Protecting Yourself When Your Data is in Danger

September 3, 2024 — Sam H. Fawaz

It’s been exactly one year since I published my article “Protecting Yourself from the Latest Cyber Scams.” It’s time to update that article, given that not a week goes by without hearing about another corporate data breach, which makes our personal data and information available for anyone to see or exploit.

National Public Data, a consumer data broker, confirmed last week that a hacker had targeted the company in December 2023, “with potential leaks of specific data in April 2024 and summer 2024.” (1)

Other reports indicate that this leaked data had already been found on the dark web and could include millions of Americans’ names, addresses, phone numbers, and Social Security numbers. (2)

A data breach of this magnitude is especially worrisome and is the latest in a string of major data breaches this year. (3)

If you’re wondering what you can do to help protect yourself against the growing threat of identity theft and related scams, here are some steps to consider.

Consider Fraud Alerts and Credit Freezes

One way to reduce your risk after a data breach is to place a fraud alert or a credit freeze on your credit report. Both are free tools that can help you prevent fraud but work somewhat differently.

A fraud alert is a notice placed on your credit report that warns potential creditors that your identity has been compromised. It allows them to check your credit but requires them to take extra steps to verify your identity before issuing new credit in your name.  You can place a fraud alert by contacting one of the three major credit bureaus (Equifax, Experian, and TransUnion), and that agency will notify the others. An initial alert will last for one year but can be extended to seven years if you have become an actual, rather than potential, victim of fraud.

A credit freeze (sometimes called a security freeze) may also help protect you if you suspect your personal information was stolen, but it’s more stringent. Once you have a credit freeze in place, potential creditors won’t be able to access your credit report or credit score (there are some exceptions.) This helps prevent identity thieves from opening fraudulent accounts in your name. You must contact each of the three major credit reporting agencies to request a credit freeze. The credit freeze will stay in place until you decide to lift it, which you must do at least temporarily before applying for credit.

Following each credit bureau’s instructions, you can set up a fraud alert or credit freeze online, by phone, or by mail. This may also be an excellent time to request a free credit report to check recent credit activity. Here are the three major credit bureaus’ website addresses and phone numbers:

·       Equifax at Equifax.com 888-298-0045

·       Experian at Experian.com 888-397-3742

·       TransUnion at Transunion.com 800-916-8800

Monitor Your Personal and Financial Information and Implement Technology Controls

·       If you need extended support, consider subscribing to a credit monitoring service. These services come at a cost, but they may bundle credit report monitoring, credit report locks, scans of the dark web, help recovering from identity theft, and insurance.

·       Periodically review your credit reports to spot suspicious activity. You can receive free weekly online reports from all three credit bureaus at the official site, annualcreditreport.com.

·       Sign up for alerts for your bank, financial, and credit card accounts. These alerts notify you when an unusual transaction occurs, or someone has signed into your account. Check your accounts frequently and review your statements monthly.

·       Pick strong passwords that are different for each account and change them periodically. For an extra layer of protection, use a password manager that generates strong, unique passwords you control through a single master password.

·       Enable multifactor authentication when offered. For example, in addition to providing a password, you may be required to enter a code sent to your phone or email, answer a security question, use a physical security key, or sign in using a facial or fingerprint scan.

·       Keep your device and security software up to date. Operating system and software updates may include security fixes. Turning on automatic updates is an easy way to do this.

·       Add security software to your smartphones and tablets, just like your computer or laptop.

·       Beware of phishing (e-mail), vishing (phone), and smishing (SMS) attempts from scammers who want to obtain passwords or financial information. Always maintain a healthy dose of skepticism.

·       Be cautious if you receive a link or attachment in your email or via social media. Don’t click on it until you verify it’s legitimate.

·       Warnings of overdue invoices, failed delivery attempts, and order confirmations in e-mails and texts look surprisingly genuine these days. Overseas scammers are now adept at using spelling and grammar checkers, so those old tell-tale signs may no longer exist.

·       Leave unsolicited/unknown phone calls to voicemail and double-check phone numbers, even if they appear familiar or appear to originate from a company you usually do business with. Cloning and spoofing of known and “safe” caller ID information is commonplace, so you can’t always trust it.

·       With artificial intelligence, voice replication software, and deep fakes, you can’t always trust what you hear or see. A tiny snippet of your voice, picture, or video on the web (or from a phone call) can be exploited to allow imposters to create near-perfect replicas of your voice, your loved ones’ voice, or video images and trick you into acting quickly out of fear.

·       Beware of humans or robocalls looking for a simple “yes” or “no” answer to a seemingly innocent question. They may attempt to steal your voice “print” to use in future scams they have planned.

Human Controls & Constant Vigilance

Be aware that after a significant data breach, scammers may step up impersonation attempts, even if they don’t have access to stolen data. That might be an impersonation of a loved one in distress (or perhaps hurt) or a government official.

In all cases, they prey upon your fear and your natural inclination to act irrationally while you’re fearful. They may demand you to send money or gift cards, or they’ll share your personal information on the dark web. Chances are, if they have it, it’s already on the web, and they’ll probably share it with others even if you pay up.

For example, someone allegedly from the Social Security Administration or IRS might contact you and ask you to verify your Social Security number or provide or update your personal information. However, government agencies will never email you or call you to ask for this information. Don’t respond, and promptly contact the appropriate government agency to report an identity theft attempt.

Whenever a stranger contacts you with a request for money, make it a personal practice to allow yourself 5-10 minutes to think about what’s happening before acting. Be especially skeptical if they advise you not to discuss the matter with a spouse or loved one.

If your data has been compromised or your computer has been hacked, they may offer to help you avoid or recover from identity theft or help secure your computer. They’ll do neither and only try to get you to pay up. Never believe or accept their offers of help, even if they say they’re from Norton Security, Microsoft, or Apple. By dangling information about you that few people know (harvested perhaps by hacking into your e-mail account), they convince you they’re legitimate (they’re not) and scare you into acting or paying up.

Hang up or shut down your computer immediately, and take the time to think about your next steps. Contact your closest tech geek to help you determine if your computer or e-mail account has been compromised and to sweep it for possible malware. Change your e-mail password immediately and turn on multi-factor authentication.

If you believe a loved one is in trouble, call them directly before doing anything (like sending money or even answering seemingly innocent questions) to confirm if they’re OK independently. Setting up a safe word or phrase with loved ones in advance can save you from heartache and a lighter wallet.

For more information about how to report and recover from identity theft, visit the Federal Trade Commission’s website IdentityTheft.gov.

If you suspect fraud, you can file a complaint with the Federal Trade Commission at reportfraud.ftc.gov.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

(1) National Public Data, August 2024

(2) KrebsonSecurity.com, August 15, 2024

(3) Identity Theft Resource Center, 2024

Posted in Financial Planning, Identity Theft, retirement planning. Leave a Comment »

What’s Going on in the Markets August 6, 2024

August 6, 2024 — Sam H. Fawaz

With the lazy, hazy days of summer come the doldrums in the stock markets—or so everyone thought.

