Posts Archives

Coming in for a Landing

Written by Minich MacGregor Wealth Management on August 29, 2023. Posted in Featured, News, Posts.

You are on a plane, currently descending gradually through the clouds. We are on the plane, too. In fact, everyone in the country is on board. Welcome to Flight 2023 of U.S. Economy Airlines. We know our destination: A normal rate of inflation. What we don’t know is how long the flight will take…nor what kind of landing to expect when we get there.

Will it be a hard landing, or a soft one?

This metaphor, silly as it is, accurately describes the central economic problem of the year: How to bring historically high prices down without also tanking the economy. (In other words, how to land the plane without crashing it.) It’s a puzzle that has plagued every economist who has ever sat in the cockpit during times of high inflation.

In this message, we want to give you an update as to where we are on our trip.

The Flight So Far

If you’re one of those people who can actually sleep on a plane – lucky you – then here’s a recap of what happened while you were out. In 2022, coming on the heels of a global pandemic, a global reopening, and a war in Europe, inflation in the U.S. peaked at 9.1%.¹ If you rewind back to the beginning of this year, prices fell but were still elevated at 6.4%.¹ This was partially achieved by higher interest rates, which had risen to just over 4% in January.²

At the time, it was widely expected among economists that the Federal Reserve would continue hiking rates to bring inflation down…but as a result, the economy would enter a recession sometime later in the year. (This would be the aforementioned hard landing.) Now, over eight months into 2023, we can say that the first part of the prediction held up. The Fed has continued raising rates, albeit at a slower pace, with rates currently sitting at 5.3%.² Consumer prices have cooled, too, with the most recent data showing inflation down to 3.2%.¹

The second half of the prediction, however, is yet to come true. The U.S. economy grew by 2% in the first quarter, and current data suggests it grew by 2.4% in the second.³ (That number may be revised later as more data becomes available.) In addition, the labor market has remained healthy, adding 187,000 new jobs in July alone.⁴ That has kept the unemployment rate to around 3.5%…the same rate we saw before the pandemic began in 2020.⁴

Over the summer, many of the same experts that were forecasting a recession began revising their predictions. Maybe, they say, we’ll avoid a recession this year. Maybe it is possible to bring down inflation without tanking the economy. Maybe we can land this bird softly after all.

Soft Landings vs Hard Landings

This is an important issue to ponder. How investors expect the landing to go plays an important role in how the markets perform. But to accurately think about the issue, we have to first understand what the difference is…and why it’s so hard to know which we’re in for.

First, let’s define these two terms. A soft landing is when inflation decreases to an acceptable rate without triggeringan unacceptable rise in unemployment. A hard landing, by contrast, is when prices come down so fast that most businesses experience a major drop in revenue, causing them to lay off workers. This would result in a surge in unemployment. Since unemployed people tend to spend less money, the economy would contract. When an economy contracts long enough – two straight quarters is a common measurement – we call it a recession.

Do you see why the plane analogy is actually a good one? When pilots land a plane, they must do so quickly enough to prevent stalling, but gradually enough to glide parallel to the ground, kissing the runway rather than slamming into it. That’s the goal, here, too. Inflation has to decline quick enough to overcome inertia, but not so fast the economy crashes.

The folks most responsible for doing this – the pilots in our metaphor – are the board members of the Federal Reserve. In fact, the Fed is mandated to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”⁵ When one of those three goals gets out of alignment – in this case, prices – it can be extremely difficult to regain balance.

The Fed’s track record in this area is…mixed at best. You might think that, as a society that has put people on the moon, cured smallpox, and invented robot vacuum cleaners, we’d be able to crack this code easily. Unfortunately, policymakers don’t really have many options, and the ones they do have all come with downsides.

For example, the simplest option for bringing down inflation without damaging the economy is to simply wait and hope prices come down on their own. But this risks the possibility that inflation will become entrenched. When this happens, the effects can be devastating. (Think of Germany in the early 1920s, when children stacked worthless cash as building blocks, or the 1970s here in the U.S.)

