Year-end tax planning

Tips for 2023

Jay Fox, CFP®

Wealth Management Advisor

16020 Swingley Ridge Rd.

Suite 220

Chesterfield, MO 63005

O:(636) 851-9181 jay@foxfinancialgrp.com

Consider these tips on how you might be able to reduce your tax bill. With the end of the year fast approaching, a little year-end housekeeping could help lower your taxable income, maximize your charitable deductions, and reduce exposure to future taxes.

Lowering your taxable income.

The end of the year is a great time to take stock of what opportunities are available to you and how you can use them to your advantage. Here are some ways you might be able to hang on to more of your hard-earned money:

Tax-loss harvesting.

Investment losses can be used to offset any gains you've realized in 2023, or up to $3,000 of income. Consider selling depreciated securities that no longer fit your strategy, have poor prospects for future growth, or can be replaced with similar investments that play a similar role in your portfolio.

Contributing to tax-advantaged accounts.

Contributions to a 401(k), 403(b), or a health savings account1 could potentially lower your taxable income for this year and increase the assets you have available for future retirement and medical expenses. It's good practice to review your contributions before year-end to ensure you're taking full advantage of the limits for these accounts.

2023 Key Takeaways

You may be able to do several things that could potentially help reduce your taxable income, maximize your charitable deductions, and reduce exposure to future taxes.

Understanding these possibilities can help you build enough flexibility into your plan to ensure that you are able to stay focused on your long-term goals and objectives.

Before making any decisions, be sure to consult with your tax advisor to make sure it suits your present circumstances and long-term strategy.

Maximizing your charitable deductions

If you're like me, your mailbox is probably filling up with letters from the charities you support asking for additional end-of-year contributions. Giving is inherently rewarding, but you may also want to consider ways to give tax-efficiently. Here are some tax-efficient giving strategies based on current law:

Bunching charitable contributions. It may be wise to make 2 or more years' worth of charitable contributions this year so you can itemize deductions versus splitting them over multiple years and taking the standard deduction each year.

Donating appreciated assets. If you are itemizing deductions, and you donate an asset held for longer than one year to a qualified public charity, you may be able to deduct the fair market value of the asset without paying capital gains on a sale, subject to a 30% adjusted gross income (AGI) limitation.

Making cash contributions. If you are itemizing deductions, remember that up to 60% of your AGI can be deducted for cash contributions made to qualified charities in 2023.

Reducing exposure to future taxes

Year-end planning isn't just about the here and now. There are several things you can do before the end of this year that could help reduce the impact of future taxes and provide added benefit to your beneficiaries or favorite causes:

This year's lifetime estate and gift tax exemption increase. In 2023, the inflation adjustment for the lifetime estate and gift tax exemption was quite large: $860,000. For those who had already maxed out their exemption prior to 2023, this offers an additional opportunity to move money out of their estate—as much as $1.72 million for a married couple. While this isn't something that has to be done within the calendar year, you should take it into account when making future plans.

Annual exclusion gifts. You can make gifts up to $17,000 to as many beneficiaries as you like, which can help reduce your estate's value without using any of your lifetime gift & estate tax exemption.

RA or 401(k) distributions. This may be worth considering if you have relatively low income this year, especially if you believe that tax rates will rise in the coming years.

Qualified charitable distributions. If you are age 70½ or older and have an IRA, you may want to consider making direct transfers of up to $100,000 from your IRA to eligible charities. This could potentially reduce the amount of current or future required minimum distributions. Additionally, a direct transfer does not increase your AGI, meaning it will not adversely affect your itemized deductions, Medicare premiums, or Social Security benefits.

Roth IRA conversions. In 2026, income tax rates will revert back to their 2017 levels provided there is no change to the sunsetting provisions of the 2017 Tax Cuts and Jobs Act. Those changes could have a significant impact on a family's tax liability, which could make Roth conversions less appealing in 2026 and beyond. Before you decide, however, understand that you will need to have other liquid assets available to pay the associated income tax due as a result of the conversion.

Keep a long-term perspective

Keep your eyes on the horizon.

While we can never predict the future with certainty, it's never a bad thing to be educated on the possibilities of different outcomes. By understanding these possibilities, we can build enough flexibility into our plans to ensure that we're able to stay focused on our long-term goals and objectives. Before you determine your next step, consult with your tax advisor and work together to identify the best approach for your specific situation.

Key Takeaways for Taxes

Ask a Pro. Options for filing taxes include getting free help from the IRS, paying for tax software, or hiring a pro. You can always reach out to Fox Financial Group for a referral to a C.P.A. or just to double check your current situation with Jay.

Whether you go solo or with a tax pro, the IRS says you'll get a refund faster (if you're owed one) by filing electronically and including your direct deposit information.

Remember: The sooner you get started, the sooner you will get money back if you are owed any. Filing your taxes early could reduce your exposure to identity theft. Getting started ahead of time gives you plenty of time to look for opportunities to reduce your taxable income.

If you end up owing money, starting early may help soften some of the sticker shock since you'll have time to plan how to make the payment.