July went out with a bang as the market rally broadened significantly to include small-caps and mid-caps, while the red-hot technology stocks took a breather. Sure, the S&P 500 index was only up 1%, but the small caps were up 11%, the mid-caps were up 7%, and even the bonds were up 3%.

But since then, if July was the lion, August has been the bear. The S&P 500 index is down 5% in just three August trading days, the small caps have given back almost 10%, and the tech-heavy NASDAQ 100 has slid 7.5%. In the digital age, markets move fast.

Now, mind you, the S&P 500 is still up about 15% over the last 12 months (and up 9.5% year-to-date), but every 10-12 months, we should expect a 5%- 9% pullback in the markets. We had a 5.3% pullback in April, but the last time we saw a pullback of this size ended last October. The markets have been remarkably calm over the past year, and we went 356 trading days without a 2% daily pullback in the S&P 500 index. That may be why this pullback feels so jarring.

Pundits and the media will posit several reasons for the pullback, such as:

·       The Federal Reserve is on the cusp of making a policy mistake by keeping interest rates higher for longer and is pushing the country into a recession.

·       The July monthly jobs report, which was out on Friday, spooked traders and investors as it came in much lighter than expected, and the unemployment rate ticked up. This fanned the fears that a recession was on the way (there’s always a recession on the way; the trick is knowing when we’re in one.)

·       Over the weekend, news broke that legendary investor Warren Buffet sold half of his stake in Apple during the past quarter and is stockpiling cash.

·       The possibility of a bigger, more freely spending government—regardless of party—is giving traders fits. The markets crave certainty, and summertime offers little of it in election years.

·       Escalating tensions in the Middle East.

·       The unwinding of a long-running Japanese Yen carry trade, in which traders sold the Yen and invested it in higher-paying countries and other opportunities for months if not years. Now, that trade is unwinding and directly affects the world’s stock markets.

You can cite any of the above reasons for the selloff, but the selling will stop when the fear that’s getting the better of so many traders and investors goes away. But certainty about the election is about three months away. Absent a market crash, any possibility of a short-term interest rate cut is about 45 days away. So, buckle up, meanwhile.

In our client portfolios, we’ve been getting defensive by taking some money off the table for weeks now. We are hedged with money market cash earning 5%, Treasury Bills, bonds, inverse funds, and options sold against our positions. We’re prepared to get more defensive if things get worse, but this is a time to look for quality stocks and funds that were too expensive about a week ago. We did some shopping for some clients last week.

We’ve had a fantastic start to the year, and historically, an election year tends to be volatile from the summer into September/October. Once the overhang from the election uncertainty is gone, the market should resume its uptrend by the end of the year.

In short, as I’ve repeated before, the secret to success in accumulating wealth is not to get scared out of your positions. It’s never about completely avoiding risk in the markets but reducing risk. If you’re losing sleep over your investments, consider reducing your exposure or contact us to help determine if you’re overly invested.

Meanwhile, try and stay cool!

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

Posted in American Economy, Financial Planning, US Stock Market. Leave a Comment »

Real Estate Commissions are about to Change

July 31, 2024 — Sam H. Fawaz

For decades, it’s been a well-known and accepted truism. Anytime you plan to sell your home with the help of a real estate agent, you are expected to pay a 6% commission on the sale. Sure, there have been discount brokers and ways to get your home listed on the Multiple Listing Services (MLS) on the cheap, but deep down, you knew that if you didn’t pay at or near 6%, your property might not get the same attention as others who did.

That’s about to change.

In March 2024, the National Association of Realtors (NAR) reached a landmark $418 million settlement after losing an antitrust lawsuit filed by a group of home sellers. As many as 50 million people who paid commissions on homes sold in recent years could receive a small amount from the class-action settlement. The powerful industry group also agreed to change long-standing practices related to sales commissions. (1)

Background

For decades, many real estate agents have had little choice but to join NAR and follow its rules regarding local MLS — the databases most brokers use to list information about properties for sale. Listing brokers typically cooperated with buyer’s agents and split the commission paid by the seller, with the amounts communicated via the MLS in data fields that were only visible to agents.

Plaintiffs claimed that NAR (and brokers that require agents to be NAR members) conspired to artificially inflate commissions through an industry-wide practice requiring the seller to pay commissions to brokers on both sides of the transaction. They believed this helped to uphold a nationwide standard of five to six percent of the sales price, which is significantly higher than the commissions paid in many other countries. (2)

Practice Changes

Effective August 17, 2024, NAR will implement the following new policies related to how real estate brokers are compensated to handle transactions. (3)

1. Commission offers for buyer’s agents can no longer be required to appear in the MLS, though they are still permitted. Listing agents can advertise specific commission offers on brokerage websites and over the phone, text message, or email. Home sellers and their agents will negotiate directly with buyers and their agents regarding compensation.

2. Buyers must discuss and set compensation directly with their agents before touring homes, as sellers do with listing agents. They will be asked to sign written representation agreements that outline the agents’ services (e.g., showing property, negotiating offers, transaction management) and how much they charge. This is to help ensure that buyers are fully aware of the costs they could be responsible for paying.

Implications for Buyers and Sellers

These changes are intended to allow more room for negotiation and spur competition, which could help lower sellers’ costs. Commissions have always been baked into transaction prices, so home prices would likely be reduced in markets where sellers’ costs fall.

Some economists believe commissions could drop as much as 30% if buyer’s agents face pressure from potential clients to discount their fees, but savings of this magnitude aren’t guaranteed. (4) The impact on real estate commissions will ultimately depend on market conditions, which can vary greatly by location and how sellers, buyers, and agents respond to the new practices.

Like other businesses, brokerages have overhead that includes rent, liability insurance, marketing, and other operating costs. Most individual agents must split sales commissions with their brokers (from about 60/40 up to 80/20 for the most productive agents) or pay fees to the company.

A buyer’s agent sometimes shows property to clients over days to months and may write numerous offers for deals that never come together. Many experienced buyer’s agents — long accustomed to receiving the same commission as the listing agent — may be reluctant to work for less, even if they must justify their value more regularly.

Buyers will determine the commission for their agents, but the money may or may not come from their pockets. For example, an offer could be made contingent on the seller paying the buyer’s share of the commission or include a request for a general credit toward closing costs in the amount needed to pay the buyer’s agent. Current lending guidelines and regulations prevent most buyers from adding commission costs to their mortgages. A rule pertaining to Veterans’ Administration (VA) loans, which specifically prohibited borrowers from paying agent commissions, has been temporarily suspended. (5)

In some cases, sellers might agree to cover buyers’ commissions, as it has long been customary and could still be in their best interests. Nationwide, home prices have risen more than 50% since 2019, and high interest rates have made mortgage payments much less affordable. (6) This means sellers with equity tend to be in a better position to pay commissions than potential buyers, many of whom may struggle to come up with enough cash for the down payment. For these reasons, a seller willing to pay all or some of the buyer’s commission may receive more offers and a higher final price than one who refuses to do so. This assumes, of course, the current cooling of the housing market continues.