The second option is for the government to impose price controls. (Essentially, dictating the price that industries can charge for their goods and services.) The U.S. has tried this before. It worked during the World War II years; not so much when President Nixon tried it in 1971. And politically, it would likely never fly today.

The final option is to do what the Fed is doing now: Hike interest rates to cool off the economy so that businesses have no choice but to lower prices. It definitely works, but it’s risky. Raise rates too high, too fast, and you drive the economy into a full-blown recession. This is what happened in the early 1980s. Back then, Fed Chairman Paul Volcker took a “forget the torpedoes, full speed ahead” approach, raising interest rates as high as 20%. It broke the cycle of inflation, but it also led to a deep recession. At one point, the unemployment rate rose to 10.8%!⁶

Mindful of this, the current Federal Reserve has been raising rates much more gently and gradually. The result is a very slow return to normal prices, but – so far at least – continued economic growth. So, a soft landing, right?

Well, not so fast. First of all, the plane hasn’t landed yet. Second of all, there’s no firm agreement as to what a landing actually is. How low does inflation have to get before we declare touchdown? Three percent? That’s in line with the kind of inflation we saw for much of the 2000s before the Great Recession hit. Or is it two percent, which is what the Fed prefers? And how much is unemployment permitted to rise? Four percent? Five? Higher? Actually, here’s a thought experiment for you: What if, over the next twelve months, unemployment and inflation both stay where they’re currently at? Is that a soft landing, or a hard one? Or is it no landing at all?

You can see why nothing keeps an economist up at night so much as inflation. It’s not a clear-cut issue. (And we haven’t even gotten into more nuanced topics, like what to actually measure when calculating inflation, whether the raw unemployment rate is really the best barometer of economic health, or the role consumer sentiment plays in all this.)

In our opinion, however, it’s still too early to proclaim a soft landing. That’s because there are still potential patches of rough air ahead. For one thing, while inflation is definitely cooling overall, it actually ticked up in July. And while unemployment is low, the pace of added jobs is slowing down, too. So, the numbers we’re seeing now might not be quite as rosy in the future.

Then, too, all these interest rate hikes are affecting other areas of the economy. They’re partially responsible for the weaknesses we’re seeing in the banking sector. They’ve also caused yields on long-term U.S. Treasury bonds to fall below those of shorter-term bonds. This is what’s known as an inverted yield curve, and it’s historically been a reliable – if imprecise – indicator of a future recession. (Here’s what this means in a nutshell: Typically, bond investors expect to be paid more interest for lending their money for longer periods of time, so interest rates for long-term bonds are higher than for short-term ones. When this flips around, it means investors expect interest rates to fall sometime in the future. This usually happens when the economy dips and needs propping up, forcing the Fed to cut rates. So, to put it simply, an inverted yield curve suggests that many investors are still expecting a recession in the not-too-distant future.)

For now, though, inflation is cooling down, the economy is not in a recession, and the Fed’s rate hikes are coming lower and fewer. This is good news! And it’s a major reason why the markets have performed so well this year. Should these factors continue in a positive direction, it’s perfectly reasonable to hope for a smooth final leg of our flight.

What This All Means For Us

Whew! We got really wonky in this message, didn’t we? But we wanted to make sure you got an up-to-date view of the situation. As the co-pilot on your financial journey, here’s our view. While the year has been positive, it’s possible that a “landing,” whether hard or soft, is still far away. Right now, we’re in a low-altitude glide. Therefore, the message from the cockpit is this: Feel free to move about the cabin, but for now, it may be best to keep the seat belt sign on.

In the meantime, our team will keep doing all we can to help our clients continue moving forward. Please let us know if you ever have any questions or concerns – and enjoy the rest of your flight!

