Yearend Tax Planning | Tough Times for Small Caps

Charitable Giving:?As we round the corner towards the last quarter of the year, charitable giving is undoubtedly a much-discussed topic. Many of our clients are aware of the Qualified Charitable Distribution option that provides an opportunity to give to your favorite charities and includes a side benefit of a tax break. You can donate directly from your traditional IRA, which isn’t characterized as an itemized deduction but also isn’t taxable. This means payouts don’t add to adjusted gross income or AGI.

This matters because AGI is a key threshold: It’s used to determine so-called Irmaa Medicare surcharges based on income, the 3.8% surtax on net investment income, and medical expense deductions, among other things.

IRA owners must be at least 70 ? to make QCDs. Each eligible owner can donate a total of $100,000 of IRA funds a year. The first dollars out of the IRA are considered the required minimum distribution, or RMD. You can make a portion of the RMD (or all of it) a QCD. QCDs must be to a 501(c)(3) charity.

If you are interested in making a QCD, contact us today. We can process the paperwork for you and ensure it is wrapped up before the December 31 deadline.

Economic Review in Charts:?Sometimes, charts are the best way to take a quick look at how the economy is doing. Here are charts we find as interesting indicators:

Nothing Drives Sentiment Like Prices

Markets love to fool the masses. The Federal Reserve’s first-rate hike of this cycle happened on March 16, 2022. Ten more rate hikes followed over the next 16 months—one of the most aggressive Fed hiking cycles yet. What have U.S. stocks done since that first hike? They’re positive—up more than 5%.

Not as Great for the Little Guys

The story is a little different for small caps. They have hit a 22-year low relative to large caps.

The Timing Question

A common question and conversation is about timing—“Do I hold off putting new money in the market and/or possibly derisk my portfolio? The most practical answer is that it’s a matter of perspective. The market is inherently unpredictable over the short term. For example,

• Since 1970, the S&P 500 has had an annual return of 20% or more 19 different times.
• Eight of those 19 years (42% of the time) saw an intra-year decline of 10% or more.
• Seventeen of those 19 years (89% of the time) saw an intra-year decline of 5% or more.

Given that the U.S. market is up around 20% already this year, there’s some evidence that a market correction—of some variety—could be looming. The best remedy for moving forward is to be clear with yourself about your investment timeline. Involve your advisor in that discussion, too. We are here to help!

Business Briefing

• Home Sales Drop Again:?U.S. home sales dropped 21% from January to August compared to the same period last year, according to the National Association of Realtors data released Thursday. The year before, sales fell 18%. The median home sale price increased 3.9% compared to a year earlier, to $407,100. (The Washington Post)
• Fed Leaves Rates Unchanged:?The Federal Reserve left its benchmark short-term interest rate unchanged on Wednesday but kept the door open to another hike later this year to continue fighting inflation. The central bank raised rates 11 times since March 2022, the fastest pace in four decades. At the end of its two-day policy meeting, the Fed also indicated that it would likely keep rates high for longer than previously hoped to prevent prices from rising too much, indicating that households shouldn’t expect relief from borrowing costs anytime soon. (Bloomberg)
• Spending Proposal:?A dozen Republicans indicated last week that they would oppose a spending proposal unveiled by House Speaker Kevin McCarthy (R-Calif.) in hopes of averting a government shutdown at the end of the month. With a slim House majority, the GOP can’t pass the measure if a dozen members defect. Even without the far-right opposition, the plan, which includes an 8% spending cut for federal agencies and would only fund through October, stands almost no chance of clearing the Democratic-controlled Senate. (The New York Times)

Monday Musing

Does this sound familiar?