Online sites have made it easier to shop for a home without using an agent, so more buyers might brave the market on their own if they think they can pocket the savings. Yet buying a home is the biggest financial transaction many people will make in their lifetimes, and the issues that arise during the process can be unexpected. There are many situations in which buyers could benefit from having their own representation, especially if they are inexperienced or unfamiliar with the local market.

First-time buyers, responsible for 31% of existing home sales in May 2024, may have more confidence and make more informed decisions if they work with a trusted professional. (7) However, many will need help from sellers to pay their agents’ fees, putting them at a bigger disadvantage than ever against buyers with more access to cash in competitive markets.

Negotiating commissions among all parties is likely to make it harder to strike deals in general, so buyers may have to search longer and write more offers before they are successful. It’s also possible that sellers will see little change in commission costs in the coming months while the market is in flux. But in time, the new rules could spark innovation that creates new business models and expands lower-cost options.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

1) The Wall Street Journal, March 15, 2024

2, 4) The New York Times, May 10, 2024

3, 5, 7) National Association of Realtors, 2024

6) The Wall Street Journal, June 27, 2024

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Google Securities Class Action Settlement

July 8, 2024 — Sam H. Fawaz

If you received a notice via U.S. mail last month regarding a securities class action settlement for Alphabet/GOOGL, it is because you are or were an Alphabet (GOOGL) Shareholder and purchaser of shares between April 23, 2018, and April 30, 2019.

As an affected shareholder, you can file a claim to recover (a yet undetermined but estimated) amount from the fund.

If you’re interested in doing so, for your convenience, I have compiled the below instructions describing background information and steps you need to take to file your claim.

I reviewed the GOOGL securities class action settlement, and depending on the number of shares you bought during the above period, you may conclude that the effort required to collect your portion of the claim not be worth the payoff. You should make this decision for yourself.

The settlement entitles “Persons that purchased or otherwise acquired Alphabet Class A and/or Class C stock from April 23, 2018, through April 30, 2019, inclusive” a portion of the settlement. 

“Members of the class here will recover an average distribution per common share, under the Plan of Allocation, approximately $6.41 per Class A share and $5.90 per Class C share.”

The above distribution plan relates to the number of pre-split shares of GOOGL. In July 2022, GOOGL shares underwent a 20 for 1 split, so based on the above distribution plan, you would receive approximately $0.32 per current Class A share and $0.295 per Class A share post-split.

Given the time it takes to complete the online claim and the documentation you must attach/upload (trade confirmations and statements proving ownership), this may or may not be worth your time.

However, if you’d like to file a claim, you can do so online at Alphabet Securities Settlement.

Shareholders have until July 25, 2024 to file a claim. Claim processing will likely take several months, so I would not expect reimbursement until early to mid-2025.

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The Impact of Higher Interest Rates on Real Estate

June 30, 2024 — Sam H. Fawaz

At the beginning of March 2022, the U.S. 10-year Treasury Bill interest rate hovered around 1.8%. By January 2024, that same 10-year rate hovered around 4%, more than doubling in less than two years.

As a result, U.S. commercial real estate prices fell more than 11% between March 2022, when the Federal Reserve started hiking interest rates, and January 2024. The potential for steeper losses has chilled the market and still poses potentially significant risks to some property owners and lenders. (1)

On the residential side of the real estate market, the national median price of an existing home rose 5.7% over the year that ended in April 2024 to reach $407,600, a record high for April. (2) Despite sky-high borrowing costs, buyer demand (driven by younger generations forming new households) has exceeded the supply of homes for sale.

Here are some factors affecting these distinct markets and the broader economy.

Slow-motion Commercial Meltdown

The expansion of remote work and e-commerce (two byproducts of the pandemic) drastically reduced demand for office and retail space, especially in major metro areas. An estimated $1.2 trillion in commercial loans are maturing in 2024 and 2025, but depressed property values, high financing costs, and vacancy rates could make it difficult for owners to keep up with their debt. (3) In April 2024, an estimated $38 billion of office buildings were threatened by default, foreclosure, or distress, the highest amount since 2012. (4)

In a televised interview on CBS’ 60 Minutes in February, Federal Reserve Chairman Jerome Powell said the mounting losses in commercial real estate are a “sizable problem” that could take years to resolve, but the risks to the financial system appear to be manageable. (5)

Locked-up Housing Market

The average rate for a 30-year fixed interest rate mortgage climbed from around 3.2% in the beginning of 2022 to a 23-year high of nearly 8% in October 2023. Mortgage rates have dropped since then, but not as much as many hoped. In May 2024, the average rate hovered around 7%. (6)

The inventory of homes for sale has been extremely low since the pandemic, but a nationwide housing shortage has been in the works for decades. The 2005-2007 housing crash devastated the construction industry, and labor shortages, limited land, higher material costs, and local building restrictions have all been blamed for a long-term decline in new single-family home construction.  The Federal Home Loan Mortgage Corporation, better known as Freddie Mac, estimated the housing shortfall was 3.8 million units in 2021 (most recent data). (7)

Many homeowners have mortgages with ultra-low rates, making them reluctant to sell because they would have to finance their next homes at much higher rates. This “lock-in effect” has worsened the inventory shortage and cut deep into existing home sales. At the same time, the combination of higher mortgage rates and home prices has taken a serious toll on affordability and locked many aspiring first-time buyers out of homeownership.

In April 2024, home inventories were up 16% over the previous year, but there was still just a 3.5-month supply at the current sales pace (a market with a six-month supply is viewed as balanced between buyers and sellers, but see the Latest Housing Data below.) The supply of homes priced at more than $1 million was up 34% over the previous year, which may help affluent buyers but won’t do much to improve the affordability of entry-level homes. (8)

New Construction Kicking In

Newly built homes accounted for 33.4% of homes for sale in the first quarter of 2024, down from a peak of 34.5% in 2022 but still about double the pre-pandemic share. The growth in market share for new homes was mostly due to the lack of existing homes for sale. (9)

April 2024 was the second-highest month for total housing completions in 15 years, with 1.62 million units (measured annually), including single-family and multi-family homes. (10) This may cause apartment vacancies to trend higher, help slow rent growth, and allow more families to purchase brand-new homes in the next few months.

Renters are seeing some relief thanks to a glut of multi-family apartment projects that were started in 2021 and 2022 — back when interest rates were low — and are gradually becoming available. In the 1st quarter of 2024, the average apartment rent fell to $1,731, 1.8% below the peak in the summer of 2023. (11)

We don’t want to see a dramatic decline in new multi-family housing projects just as rents are starting to ease. Reducing housing inflation is essential to paving a path toward lower interest rates, but rents could rise again if the new supply drops significantly.