¹ “Current US Inflation Rates: 2000-2023,” US Inflation Calculator, https://www.usinflationcalculator.com/inflation/current-inflation-rates/

² “Effective Federal Funds Rate,” Federal Reserve Bank of New York, https://www.newyorkfed.org/markets/reference-rates/effr

³ “Gross Domestic Product, Second Quarter 2023,” Bureau of Economic Analysis, https://www.bea.gov/news/2023/gross-domestic-product-second-quarter-2023-advance-estimate

⁴ “The Employment Situation – July 2023,” Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/empsit.pdf

⁵ “Monetary Policy Principle and Practice,” Federal Reserve, https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm

⁶ “Unemployment continued to rise in 1982 as recession deepened,” Bureau of Labor Statistics, https://www.bls.gov/opub/mlr/1983/02/art1full.pdf

The Duality of the Markets

Written by Minich MacGregor Wealth Management on May 11, 2023. Posted in Posts.

Have you ever noticed how so many idioms refer to the duality of life? Consider: There are two sides to every coin. Life is a double-edged sword. You can see the glass as half-full or as half-empty. Every cloud has a silver lining.

Each of these sayings refers to the fact that almost everything in life can be seen as either good or bad; it’s all based on what we focus on. Sometimes, it can even depend on which “side” we see, hear, or learn about first. Even science has found this to be true. For example, in 2014, two psychologists named Angela Legg and Kate Sweeny ran an interesting study. Two groups of people filled out a personality inventory. The first group was told they would get feedback, some positive, some negative. The second group learned that they would be the ones to give it.

The study found that 78% of the people in the first group wanted to hear the negative stuff first.¹ That’s because they believed that if they got the bad news out of the way, they could end on a good note, and their day wouldn’t be ruined.

The second group – the ones giving the feedback – were divided. Roughly half focused on what they thought the recipient would want to hear and decided to give the bad news first. The other half focused on their own feelings and decided to give the good news first, because they felt it would be easier to start off with something positive. Either way, just about everyone in the study was preoccupied with the order in which to face both sides of the situation. It didn’t matter if both the good and bad were roughly equal. What mattered was mindset.

We were thinking about this recently while pondering our next market message. The very message, in fact, that you are reading now. You see, there is a real duality to the markets at the moment. Storylines pulling the markets down, storylines pushing them back up. But which to focus on? Which to start with?

Given what we learned from that study we mentioned, we think we’ll start with the “bad” news before sharing the “good.” Then, we’ll explain why, when you think about it, it really doesn’t matter.

Interest Rates and Bank Failures

Perhaps the biggest drag on the stock markets – not just now but over the last year – has been the steady rise of interest rates. The most recent hike came on May 3^rd, bringing rates to a 16-year high of 5.25%.² Essentially, the Fed has spent the last year trying to combat inflation by cooling down the economy. When rates are low, consumers and businesses are incentivized to borrow and spend. But when rates are high, it’s meant to reward saving overspending. If people spend less and demand for goods and services goes down, companies have little choice but to lower prices if they’re to attract new business.

Unfortunately, these rate hikes are very much a – wait for it – double-edged sword. Because while they do serve as a deterrent against inflation, they can depress economic activity to the point of a recession. This fear of a recession, accompanied by lower earnings from many companies as a result of higher interest rates, has triggered some of the volatility we’ve seen in recent months.

But rising interest rates have done something else, too: Threaten the solvency of America’s banks.

On March 10, federal regulators seized Silicon Valley Bank, the sixteenth largest in the country. Two days later, New York’s Signature Bank collapsed. And on May 1^st, First Republic Bank in San Francisco was seized, too, with most of its assets promptly sold to JPMorgan Chase. Given how suddenly – and consecutively – these regional banks fell, many investors have been gripped by fear of contagion spreading across the entire banking industry.

While none of these situations were exactly the same, all three banks had certain things in common. For one, all made long-term investment bets that turned out to be far too risky. In the case of Signature Bank, this was in cryptocurrency, the value of which has plummeted in recent months. In the case of Silicon Valley and First Republic, it was placing far too much money in U.S. Treasury bonds. When interest rates began rising, the value of these bonds fell. Suddenly, these banks held most of their money – their depositors’ money – in assets that no one wanted. Furthermore, all these banks had an unusually high number of uninsured deposits. As a result, customers began withdrawing their money in droves. No bank can survive without deposits, forcing the government to step in and take over before everyone lost everything.

