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Tax Day is on the Horizon
Three last-minute options to reduce your clients' taxable income
Happy Sunday everyone, and welcome to Benzinga’s financial advisor newsletter.
There is nothing certain in this world aside from death and taxes, and this coming month, we will be reminded of the latter.
As Tax Day looms closer, we’ve got tax tips that might be perfect for some of your clients— scroll on to hear the industry chatter.
Lastly, if you would like to be featured in our upcoming advisor spotlight editions click here to send us an email.
INDUSTRY CHATTER
Tax Day is rapidly approaching.
While some Americans are celebrating tax refunds, others are facing a tax bill they’ll need to settle.
Most tax deductions must have occurred during the 2023 calendar year, leaving clients with limited options to reduce their total tax bill.
However, advisors can remind clients of three last-minute options to reduce their taxable income for 2023.
Saving for Future Healthcare Costs
One option that’s still available to clients is contributing to a Health Savings Account (HSA). To be eligible for an HSA, a client must have a high-deductible health plan.
To reduce taxable income in 2023, a contribution to an HSA must be designated as a 2023 contribution, which is permitted until the tax deadline (April 15th).
Money placed into an HSA counts as an above-the-line deduction. For example, a client making $100,000 who puts $3,000 into their HSA would pay federal taxes on $97,000 for the 2023 year.
The maximum contribution for an individual in 2023 is $3,850 and $7,750 for a family. Individuals 55 or older can put in an extra $1,000.
Retirement Savings
Advisors can also point clients to a traditional IRA to lower their taxable income. This is one of the most common ways for advisors to assist clients with maximizing tax savings.
Just like HSA contributions, deposits into an IRA qualify for an above-the-line deduction.
The maximum contribution for 2023 is $6,500 or $7,500 for those over 50.
Advisors can assess each client’s individual needs to determine the amount and timing of IRA contributions to maximize savings.
Freelancers & Self-Employed Clients
A third option is available to individuals who are freelancers or self-employed.
These clients can look into a SEP IRA for making retirement contributions to lower taxes owed for 2023. The contribution limit may be significantly higher than an HSA or traditional IRA because it’s based on the client’s income level. For this type of account, 2023 contributions cannot exceed 25% of an individual's compensation, or $66,000, whichever figure is lesser.
If the client files an extension, they can contribute to their SEP IRA until the October 15th extension deadline.
While all three of these options can help at the last minute, advisors can eliminate stress by helping clients plan for the current tax year with these options in mind. Many clients are thankful for help with the delicate dance of maximizing tax savings.
MARKET RECAP
Personal consumption expenditures, the Federal Reserve’s preferred measure of inflation, rose as economists expected in February, leaving markets frustrated as to the likely timing of interest rate cuts.
Personal spending rose by 0.8% to $145.5 billion, more than the 0.5% expected and higher than the 0.2% increase seen in January.
Key highlights from February’s Personal Consumption Expenditures inflation report:
The headline personal consumption expenditures price index rose by an annual rate of 2.5%, up from January’s 2.4% and in line with expectations.
The headline month-on-month rate rose by 0.3% in a shade lower than the 0.4% forecasts, after a 0.3% rise last month.
The core price index, stripping out volatile food and energy prices, rose by an annual rate of 2.8%, in line with consensus forecasts. January’s core price index rose by an upwardly revised 2.9%.
The core monthly rate rose at 0.3%, in line and down from January’s 0.4% rise.
The slight rise in the headline measure of PCE inflation was largely expected following a similar tick higher in the annual rate of the headline consumer price index in February, reported earlier this month.
Indeed, February’s headline CPI rose to 3.2%, up from January’s 3.1%. Markets had been expecting the annual rate to remain at 3.2%.
Friday’s data showed that spending on services increased by $111.8 billion, with the largest contributors to the increase being housing and utilities. The increase in services spending was accompanied by a $33.7-billion increase in spending on goods.
Personal income in February rose by $66.5 billion, or 0.3%, following a 1% surge in January — which is not unusual as annual salary negotiations are often settled in January. Expectations were for a 0.4% increase.
It appears with Friday’s data, the Fed’s favored inflation gauge, as with the CPI data, that the final mile down to the Fed’s target rate of 2% is the stickiest.
Reactions And Rate Implications
The Fed continues to monitor the latest inflation and labor market data for the ideal time to begin cutting interest rates. Its next policy meeting is May, but perhaps this will be too soon. The central bank currently sees the likelihood of cutting three times in 2024.
The CME Group‘s FedWatch tool shows 95.8% of traders expect the Fed to hold rates steady in May as of Friday morning, up from 90.7% on Thursday.
For the Fed’s June meeting, 61% of traders expect an interest rate cut as of Friday, according to the FedWatch tool.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: “The June meeting is still three months away, and we are sticking to our view that better inflation data and a clear softening in the labor market will push the Fed into easing.
“FOMC members have made it very clear that they are sensitive to the most recent data, despite the unreliability of the initial estimates of almost all economic statistics. When the data flip, the Fed will flip too. The only question is timing.”
Markets appeared to be pricing in a slim chance of a cut in May, but most bets were now pushed forward to June or July.
In Treasury markets, yields had been slightly higher before Friday’s inflation data and they were unmoved following the data, with the yield on the rate-sensitive two-year Treasury at 4.63%.
The dollar, meanwhile, gained 0.1% against a basket of rival currencies. U.S. markets were closed Friday.
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THE WEEK AHEAD
Economic Data
Monday: S&P U.S. manufacturing PMI (final), Construction spending, ISM manufacturing
Tuesday: Factory orders, Job openings, Fed Governor Michelle Bowman speaks, U.S. auto sales
Wednesday: ADP employment, Fed Chair Jerome Powell speaks
Thursday: Initial jobless claims, U.S. trade balance, Philadelphia Fed President Patrick Harker speaks
Friday: U.S. nonfarm payrolls, U.S. unemployment rate, Consumer credit
Earnings
Monday: BlackRock Municipal Income Trust
Tuesday: Dave & Buster’s
Wednesday: Exxon Mobil
Thursday: Simply Good Foods Co
Friday: Byrna Technologies
Click here for the full calendar of economic data and earnings reports.
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