Effects Weave Through the Economy

By one estimate, the construction and management of commercial buildings contributed $2.5 trillion to U.S. gross domestic product (GDP), generated $881.4 billion in personal earnings, and supported 15 million jobs in 2023. (12) According to the National Association of Realtors, residential real estate contributed an estimated $4.9 trillion (or 18%) to U.S. GDP in 2023, with each median-priced home sale generating about $125,000. When a home is purchased (new or existing), it tends to increase housing-related expenditures such as appliances, furniture, home improvement, and landscaping. (13)

Both real estate industries employ many types of professionals, and developing new homes and buildings stimulates local economies by creating well-paying construction jobs and boosting property tax receipts. The development benefits other businesses (locally and nationally) by increasing production and employment in industries that provide raw materials like lumber or that manufacture or sell building tools, equipment, and components.

Shifts in real estate values, up or down, can influence consumer and business finances, confidence, and spending. And when buying a home seems unattainable, some younger consumers might give up on that goal and spend their money on other things.

If interest rates stay high for too long, they could accelerate commercial loan defaults, losses, and bank failures, continue to constrain home sales, or eventually push down home values—and any of these outcomes could potentially cut into economic growth. When the Federal Reserve finally begins to cut interest rates, borrowing costs should follow, but that’s not likely to happen until inflation is no longer viewed as the larger threat.

Latest Housing Data

The latest housing data shows we may have seen a cyclical high for the housing market.

For April, the S&P Case-Shiller 20-City House Price Index was up again, increasing by 0.4% on a seasonally adjusted basis, but below forecasts. While the Index is rising to new highs, home price growth is slowing.

May New Home Sales fell 11.3% from the previous month, and prices are now 9% below their October 2022 peak. The number of months’ supply of new homes for sale jumped, rising to 9.3 months, reflecting inventory levels only seen in some of the worst housing recessions of the last 50 years.

The housing market is starting to come back to earth. It is a major unknown how long it will take to normalize or how swift its fall. If new home sales data worsens and existing home supply increases further, prices will inevitably come down. We don’t want to see mounting evidence of a housing market plunge, which would majorly affect the broader economy.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

1, 3) International Monetary Fund, January 18, 2024

2, 8, 10, 13) National Association of Realtors, 2024

4) The Wall Street Journal, April 30, 2024

5) CBS News, February 4, 2024

6–7) Freddie Mac, 2022–2024

9) Redfin, May 20, 2024

11) Moody’s, April 1, 2024

12) NAIOP Commercial Real Estate Development Association, 2024

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The Outlook for Social Security and Medicare

May 31, 2024 — Sam H. Fawaz

In a recent survey, 87% of Americans said that Congress should act now to shore up the Social Security program rather than waiting 10 years to find a solution. The sooner they do, the better.

Each year, the Social Security and Medicare trust fund Trustees provide detailed reports to Congress that track the programs’ current financial condition and projected financial outlook. These reports have warned for years that the trust funds would be depleted in the not-too-distant future, and the most recent reports, released on May 6, 2024, show that Social Security and Medicare continue to face significant financial challenges.

The Trustees of both programs continue to urge Congress to address these financial shortfalls soon so that solutions will be less drastic and may be implemented gradually.

Despite the challenges, it’s important to remember that neither of these programs is in danger of collapsing completely. The question is what changes will be required to rescue them.

More Retirees and Fewer Workers

The fundamental problem facing both programs is the aging of the American population. Today’s workers pay taxes to fund benefits received by retirees, and with lower birth rates and longer life spans, fewer workers pay into the programs, and more retirees receive benefits for a longer period. In 1960, there were 5.1 workers for each Social Security beneficiary; in 2024, there were 2.7, projected to drop steadily to 2.3 by 2040.

Dwindling Trust Funds

Payroll taxes from today’s workers and income taxes on Social Security benefits go into interest-bearing trust funds. During times when payroll taxes and other income exceeded benefit payments, these funds built up reserve assets. But now, the reserves are being depleted as they supplement payroll taxes and other income to meet scheduled benefit payments.

Social Security Outlook

Social Security consists of two programs, each with its own trust fund. Retired workers, their families, and survivors receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program, and disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program.

The OASI Trust Fund reserves are projected to be depleted in 2033, unchanged from last year’s report. At that time, incoming revenue would pay only 79% of scheduled benefits. Reserves in the much smaller DI Trust Fund, which is on stronger footing, are not projected to be depleted during the 75 years ending in 2098.

Under current law, these two trust funds cannot be combined, but the Trustees also provide an estimate for the hypothetical combined program, referred to as OASDI. This would extend full benefits to 2035, a year later than last year’s report, at which time, incoming revenue would pay only 83% of scheduled benefits.

Medicare Outlook

Medicare also has two trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care under Medicare Part A. The Supplementary Medical Insurance (SMI) Trust Fund comprises two accounts: one for Medicare Part B physician and outpatient costs and the other for Medicare Part D prescription drug costs.

The HI Trust Fund will contain surplus income through 2029 but is projected to be depleted in 2036, five years later than last year’s report. At that time, revenue would pay only 89% of the program’s costs. Overall, projections of Medicare costs are highly uncertain.

The SMI Trust Fund accounts for Medicare Parts B and D are expected to have sufficient funding because they are automatically balanced through premiums and revenue from the federal government’s general fund. Still, financing must increase faster than the economy to cover expected expenditure growth.

Possible Fixes

Based on this year’s report, if Congress does not take action, Social Security beneficiaries might face a benefit cut after the trust funds are depleted. Any permanent fix to Social Security would likely require a combination of changes, including:

• Raise the Social Security payroll tax rate (currently 12.4%, half paid by the employee and half by the employer). An immediate and permanent payroll tax increase to 15.73% would be necessary to address the long-range revenue shortfall (or 16.42% if the increase starts in 2035).

• Raise the ceiling on wages subject to Social Security payroll taxes ($168,600 in 2024).

• Raise the full retirement age (currently 67 for anyone born in 1960 or later).

• Change the benefit calculation formula.

• Use a different index to calculate the annual cost-of-living adjustment.

• Tax a higher percentage of benefits for higher-income beneficiaries.

Addressing the Medicare shortfall might necessitate spending cuts, tax increases, and cost-cutting through program modifications.

Based on past changes to these programs, future changes are likely to primarily affect future beneficiaries and have a relatively small effect on those already receiving benefits. While neither Social Security nor Medicare is in danger of disappearing, it would be wise to maintain a strong retirement savings strategy to prepare for potential changes that may affect you in the future.

Many people believe the social security system will not be around when it’s their turn to collect benefits. I don’t believe that to be the case. Based on everything I’ve studied, I believe Congress will act, but not any sooner than they have to, or perhaps when it becomes a crisis. And when they do, combining some or all of the above techniques will extend the social security fund and medicare benefits for many more decades. There’s no rush, in my opinion, to collect benefits as soon as possible out of fear of the system running out of money.

You can view a summary of the 2024 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at ssa.gov. You can find the full Medicare report at cms.gov.

All projections are based on current conditions, subject to change, and may not come to pass.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

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What Persistent Inflation Could Mean for the U.S. Economy

April 30, 2024 — Sam H. Fawaz

Economic reports of late seem to point to a weakening economy and stubborn inflation.

On April 30, the Employment Cost Index for the first calendar quarter of 2024 showed a 1.2% increase (4.2% year-over-year); that was 25% higher than the consensus estimate of 0.9%.