Now, three banks – out of the thousands that exist in the U.S. – may not sound like much. But since this started, investors have been combing the industry with a magnifying glass, trying to find which other firms might have hidden weaknesses. This has caused many banks’ stock prices to fluctuate wildly in recent weeks, acting as a further drag on the markets as a whole. It’s also added to recession fears. That’s because regional banks like these play a vital role in helping families, local businesses, and startups participate in the broader economy.

In each of these cases, the government has acted quickly in order to prevent any contagion from spreading. So, if all this banking turbulence stops with First Republic, well and good. But if other regional banks experience more credit shocks or a fire sale on their stock prices, this may well be a case of getting out of the frying pan only to fall into the fire. Stay tuned.

So, that’s the “bad news”. Now, let’s turn to a new subject that could be seen as either good or bad, depending on how you look at it.

Inflation

Since 2021, inflation has been the root cause of almost every bit of economic uncertainty. But the role inflation plays has changed over time.

The current spike in inflation started due to an explosion of economic activity after the COVID-19 lockdowns. Buoyed by historically low interest rates, Americans were shopping again, and not just for distractions to keep them busy while they were stuck at home. But this pent-up demand far exceeded supply, causing prices to skyrocket. Later, inflation became more driven by snarls in global supply chains. Then, it became exacerbated by the war in Ukraine. All these factors simply made it very difficult – and expensive – to get goods where they needed to be.

Lately, though, inflation has changed again. Now, the single biggest factor is not the price of goods, but of services. People aren’t just buying things again; they’re doing things again. Eating out at restaurants, going to sporting events, putting their children in daycare, and traveling. Meanwhile, a strong labor market has led to extremely low unemployment and rising wages. This has caused businesses to raise prices to compensate.

For these reasons, inflation remains stubbornly high, even after a year of rising interest rates. But here is where you can see the glass as either half full or half empty. The half-empty view would be that inflation remains high, meaning the Fed could keep raising rates. But the half-full view is that these same factors keeping inflation high are also keeping us out of a recession. (More on this in a moment.) Then, too, prices are coming down…just very, very slowly. (Back in March, prices were up 5% compared to the same time last year; that’s down from the 6% mark we saw in February.³)

Finally, let’s get to the “good” news…unless, of course, you’re the Federal Reserve, proving that even good news can be a double-sided coin.

Jobs

For months, analysts have predicted the labor market would slow down. Because of higher interest rates, companies would stop hiring, or even lay off workers. To be frank, this is what the Federal Reserve wants – at least to a degree. Because it’s this sort of economic cooldown that will tamp down prices. But it’s also been a main source of recession-based fears. When unemployment starts rising, a recession is often not far behind.

To date, however, it hasn’t happened. In April alone, the economy added 253,000 jobs. That’s far more than what most economists predicted. In fact, it’s brought the unemployment rate even lower, to 3.4%. That matches a 53-year low!⁴

This is terrific news. The more jobs there are, the more spending there is. The more spending there is, the more the economy will grow…or at least, not contract to the point of a recession. But unbelievable as it may seem, there is a counterargument. These job numbers may prompt the Fed to keep raising rates if they believe the economy can handle it…thereby injecting more uncertainty into the stock market and bringing us closer to a recession. Only time will tell which way investors decide to spin it.

The Takeaway

So, what are you thinking right now? Are you feeling positive or negative about the markets? On the one hand, we devoted more words to the “bad” news. On the other, we finished with a (mostly) positive note, with lower inflation and higher employment.

To be honest, however you react to all this says more about you – and more about how we wrote this message – than about the markets themselves. And that is exactly the point.