November 2023

3 Investing Themes to Consider

1. US Stocks

Overlooked potential for strength

No secret that interest rates are on the rise. With the economy showing surprising resilience, the Federal Reserve has signaled it may need to hike rates further, and keep them at high levels for longer, in order to keep reining in inflation. This has many investors worrying about the impacts of high rates on the stock market.

Analysis suggests these investors may be focusing too much on the negatives from higher rates and overlooking the positives from an improving economy. Higher interest rates are often a function of strong economic growth. On a year-over-year inflation-adjusted basis, US gross domestic product (GDP) expanded at a rate of 2.4% in the second quarter of this year, accelerating from 1.7% in the previous quarter. And better-than-expected job growth and retail sales in the third quarter indicated that strength may have continued.

Historically, the strength of the economy has had a greater influence on stock returns than the direction of interest rates. We looked at 12-month periods when economic growth accelerated and interest rates rose since 1962. (I measured economic growth using inflation-adjusted GDP.).

Stocks returned an average of 12% during those strengthening-economy, rising-rate periods. By contrast, during 12-month periods when the economy slowed, stocks advanced just 6% when rates fell and 1% when they rose.

2. Cyclical sectors

Riding a rotation

An improving economy could also give a potential boost to cyclical sectors, at least on a relative basis. This group of sectors is generally considered to include communication services, consumer discretionary, energy, financials, industrials, materials, real estate, and technology.

Since 1962, cyclical sectors have tended to outperform during periods of above-average GDP growth, regardless of whether interest rates rose or fell. Conversely, during historical periods of weak growth, cyclicals have generally lagged defensive sectors (which include consumer staples, health care, and utilities).

November 2023

3 Investing Themes to Consider

2. Cyclical Sectors [cont.]

Riding a rotation

A rotation away from defensives and toward cyclical stocks is already well underway. In the 6 months through July, cyclicals experienced relative outperformance that was in the top 5% of all 6-month periods going back to 1962.

Rotations of this scale are generally only seen during recoveries from recessions—and when they've occurred, they've had staying power. Over the last 60 years, the bigger the rotation into cyclicals, the more likely it was to continue over the next 6 months and the stronger cyclicals' subsequent relative performance, on average.

In historical periods similar to what we've just seen—with cyclical outperformance reaching the top 5% of all 6-month periods—the sectors outperformed the market by nearly 6 percentage points over the following 6 months.

3. Energy

A cyclical sector to approach with caution

Stocks returned an average of 12% during those strengthening-economy, rising-rate periods.

By contrast, during 12-mos. periods when the economy slowed, stocks advanced just 6% when rates fell and 1% when they rose.This might come as a surprise given the run-up in oil prices we've seen in the past few months.

There has been a sharp rise in the energy sector's ratio of capital expenditures (CapEx) to sales.

CapEx is the money a company uses to buy, maintain, and improve assets such as land, buildings, vehicles, and equipment. In the energy sector, CapEx includes much of the costs of producing oil and gas, such as for drilling a well.

November 2023

3 Investing Themes to Consider

Historically, sharp rises in the ratio of CapEx-to-sales have tended to go hand in hand with underperformance (this has been true historically even when the ratio is rising off low levels, as it recently has been).

The dynamics behind the recent increase may be a bearish signal for the sector. The ratio has risen because both capital expenditures and sales fell, but sales fell more.

In historical periods with similar dynamics, the sector went on to underperform the market by an average of 9.4 % points over the next 12 mos.

IN CONCLUSION

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

To be sure, past performance is never a guarantee of future results. But as the final quarter of 2023 gets underway, I suggest investors remember that trends in interest rates and oil prices are only pieces of the current economic puzzle—not the full picture.

Historically, an accelerating economy tends to benefit the market and cyclical sectors—even in the face of higher interest rates. And while higher oil prices might be (all else equal) a positive for energy, other factors might have more influence on the sector's near-to-intermediate-term performance.

Past performance is no guarantee of future results. Growth measured by real gross domestic product (GDP), the value of US economic output adjusted for inflation. Analysis based on the S&P 500®. Rising or falling rates determined by the change in the yield on the 10-year Treasury note over the previous 12 months. All data gathered and analyzed quarterly January 1962 to June 2023. Sources: Haver Analytics and Fidelity Investments, as of June 30, 2023.

Keep in Touch!

As a reminder, please keep us apprised of any changes (such as health issues or changes in your retirement goals). The more knowledge we have about your unique financial situation the better equipped we will be to best advise you.

Risk tolerance, time horizon, and your behavior should all be considered when investing. Many investors may feel they have the emotional fortitude to withstand volatility, however, they may not have the financial stability to ride it out.

As your financial professional, we take all these key elements into consideration when assessing your financial plan.

Matt Winscher

Jay Fox, CFP

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The views stated in this letter are not necessarily the opinion of Fox Financial Group or Mutual Advisors, LLC and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Fox Financial Group, nor any of its members, are tax accountants or legal attorneys, and do not provide tax advice. For tax advice, you should consult your tax professional. Investment advisory services offered through Mutual Advisors LLC DBA Fox Financial Group, an SEC registered investment adviser. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index.