The FHFA House Price Index for February 2024 was much hotter than expected, coming in at 1.2% versus 0.1% expected (7.0% year-over-year.) Similarly, the February Case-Shiller 20-City Home Price Index came in at 0.6% versus 0.1% expected (7.3% year-over-year.)

At the same time, two more economic reports were released on April 30.

The Chicago Purchasing Managers’ Index (PMI) was 37.9 (versus 45 expected).

The Conference Board’s Consumer Confidence Index also came in far below expectations (97 versus 104 expected).

The stock markets were understandably confused: Normally, lower economic activity means lower inflation. Instead, what we got was higher inflation and lower economic activity.

In the stock markets, confusion equals selling now and asking questions later. That’s what we are seeing now.

Persistent Inflation

On April 10, 2024, the U.S. Bureau of Labor Statistics released the Consumer Price Index (CPI) for March, and the increase in CPI — the most commonly cited measure of inflation — was higher than expected. The rate for all items (headline inflation) was 3.5% over the previous year, while the “core CPI” rate, which strips out volatile food and energy prices, was even higher at 3.8%. The month-over-month change was also higher than anticipated at 0.4%. (1)

The stock market then dropped sharply on this news and continued to slide over the following days, while economists engaged in public handwringing over why their projections had been wrong and what the higher numbers might mean for the future path of interest rates. Most projections were off by just 0.1% — core CPI was expected to increase by 3.7% instead of 3.8% — which hardly seems earth-shattering to the casual observer. But this small difference suggested that inflation was proving more resistant to the Federal Reserve’s high interest-rate regimen (raising interest rates is one of the most common ways to curb spending and corporate investing to reduce inflationary pressures.) (2)

It’s important to remember that the most dangerous battle against inflation seems to have been won. CPI inflation peaked at 9.1% in June 2022, and there were fears of runaway inflation similar to the 1980s. That did not happen; inflation declined steadily through the end of 2023. The issue now is that there has been upward movement during the first three months of 2024.(3) This is best seen by looking at the monthly rates, which capture the current situation better than the 12-month rates. March 2024 was the third increase month that points to higher inflation (see chart).

High for longer

While price increases hit consumers directly in the pocketbook, the stock market reacted primarily to what stubborn inflation might mean for the benchmark federal funds rate and U.S. businesses. From March 2022 to July 2023, the Federal Open Market Committee (FOMC or AKA the Fed) raised the funds rate from near-zero to the current range of 5.25%–5.5% to slow the economy and hold back inflation.

At the end of 2023, with inflation moving firmly toward the Fed’s target of 2%, the FOMC projected three quarter-percentage point decreases in 2024, and some observers expected the first decrease might be this spring. Now it’s clear that the Fed will have to wait to reduce rates. (4)(5)

Higher interest rates make it more expensive for businesses and consumers to borrow. For businesses, this can hold back expansion and cut into profits when revenue is used to service debt. This is especially difficult for smaller companies, which often depend on debt to grow and sustain operations. Tech companies and banks are also sensitive to high rates. (6)

As mentioned above, in theory, high interest rates should hold back consumer spending and help reduce prices by suppressing demand. So far, however, consumer spending has remained strong. In March 2024, personal consumption expenditures — the standard measure of consumer spending — rose at an unusually strong monthly rate of 0.8% in current dollars or 0.5% when adjusted for inflation. (7)

The job market has also stayed strong, with unemployment below 4% for 26 consecutive months and wages rising steadily. (8)

The fear of keeping interest rates too high for too long is that it could slow the economy, but that is not the case, making it difficult for the Fed to justify rate cuts.

What’s driving inflation?

The Consumer Price Index measures price changes in a fixed market basket of goods and services, and some inputs are weighted more heavily than others.

The cost of shelter is the largest single category, accounting for about 36% of the index and almost 38% of the March increase in CPI. (9) The good news is that measurements of shelter costs — primarily actual rent and estimated rent that homeowners might receive if they rented their homes — tend to lag current price changes, and other measures suggest that rents are leveling or going down. (10)

Two lesser components contributed well above their weight. Gas prices, which are always volatile, comprised only 3.3% of the index but accounted for 15% of the overall increase in CPI. Motor vehicle insurance prices comprised just 2.5% of the index but accounted for more than 18% of the increase. Together, shelter, gasoline, and motor vehicle insurance drove 70% of March CPI inflation. On the positive side, food prices comprised 13.5% of the index and rose by only 0.1%, effectively reducing inflation. (11)

While the Fed pays close attention to the CPI, its preferred inflation measure is the personal consumption expenditures (PCE) price index, which places less emphasis on shelter costs, includes a broader range of inputs, and accounts for changes in consumer behavior. Due to these factors, PCE inflation tends to run lower than CPI. The annual increase in March was 2.7% for all items and 2.8% for core PCE, excluding food and energy. The monthly increase was 0.3% for both measures. (12)

Although these figures are closer to the Fed’s 2% target, they are not low enough, given strong employment and consumer spending, to suggest that the Fed will reduce interest rates anytime soon. It’s also unlikely that the Fed will raise rates.

The Fed seems poised to give current interest rates more time to push inflation to a healthy level, ideally without slowing economic activity. (13)

And since higher interest rates mean more competition for investment dollars and lower corporate earnings, stock markets don’t tend to react favorably, especially when 3-4 interest rate cuts were expected earlier this year.

The Fed issues its next interest rate decision on Wednesday afternoon, May 1, 2024. No change in interest rates is all but a given. However, what Federal Reserve Chairman Jerome Powell says about the recent economic data and the Fed’s stance on when future rate cuts are coming will no doubt be parsed word for word for clues when the press conference is convened.

Please pass the popcorn.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

Footnotes:

1, 3, 8–9, 11) U.S. Bureau of Labor Statistics, 2024

2)The New York Times, April 10, 2024

4) Federal Reserve, 2023

5) Forbes, December 5, 2023

6) The Wall Street Journal, April 15, 2024

7, 12) U.S. Bureau of Economic Analysis, 2024

10) NPR, April 18, 2024

13) Bloomberg, April 19, 2024

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What You Must Know About the Tax Return Deadline

March 31, 2024 — Sam H. Fawaz

It’s that time of year, folks, and I wish I were talking about spring. The federal income tax filing deadline for individuals is fast approaching—generally Monday, April 15, 2024. For taxpayers living in Maine or Massachusetts, you get a couple of extra days to procrastinate—your deadline is April 17, 2024.

The IRS has also postponed the deadline for certain disaster-area taxpayers to file federal income tax returns and make tax payments. The current list of eligible localities and other details for each disaster are always available on the IRS website’s Tax Relief in Disaster Situations page. Interest and penalties are suspended until the postponed deadline for affected taxpayers.

If I refer to the April 15 deadline in this article, you can assume I also mean any other postponed original deadline that applies to you.

Need More Time?

If you cannot file your federal income tax return by the April (or other) due date, you can file for an extension by the April 15 due date using IRS Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” Most software packages can electronically file this form for you and, if necessary, remit a payment.