Positive and negative. Good news and bad. Yin and yang. Jekyll and Hyde. Dark side and light side. Half-full and half-empty. The fact is, there are two sides to almost every storyline impacting the markets right now. And most investors are picking and choosing what they react to, and how they react, based on which side of that duality they fall on. They choose one side of the coin, one edge of the sword. They turn investing into one big psychology experiment.

But we’re not most investors.

Moving forward, we need to accept that there are forces pushing the markets up and forces pulling the markets down. We can’t control which of those forces wins. Nor can we predict, day to day, which force will prove stronger. This is precisely why we have chosen a long-term strategy for investing. We don’t have to decide whether the glass is half-full or half-empty. We don’t have to stress over whether we hear the good news or the bad news first. We acknowledge both as important…but neither as everything. We don’t have to worry about guessing right because we never guess. Instead of guessing, we take a measured approach of analyzing the data, identify the areas of strength and weakness and make portfolio changes as necessary. As always, our team will keep watching all these storylines closely. In the meantime, our advice is to not stress about whether tomorrow’s news will be good or bad. We are always here to help you hope for the one and plan for the other…while remembering the words of one of our favorite idioms: Slow and steady wins the race.

¹ “Why Hearing Good News or Bad News First Really Matters,” PsychologyToday, June 3, 2014. https://www.psychologytoday.com/us/blog/ulterior-motives/201406/why-hearing-good-news-or-bad-news-first-really-matters

² “Fed increases rates a quarter point,” CNBC, May 4, 2023.
https://www.cnbc.com/2023/05/03/fed-rate-decision-may-2023-.html

³ “Inflation Cools Notably, but It’s a Long Road Back to Normal,” The NY Times, April 12, 2023. https://www.nytimes.com/2023/04/12/business/inflation-fed-rates.html

⁴ “US labor market heats back up, adding 253,000 jobs in April,” CNN Business, May 5, 2023. https://www.cnn.com/2023/05/05/business/april-jobs-report-final/index.html

Q1 Market Recap

Written by Minich MacGregor Wealth Management on April 17, 2023. Posted in Posts.

Have you ever heard the stock market be compared to a roller coaster? There’s a good reason for this. While sometimes the markets will go through long, relatively flat periods, there are also times when they will rise and fall, climb and dip with astonishing speed.

The first quarter of 2023 was the perfect example of this.

As you know, last year was a turbulent one for investors. Inflation worries, rising interest rates, oil prices, and the war in Ukraine all combined to drag the S&P 500 down 19.4% for the year.¹ In fact, it was the worst 12-month span since the financial crisis of 2008.

The good news is that stocks bounced back somewhat in Q1. But this is where the roller coaster analogy really kicks in.

For example, in January, the S&P 500 rose just over 6.5%.² But in February, the markets dropped 2.6%.² Things got bumpy in early March, as the S&P rattled up and down like one of those old, wooden roller coasters from the early 20^th century. But the markets hit a hot streak toward the end of the month, and as a result, the S&P finished up 7% for the quarter.³

Some sectors did even better than this. For example, tech stocks – which got hammered in 2022 – have enjoyed a much more positive start to the year. In fact, the Nasdaq, an index made up largely of tech stocks, shot up nearly 17%!³

A roller coaster, indeed.

So, what was behind the market’s latest thrill ride? There are a few factors, but chief among them is the Federal Reserve’s war on inflation. After some data suggested that inflation began cooling off in late 2022, the Federal Reserve started cooling off the rate at which it’s been raising interest rates. In both February and March, the Fed hiked rates by only 0.25%.⁴ That’s far less than the 0.75% hikes we were seeing previously. This has led many investors to hope the Fed won’t raise rates as high as economists expected.

There are two reasons this matters. First, the higher interest rates go, the greater the chances of our economy entering a recession. Second, higher rates tend to eat into corporate earnings.

Put these two together, and it’s clear why the expectation of lower interest rates – or at least, slower rate hikes – would boost investor confidence.

So, what does all this mean moving forward? Is the roller coaster coming to an end? Is the car pulling into the station?

