago at this time, the stock market was 25% to 30% off its peak. To make matters far worse,  bonds were also experiencing one of their deepest bear markets ever, down around 15%. Together, it resulted in one of the single worst periods for balanced portfolios. In all practicality, there was almost no place to hide. Doom and gloom had descended upon the scene.

With such negativity already baked into the cake, it left open the possibility that things might actually turn out better than feared. As we all know now, inflation basically peaked at this darkest moment, declining from around 8% to just about 4%. By the end of July, the stock market breathed a heavy sigh of relief by rising a whopping 30% off its low and the bond market returned almost 5%, too. 

At this point in time, the worries of a looming recession this year began to fade. Inflation was in steady decline, as they had hoped it would be, and the economy was seemingly cruising along relatively unharmed by so many rate hikes. This was the case even in the face of a mini-crisis in banking that was uncomfortably reminiscent of the ’08 financial crisis. Goldilocks had confidently entered the scene. 

Then, as if right on cue, the progress on inflation stalled out with the economy inconveniently picking up steam. In response, the Fed shifted its tone to one of cautious vigilance and signaled the possible need for still more rate hikes to avoid the mistakes of the ‘70s. Almost overnight, longer-term rates jumped higher and stocks fell over 10% and bonds dropped 5%. The lights dimmed and Goldilocks exited stage left.

Naturally, the show never really ends. Over just the past few weeks, Fed officials are seeing signs of the long-awaited economic slowdown and the most recent inflation report showed some renewed progress. They have calmed investors’ nerves by publicly signaling they might actually still be in pause-mode. In truly knee-jerk fashion, just like that both stocks and bonds have almost fully rebounded from their post-summer swoon.

Now, if anything is true, 2023 certainly shows how impossible it is to forecast markets. Nonetheless, if I were forced to make a forecast, I’d say it’s wise to count on the continued vicissitudes of markets to darken the stage a few more times. After all, we all know that Goldilocks is a fairy tale. 

Q: We are thinking about tax planning before the end of the year. For the past couple of years, our tax preparer mentioned making “Qualified Charitable Donations” from our IRA, but we feel too uninformed. Please explain.

A: Your tax preparer is giving you good advice. Making qualified charitable donations (QCDs, for short) directly out of your IRA will both lower your tax bill and help your favorite charities. It’s a win-win for everyone but Uncle Sam. Actually, I suppose that makes it a win-win-win!

To explain why donations from your IRA are smart, we have to go back to the Trump-era tax cuts. Starting in 2018, the standard deduction essentially doubled in size. Suddenly about 9 out of 10 taxpayers no longer itemize their tax deductions. Given this, the vast majority of people also no longer enjoy a tax break when making charitable donations.

The doubling of the standard deduction really left only one other avenue to enjoy a tax deduction for your charitable giving. For some, I should say. For those over the oddball age of 70.5, you are allowed to donate directly from your IRA and it won’t be counted as taxable income as it normally would be coming out of a (never been taxed) IRA.

Better yet, once you reach the age of 73, your IRA donations will count as part of your required minimum distribution (RMD.) Theoretically, you could give away all of your RMD to charity (up to a current annual limit of $100,000) and not have to pay a dime of taxes on any of it.  

Q: I am hearing mixed signals about bonds. On one hand, bonds have been a drag in my portfolio over the last two years. On the other hand, now their current yield is looking really nice. Which side of the coin should I focus on?

A: Bonds keep coming back up, no pun intended. Normally, bonds should be one of the most boring things in your portfolio. Lately, bonds have been anything but boring.

As I wrote a couple months ago, bonds that were originally issued during the super low interest rate environment are now selling at depressed prices. For long-term bonds, I’d say they are selling at highly-depressed levels. Naturally, those old bonds are less desirable since they only pay paltry levels of interest until they mature. So, price is the great equalizer that puts those old bonds on a level playing field with newly issued bonds that come with much higher rates.

My advice is to fight against your tendency to look backward. With the 10-year US Treasury selling at yields near 5%, a level not seen in about 16 years or so, bonds appear quite attractive and should be a healthy segment of any balanced portfolio.  

Q: Our son and his wife are looking to buy a home in Traverse City. Our advice to them is difficult to give and certainly for them to receive. Perhaps that’s due to our long memories of the reasonable home prices of yesteryear! Any advice you can give them and us would be appreciated.

A:  Giving advice to others is often hard, especially when it’s unsolicited! But, as a parent, I know it’s nearly impossible to remain silent. Hopefully, your son and daughter-in-law will take any advice you offer as heartfelt. Acknowledging that you may have some preconceived notions of what you see as value will demonstrate your sincerity.

Younger adults face a totally different environment than the generations of homeowners before them. With 30-year, fixed rate mortgage rates skyrocketing from a bit above 3% to now over 8% in just two years time, buying an identically priced home results in a 70% higher monthly payment. Adding insult to injury, since just before Covid hit, home prices have jumped over 40% nationally.

Taking these two facts in combination – higher rates along with higher prices – homebuyers today face more than a doubling of their housing costs compared to just a few years ago. This indirectly feeds into higher rental rates for those who are unable to even consider buying a home. There really is no way to escape the situation as everyone, in the end, needs a roof over their head. And, honestly, there is no way for society to ignore the situation, either. But, solutions are hard to come by.

I’m afraid my advice will feel awfully basic.

Before buying a home, your son and daughter-in-law need to be confident that their income is very secure. Their higher mortgage obligation will no doubt place a strain on the rest of their budget. The greater share of their income dedicated to their housing cost will impact their ability to spend on other things like travel, entertainment and eating out, let alone funding their other necessities.

While living close to both work and play is really attractive, considering a home outside of town might afford them the money to actually enjoy the amenities of our area. This is a real trade-off.  But, you should know that this advice might smack of hypocrisy coming from someone who was lucky enough to buy a home in town years ago before the surge in prices.

Our area is wonderful in so many ways, but it’s obvious that the access to this wonder is not spread evenly among us. While I imagine you have full perspective, it’s always important to recognize that your son’s challenge in deciding where and when to buy a home in our area is a truly fortunate problem to have. It might be a lot tougher for many others.