Filing this extension gives you until October 15, 2024, to file your federal income tax return. You don’t have to explain why you’re asking for the extension, and the IRS will contact you only if your extension is denied and explain the reason(s). There are no allowable extensions beyond October 15 unless extended by law, or you’re affected by a federally declared disaster area.

Assuming you owe a payment on April 15, you can file for an automatic extension electronically without filing Form 4868. Suppose you make an extension payment electronically via IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS) by April 15. In that case, no extension form has to be filed (see Pay What You Owe below for more information).

An extension of time to file your 2023 calendar year income tax return also extends the time to file Form 709, “Gift and generation-skipping transfer (GST) tax returns” for 2023.

Special rules apply if you’re a U.S. citizen or resident living outside the country or serving in the military outside the country on the regular due date of your federal income tax return. If so, you’re allowed two extra months to file your return and pay any amount due without requesting an extension. Interest, currently at 8% (but not penalties), will still be charged on payments made after the regular due date without regard to the extended due date.

You can pay the tax and file your return or Form 4868 for additional filing time by June 17, 2024. If you request an extension because you were out of the country, check the box on line 8 of the form.

If you file for an extension, you can file your tax return any time before the extension expires. And there’s no need to attach a copy of Form 4868 to your filed income tax return.

Tip #1: By statute, certain federal elections must be made with a timely filed return or extension and cannot be made after the original due date has passed. For example, if you’re a trader and want to elect trader tax status for the current tax year (2024), it must be made by April 15, 2024, with your timely filed return or attached to your extension. Once April 15 has passed, you are barred from making the election until the following tax year. Some elections may be permanently barred after the regular due date, so check with your tax advisor to see if you need a timely filed election with your return or extension.

Tip #2: For proof of a timely snail-mailed extension, especially for those with a relatively large payment, be sure to mail it by certified mail, return receipt requested (always request proof of delivery regardless of the method of transportation.)

Caveat: Generally, the IRS has three years from the original due date of your return to examine it and assess additional taxes (six years if fraud is suspected). If you extend your return, the three (or six) year “clock” does not start ticking until you file it, so essentially, by extending your return, you are extending the statute of limitations. But contrary to popular belief, requesting an extension does NOT increase your odds of an examination.

Pay What You Owe

One of the biggest mistakes you can make is not filing your return because you owe money. If the bottom line on your return shows that you owe tax, file and pay the amount due in full by the due date if possible. If you cannot pay what you owe, file the return (or extension) and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time. You may be able to work with the IRS to pay the unpaid balance via an installment payment agreement (interest applies.)

It’s important to understand that filing for an automatic extension to file your return does not provide additional time to pay your taxes. When you file for an extension, you must estimate the amount of tax you will owe; you should pay this amount (or as much as you can) by the April 15 (or other) filing due date.  If you don’t, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension, potentially causing you to owe failure to file penalties and late payment penalties as well.

There are several alternative ways to pay your taxes besides via check. You can pay online directly from your bank account using Direct Pay or EFTPS, a digital wallet such as Click to Pay, PayPal, Venmo, or cash using a debit or credit card (additional processing fees may apply). You can also pay by phone using the EFTPS or debit or credit card. For more information, go to Make a Payment.

Tax Refunds

The IRS encourages taxpayers seeking tax refunds to file their tax returns as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if 1) the return is filed electronically, 2) the tax refund is delivered via direct deposit, and 3) there are no issues with the tax return. To help minimize delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.

To check on your federal income tax refund status, wait five business days after electronic filing and go to the IRS page: Where’s My Refund? Your state may provide a similar page to look up state refund status.

State and Local Income Tax Returns

Most states and localities have the same April 15 deadline and will conform with postponed federal deadlines due to federally declared disasters or legal holidays. Accordingly, most states and localities will accept your federal extension automatically (to extend your state return) without filing any state extension forms, assuming you don’t owe a balance on the regular due date. Otherwise, your state or locality may have its own extension form you can use to send in with your payment. Most states also now accept electronic payments online instead of a filed extension form with payment. Never assume that a federal extension will extend your state return; some do not. Always check to be sure.

Tip: If you want to cover all your bases, if your federal extension is lost or invalidated for any reason, you may want to file a state paper or online extension to extend the return correctly. It rarely happens, but sometimes, it is better to be safe than sorry.

IRA Contributions

Contributions to an individual retirement account (IRA) for 2023 can be made up to the April 15 due date for filing the 2023 federal income tax return (this deadline cannot be extended except by statute). However, certain disaster-area taxpayers granted relief may have additional time to contribute.

If you had earned income last year, you may be able to contribute up to $6,500 for 2023 ($7,500 for those age 50 or older by December 31, 2023) up until your tax return due date, excluding extensions. For most people, that date is Monday, April 15, 2024.

You can contribute to a traditional IRA, a Roth IRA, or both. Total contributions cannot exceed the annual limit or 100% of your taxable compensation, whichever is less. You may also be able to contribute to an IRA for your spouse for 2023, even if your spouse had no earned income.

Making a last-minute contribution to an IRA may help reduce your 2023 tax bill. In addition to the potential for tax-deductible contributions to a traditional IRA, you may also be able to claim the Saver’s Credit for contributions to a traditional or Roth IRA, depending on your income.

Even if your traditional IRA contribution is not deductible, and you are ineligible for a Roth IRA contribution (because of income limitations), the investment income generated by the contribution becomes tax-deferred, possibly for years, and the contribution builds cost basis in your IRA, making future distributions a little less taxing.

If you make a nondeductible contribution to a traditional IRA and shortly after that convert that contribution to a Roth IRA, you can get around the income limitation of making Roth contributions. This is sometimes called a backdoor Roth IRA. Remember, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. If your traditional IRA balance before the non-deductible contribution is zero, then you’ll owe no tax on the conversion, and voila! You have just made a legal Roth IRA contribution.

Making a last-minute contribution to an IRA may help reduce your 2023 tax bill. In addition to the potential for tax-deductible contributions to a traditional IRA, you may also be able to claim the Saver’s Credit for contributions to a traditional or Roth IRA, depending on your income.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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New Retirement Options Starting in 2024

January 31, 2024 — Sam H. Fawaz

The SECURE 2.0 Act, passed in December 2022, made wide-ranging changes to U.S. tax laws related to retirement savings. While some provisions were effective in 2023, others did not take effect until 2024. Here is an overview of some important changes for this year:

Matching student loan payments

Employees who make student loan repayments may receive matching employer contributions to a workplace retirement plan as if the repayments were employee contributions to the plan. This applies to 401(k), 403(b), and government 457(b) plans and SIMPLE IRAs. Employers are not required to make matching contributions in any situation, but this provision allows them to offer student loan repayment matching as an additional benefit to help address the fact that people paying off student loans may struggle to save for retirement.

New early withdrawal exceptions

Withdrawals before age 59½ from tax-deferred accounts, such as IRAs and 401(k) plans, may be subject to a 10% early distribution penalty on top of ordinary income tax. There is a long list of exceptions to this penalty, including two new ones for 2024.