This is an important time to remember that current market conditions don’t reflect the present – they reflect expectation of the future. Investors expect the Fed to stop hiking rates, so investor confidence goes up. But there are many factors that could cause those same expectations to change in a heartbeat. For example, inflation is still an issue, and there’s no guarantee the Fed won’t keep hiking rates if prices remain high. (Indeed, oil prices are on the rise again, which means other prices could rise as a result.)

Here’s something else to keep in mind. While the S&P 500 rose 7% for the quarter, raw numbers like that don’t always tell the full story. Much of that rally was driven by a small group of stocks overperforming – mainly the aforementioned tech companies. But, as its name suggests, the S&P 500 contains five hundred companies…and most of them barely moved at all. The rally, in other words, was not broad, but narrow.

While it has certainly been nice to see the markets trending up again after such a rough 2022, it’s important that we do not get carried away by a few months of growth driven by relatively few companies. In other words, it’s important we don’t try to get off the ride before the roller coaster has come to a complete stop.

You see, the roller coaster metaphor isn’t important because it’s cute. It’s because it contains good advice. When you board a real roller coaster, you always know generally what to expect. You know it’s going to be bumpy, jerky, fast. You know there are going to be sharp turns that whip your head around and sudden drops that make the pit fall out of your stomach. So, what do you do? You secure your valuables. You buckle your seat belt. You brace yourself. As investors, it’s important that we keep doing that moving forward – so that, ultimately, we end up at the destination we want, having enjoyed the ride.

We’ll continue to be cautious, especially in the short term, keeping our hands and legs inside the vehicle until we get a clearer view of what’s in front of us. And our team will keep watching our clients’ portfolios, doing our best to make the ride as smooth and straight as possible.

As always, if you have any questions or concerns about the markets, please let us know. In the meantime, have a great week, a great quarter, and a great Spring!

¹“Stocks fall to end Wall Street’s worst year since 2008,” CNBC, https://www.cnbc.com/2022/12/29/stock-market-futures-open-to-close-news.html

² “S&P 500 Index Historical Prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/SPX/historical-prices

³ “Stocks Close Higher in Last Session of Turbulent Quarter,” The Wall Street Journal, https://www.wsj.com/articles/global-stocks-markets-dow-update-03-31-2023-2eafbb02

⁴ “The Fed announces ninth-straight interest rate hike of 25 basis points,” CNBC, https://www.cnbc.com/2023/03/22/fed-announces-interest-rate-hike-of-25-basis-points.html

New Tax Changes for 2022

Written by Minich MacGregor Wealth Management on February 14, 2023. Posted in Posts.

Tax season is upon us and a new year means new tax changes. While Congress didn’t pass any major tax reform last year, there are still updated tax provisions that could affect how much money you keep and how much goes to Uncle Sam. That’s because Congress did pass the Inflation Reduction Act and SECURE 2.0 Act. Both bills contain tax implications, even if that wasn’t their primary focus.

In this post, we’ve included some of the most significant changes for investors and retirees. Our suggestion: Look over the material below and highlight anything you have questions about. Then, feel free to share this post with your tax professional! He or she should be able to answer any questions you have.

As always, if there’s anything our team can do to be of assistance, please let us know. Have a great day!

Tax-Related Updates for 2023

CHANGES TO THE FILING DEADLINE

One thing to note before we get into the nitty-gritty: This year’s filing date is April 18 instead of the usual April 15.¹ Technically, this isn’t an actual change, as we saw the same date in 2022. But since April 15 is on a Saturday – and because April 17 is a holiday in Washington, D.C. – taxpayers will again get a few extra days to file. (Remember, though, that filing as early as you can is almost always better than filing last minute. That’s because it eliminates the stress of procrastination. Plus, you may get any tax refund back sooner!). Keep in mind it takes time to gather in all the tax information from your various holdings. We will have your tax documents to you as soon as possible. If you have any questions about that, please let us know.