Emergency expenses — one penalty-free distribution of up to $1,000 is allowed in a calendar year for personal or family emergency expenses; no further emergency distributions are allowed during a three-year period unless funds are repaid or new contributions are made that are at least equal to the withdrawal.

Domestic abuse — a penalty-free withdrawal equal to the lesser of $10,000 (indexed for inflation) or 50% of the account value is allowed for an account holder who certifies that he or she has been the victim of domestic abuse during the preceding one-year period.

Emergency savings accounts

Employers can create an emergency savings account linked to a workplace retirement plan for non-highly compensated employees.  Employee contributions are after-tax and can be no more than 3% of salary, up to an account cap of $2,500  (or lower as set by the employer). Employers can match contributions up to the cap, but any matching funds go into the employee’s workplace retirement account.

Clarification for RMD ages

SECURE 2.0 raised the initial age for required minimum distributions (RMDs) from traditional IRAs and most workplace plans from 72 to 73 beginning in 2023 and 75 beginning in 2033. However, the language of the law was confusing. Congress has clarified that age 73 initial RMDs apply to those born from 1951 to 1959, and age 75 applies to those born in 1960 or later. This clarification will be made official in a law correcting a number of technical errors, expected to be passed in early 2024.

No more RMDs from Roth workplace accounts

Under previous law, RMDs did not apply to original owners of Roth IRAs, but they were required from designated Roth accounts in workplace retirement plans. This requirement will be eliminated beginning in 2024.

Transfers from a 529 college savings account to a Roth IRA

Beneficiaries of 529 college savings accounts are sometimes “stuck” with excess funds that they did not use for qualified education expenses. Beginning in 2024, a beneficiary can execute a direct trustee-to-trustee transfer from any 529 account in the beneficiary’s name to a Roth IRA, up to a lifetime limit of $35,000. The 529 account must have been open for more than 15 years. These transfers are subject to Roth IRA annual contribution limits, requiring multiple transfers to use the $35,000 limit. The IRS is still working on specific guidance on this law change, so it might pay to wait a few months before making this type of transfer.

Increased limits for SIMPLE plans

Employers with SIMPLE IRA or SIMPLE 401(k) plans can now make additional nonelective contributions up to the lesser of $5,000 or 10% of an employee’s compensation, provided the contributions are made to each eligible employee in a uniform manner. The limits for elective deferrals and catch-up contributions, which are $16,000 and $3,500, respectively, in 2024, may be increased by an additional 10% for a plan offered by an employer with no more than 25 employees. An employer with 26 to 100 employees may allow higher limits if it provides either a 4% match or a 3% nonelective contribution.

Inflation indexing for QCDs

Qualified charitable distributions (QCDs) allow a taxpayer who is age 70½ or older to distribute up to $100,000 annually from a traditional IRA to a qualified public charity. Such a distribution is not taxable and can be used in lieu of all or part of an RMD. Beginning in 2024, the QCD amount is indexed for inflation, and the 2024 limit is $105,000.

SECURE 2.0 created an opportunity (effective 2023) to use up to $50,000 of one year’s QCD (i.e., one time only) to fund a charitable gift annuity or charitable remainder trust. This amount is also indexed to inflation beginning in 2024, and the limit is $53,000.

Catch-up contributions: indexing, delay, and correction

Beginning in 2024, the limit for catch-up contributions to an IRA for people ages 50 and older will be indexed to inflation, which could provide additional saving opportunities in future years. However, the limit did not change for 2024 and remains $1,000. (The catch-up contribution limit for 401(k)s and similar employer plans was already indexed and is $7,500 in 2024.)

The SECURE 2.0 Act includes a provision — originally effective in 2024 — requiring that catch-up contributions to workplace plans for employees earning more than $145,000 annually must be made on a Roth basis. In August 2023, the IRS announced a two-year “administrative transition period” that effectively delays this provision until 2026. In the same announcement, the IRS affirmed that catch-up contributions in general will be allowed in 2024, despite a change related to this provision that could be interpreted to disallow such contributions. The error will be corrected in the 2024 technical legislation.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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Last Minute Year-End Tax Planning for 2023

December 18, 2023 — Sam H. Fawaz

The window of opportunity for many year-end tax-saving moves closes on December 31, so it’s important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2023 tax year.

Timing is Everything

Consider any opportunities you may have to defer income to 2024. Doing so may allow you to postpone paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Some examples:

·       Check with your employer to see if there is an opportunity to defer year-end bonuses.

·       Defer the sale of capital gain property (or take installment payments rather than a lump-sum payment)

·       Postpone receipt of distributions (other than required minimum distributions) from retirement accounts.

Similarly, consider ways to accelerate deductions into 2023. If you itemize deductions, you might accelerate some deductible expenses by making payments before year-end.

Some examples:

·       Consider paying medical expenses or bills in December rather than January, if doing so will allow you to qualify for the medical expense deduction (must be more than 7.5% of your income).

·       Prepay deductible interest by accelerating your January mortgage payment into December.

·       Make January alimony payments in December

·       Make next year’s charitable contributions in December

·       Pay state and local taxes (income taxes, property taxes, use taxes, etc.) if you’re below the $10,000 maximum allowed itemized deduction for state and local taxes

·       Purchase that piece of equipment or vehicle needed in your business and place it in service by year-end

Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2023 and postponing deductible expenses to 2024. That might be the case, for example, if you can project that you’ll be in a higher tax bracket in 2024; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.

Factor in the Alternative Minimum Tax (AMT)

Although the number of taxpayers subject to the AMT is much lower than in prior years, make sure that you factor in the alternative minimum tax when deciding to accelerate any deductions. If you’re subject to the AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a potentially negative effect. That’s because the AMT — essentially a separate, parallel income tax with its own rates and rules — effectively disallows several itemized deductions. For example, if you’re subject to the AMT in 2023, prepaying 2024 state and local taxes won’t help your 2023 tax situation but could potentially hurt your 2024 bottom line.

Special Concerns for Higher-Income Individuals

The top marginal tax rate (37%) applies if your taxable income exceeds $578,125 in 2023 ($692,750 if married filing jointly, $346,875 if married filing separately, $578,100 if head of household). Your long-term capital gains and qualifying dividends could be taxed at a maximum 20% tax rate if your taxable income exceeds $492,300 in 2023 ($553,850 if married filing jointly, $276,900 if married filing separately, $523,050 if head of household).

Additionally, a 3.8% net investment income tax (unearned income Medicare contribution tax) may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately).

High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately).

Charitable Contribution Planning

If you are planning to donate to a charity, it’s likely better to make your contribution before the end of the year to potentially save on taxes. There are many tax planning strategies surrounding charitable giving:

·       Consider donating appreciated property (such as securities, real estate, or artwork) that has been held for more than one year, rather than cash. Note that an appraisal may be needed for certain properties. Not only do you get a deduction for the fair market value (FMV) of your appreciated stock, but you save on taxes by not recognizing the capital gains on the appreciation.

·       Opening and funding a donor-advised fund (DAF) is appealing to many as it allows for a fully tax-deductible gift in the current year and the ability to dole out those funds to charities over multiple years. Again, if you donate appreciated securities to a DAF, not only do you get a deduction for the FMV of your appreciated stock, but you save on taxes by not recognizing the capital gains on appreciation.

·       Qualified charitable distributions (QCDs) up to $100,000 are another option for certain older taxpayers (age 70-1/2 or older) who don’t typically itemize on their tax returns. If you don’t have a required minimum distribution (RMD) from your retirement accounts (see below), this will help reduce future RMDs and taxable income. If you do have an RMD requirement from your retirement accounts, this could be an even better strategy for you to reduce your current taxable income.

Note that it’s important to have adequate documentation of all claimed donations, including a letter from the charity for donations of $250 or more.

Required Minimum Distributions (RMDs)

Unfortunately, you cannot keep retirement funds in your account indefinitely. RMDs are the minimum amount you must annually withdraw from your retirement accounts once you reach a certain age (generally now age 73). Failure to do so can result in significant penalties (special rules apply if you’re still working and participating in your employer’s retirement plan). You must make the withdrawals by the date required — the end of the year for most individuals.

As described above, there are also opportunities to distribute retirement funds to a qualified charity to satisfy the RMD without incurring taxes. Missed RMDs are subject to steep excise tax penalties (25%), although recent rules greatly reduce the penalty (to 10%) if the missed RMD is taken within two years.

Digital Assets and Virtual Currency

Digital assets are defined under the U.S. income tax rules as any digital representation of value that may function as a medium of exchange, a unit of account, or a store of value. Digital assets may include virtual currencies such as Bitcoin and Ether, Stablecoins such as Tether and USD Coin (USDC), and non-fungible tokens (NFTs).

The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally have tax impacts –– and the IRS continues to increase its scrutiny in this area. The trading and use of digital assets must be disclosed on your tax returns and, since they are considered property rather than investments, different tax rules apply to their sales and exchanges.

Energy tax credits

From electric vehicles to home car chargers to solar panels, “going green” continues to provide tax incentives. The Inflation Reduction Act of 2022 included new and newly expanded tax credits for solar panels, electric vehicles (EV), and energy-efficient home improvements. The rules are complex but there is still time for these credits to be beneficial in the current and next year. The most notable change to the EV credits is the requirement that the vehicle has final assembly in North America. If you are planning an EV purchase, please ask the dealer whether the vehicle you’re eyeing is on the list of qualifying vehicles, which has changed significantly in the past years. See if they can advance the credit to you as an offset to the vehicle purchase price (you’ll have to sign a form to assign the credit to the dealer.)

Bump Up Withholding to Avoid 2024 Underpayment

If it looks as though you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for 2024 with your employer (also consider doing the same on the appropriate state withholding forms). The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are taken from your paycheck. This strategy can be used instead of making quarterly estimated tax payments.

If you’re collecting social security, a pension, or taxable IRA distributions, update your Form W-4P with the appropriate payor to ensure you’ve paid in enough to avoid underpayment penalties.

Beneficial Ownership Interest (BOI) Reporting

The Corporate Transparency Act (CTA) requires the disclosure of the beneficial ownership information of certain entities to the Financial Crimes Enforcement Network (FinCEN) starting in 2024. This is not a tax filing requirement, but an online report to be completed if applicable to FinCEN. There are severe penalties for businesses who willingly do not comply with the requirements. The details of this reporting requirement are still being written, so it’s best to get in touch with your business attorney to determine whether your corporation, partnership, or LLC must file this report.

Additional Tax and Financial Planning Considerations

We recommend you review your retirement plans at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional individual retirement accounts (IRAs), Roth IRAs, and company retirement plans. It’s also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for medical-related expenses. Once you become eligible or sign up for Medicare, you are no longer entitled to make HSA contributions.

IRAs and Retirement Plans

Make sure you’re taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2023 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible since they are made with post-tax dollars, so there’s no tax benefit for 2023, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.

For 2023, you can contribute up to $22,500 to a 401(k) plan ($30,000 if you’re age 50 or older) and up to $6,500 to a traditional IRA or Roth IRA ($7,500 if you’re age 50 or older). The window to make 2023 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline (April 15, 2024) to make 2023 IRA contributions.

If you started a small business in 2023, talk to your financial or tax advisor about setting up a small business retirement plan before year-end. Most plans must be set up before year-end, but contributions may not be required every year, and they don’t have to be made until the due date of the return (plus extensions). Some small business retirement plans can be set up at tax return time (e.g., SEP-IRA), but they have less contribution flexibility and more stringent rules than other plans (e.g., a solo 401(k)).

Roth IRA Conversions

Year-end is a good time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are generally subject to federal income tax in the year that you make the conversion (except to the extent that the funds represent nondeductible after-tax contributions).

If a Roth conversion does make sense, you’ll want to give some thought to the timing of the conversion. For example, if you believe that you’ll be in a better tax situation this year than next (e.g., you will pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. Whether a Roth conversion is appropriate for you depends on many factors, including your current and projected future income tax rates and whether you have the funds to pay the taxes outside of the IRA. Ask your financial or tax advisor whether a Roth Conversion is appropriate for this year or next.

Other Ideas

·       Life changes –– Any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business, and significant expenditures (real estate purchases, college tuition payments, etc.) can significantly impact the taxes you owe, so be sure to discuss them with your tax or financial advisor.

·       Capital gains/losses –– Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible. Also, consider selling portfolio investments that are underperforming before the end of the year. Net capital losses can offset up to $3,000 of the current year’s ordinary income. The unused excess net capital loss can be carried forward to use in subsequent years.

·       Estate and gift tax planning –– Make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($17,000 per donee in 2023, $34,000 for married couples) to help save on potential future estate taxes. If your estate/trust is worth over $5 million, it’s imperative to discuss your options with a dedicated estate planning attorney to review lifetime gift and generation-skipping transfer (GST) opportunities to use and plan additional exclusions and exemption amounts.

·       State and local taxes –– Remote working arrangements or moving your residency could potentially have state and local tax implications to consider. Be sure to discuss your working arrangements with your tax advisor.

·       Education planning –– Save for education with Section 529 education savings plans. There can be state income tax benefits to do so, and there have been changes in the way these funds can be used for private K-12 school expenses, paying down some student loans, or contributing leftover funds to Roth IRAs.

·       Updates to financial records –– Determine whether any updates are needed to your insurance policies or beneficiary designations. This should be checked at least once a year, and year-end is a good time to do so.

·       Estimated tax payments –– With underpayment interest rates being on the rise (currently at 8% for federal), you must review withholding and estimated tax payments and assess any requirements for any additional payments. The 4th quarter 2023 estimated income tax payment is due by January 16, 2024.

Hopefully one or more of the above tips helps you save a few dollars on your tax bill. By necessity, many of the tips are abbreviated, so be sure to check with your financial or tax advisor to ensure that they’re appropriate for your tax situation, both currently and in the future.

If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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