CHANGES TO FEDERAL TAX BRACKETS²

As it often does, the IRS has adjusted the 2022 tax brackets based on inflation. These adjustments are even greater than usual this year thanks to the historic inflation we’ve seen lately. That’s good news for those whose wages have gone up to keep pace with the rise in prices, because it means you can earn more before getting bumped to a higher bracket. And some people may even find themselves dropping down a level, even if their pay stayed the same.

The new brackets are as follows:

Tax Rate	Single	Single Married, filing jointly	Head of Household
10%	0 to $10,275	0 to $20,550	0 to $14,650
12%	$10,276 to $41,775	$20,551 to $83,550	$14,651 to $55,900
22%	$41,776 to $89,075	$83,551 to $178,150	$55,901 to $89,050
24%	$89,076 to $170,050	$178,151 to $340,100	$89,051 to $170,050
32%	$170,051 to $215,950	$340,100 to $431,900	$170,051 to $215,950
35%	$215,951 to $539,900	$431,900 to $647,850	$215,951 to $539,900
37%	$539,901 and up	$647,850 and up	$539,901 and up

CHANGES TO CAPITAL GAINS³

The income threshold for long-term capital gains rates has also gone up due to inflation.

Tax Rate	Single	Married, filing jointly	Head of Household
0%	0 to $41,675	0 to $83,350	0 to $55,800
15%	$41,676 to $459,750	$83,351 to $517,200	$55,801 to $488,500
20%	$459,751 and up	$517,201 and up	$488,501 and up

CHANGES TO DEDUCTIONS²

As you know, when you file your taxes, you can either claim a standard deduction or dive into the details and itemize your deductions. (Since the passing of the Tax Cuts and Jobs Act back in 2017, most people choose the former.) Per the IRS, the standard deduction is “a specific dollar amount that reduces the amount of income on which you’ve been taxed.”⁴

The IRS has increased the standard deduction for your 2022 taxes. For singles, the standard deduction is now $12,950, up from $12,550. For married couples filing jointly, it is $25,900 up from $25,100. For heads of households, the standard deduction is $19,400, up from $19,000.²

Remember, you can’t take the standard deduction if you also itemize deductions. And for married couples filing separately, both spouses must take the same type of deduction. So, if one spouse chooses to itemize, the other spouse must as well.

CHILD TAX CREDIT²

The Child Tax Credit (CTC) is returning to pre-pandemic levels this year. That means taxpayers who claim this type of credit will receive a smaller refund. Parents who received $3,600 per dependent for 2021 will now get $2,000 for 2022. That’s a reduction of $1,600.

CHANGES TO ALTERNATIVE MINIMUM TAX (AMT) EXEMPTION LEVELS²

Due to the Tax Cuts and Jobs Act, the number of Americans who owe the AMT has been drastically reduced. But in case you fall under this category, the exemption levels for 2022 are as follows:

Single	Married, filing jointly
0 to $75,900	0 to $118,100

These exemption levels begin to phase out at $539,900 for single individuals, and $1,079,800 for married couples filing jointly.

***

We hope you found this information helpful. Obviously, it’s not an exhaustive list of every tax change for the year. But it is an overview of some of the most important ones. If you have any questions or concerns, please let us know. Our door is always open!

Sources

1 “IRS sets January 23 as official start to 2023 tax filing season,” Internal Revenue Service, https://www.irs.gov/newsroom/irs-sets-january-23-as-official-start-to-2023-tax-filing-season-more-help-available-for-taxpayers-this-year

2 “IRS provides tax inflation adjustments for tax year 2022,” Internal Revenue Service, https://www.irs.gov/pub/irs-drop/rp-21-45.pdf

3 “5 tax and investment changes that could boost your finances in 2023,” CNBC, https://www.cnbc.com/2022/12/31/5-tax-investment-changes-that-could-boost-your-finances-in-2023.html

4 “Standard Deduction,” Internal Revenue Service, https://www.irs.gov/taxtopics/tc551