IRS Inflation Adjustments 2023 (Critical Retiree Decision)

In this episode of Cut Through The Noise, Anthony Saffer, CFP®,CKA® and Alex Okugawa, CFP®, CEPA®, CKA® tackle the hottest topics in financial markets, financial planning, and life, including

► IRS Inflation Adjustments 2023

► Is the Fed raising rates too Quickly?

► Getting meaningful yield on your cash

► Treasury bonds this year

IRS Inflation Adjustments 2023 (Critical Retiree Decision)


Full transcript:


Alex Okugawa & Anthony Saffer

Alex Okugawa 0:00
Hi there, and welcome to our segment Cut Through the Noise where we answer your questions that we’ve been hearing throughout the month. Today we’re talking about tax IRS inflation adjustments 2023, Is the Fed raising rates too quickly, getting meaningful yield on your cash, and treasury bonds down this year greater than stocks? Stay tuned. Hey, there, it’s Alex and Anthony, from One Degree Advisors. We are Certified Financial Planners who help folks with all things tax retirement and investment related. Anthony, a lot of stuff happening around the world. But let’s dive into that first topic, which is the tax inflation adjustments that will be increasing people’s deductions.

Anthony Saffer 0:45
Yeah, so the IRS announced that standard deductions are going up by $1,800 and $27,700. For joint filers, half of that for single filers, retirees over 65, it’s actually a bit above that. So a retiree could have a $30,000 standard deduction.

Alex Okugawa 1:03
And this is huge relative to where this was, I mean, 510 years ago, right? People are getting that greater standard deduction, which means folks that maybe do some like charitable giving, or they have a mortgage, and they can deduct that mortgage interest, you really want to be making strategic decisions on how you’re doing, you’re giving to make sure that you’re getting that full tax benefit.

Anthony Saffer 1:26
Yeah. So in 2018, when tax reform happened, that standard deduction went way up, and far fewer people are itemizing, it’s going to even go down more. So more people are going to be taking that standard deduction, here’s where it’s important, and where we really see it. If you’re making charitable deductions, then a lot of people don’t realize they’re not getting a lot of benefit from that tax benefit. There is a way around that to some extent, with charitable stacking. It’s where you basically double up your charitable contributions in one year, we have a video on that, and we’ll go ahead and post the link to that if somebody wants to dig in further.

Alex Okugawa 1:58
This is why we ask our clients for their tax returns every single year, we can’t necessarily control the direction of markets like we’re seeing so far this year. But there are a lot of things that we can do strategically to save clients taxes, not just in the current year, but potentially in future years. So this is a really big benefit. And something folks need to be paying attention to.

Anthony Saffer 2:19
Yeah, one more thing of interest, annual gift exclusion going up to $17,000. The amount you can give away to one one-person gift is tax-free.

Alex Okugawa 2:27
I think it’s going up by $1,000 from this year, to next year.

Anthony Saffer 2:30
All right. Next question for you. Is the Federal Reserve raising interest rates too quickly?

Alex Okugawa 2:34
Yeah, I think there are a lot of people, right, if you watch the talking heads on TV, there’ll be talking about the Federal Reserve, they’re raising rates, too quickly, we’ll pull this chart up from a visual capitalist, that shows that, at this point in time, I mean, we are increasing interest rates at the fastest clip in recent history. A lot of people are saying, oh, you know, the raising of too fast, they’re gonna break things, you know, don’t fight the Fed is the common phrase right now. The way I like to think about this is, if we look at the rhetoric even a year ago, what was the Federal Reserve saying they were saying things of the effect of inflation is transitory. There was a lot of talk of, we’re going to have a soft landing. And now that rhetoric has changed, right? The people in charge of policy decisions, can’t even get this exactly right. And they are changing all the time. So I think as an investor, what do you do with this information? I think trying to make meaningful decisions off on what the Federal Reserve says they’re going to do. That’s a tough bet. You really need to get back to your plan and make sure that you’re prepared for many different scenarios.

Anthony Saffer 3:46
Yeah, there are a lot of concerns there. But predicting what the Fed is going to do is is a tough game to play.

Alex Okugawa 3:53
Alright, the third thing here is the yield on cash. Finally, people are able to earn something with their cash.

Anthony Saffer 3:58
Yeah. So we need to pay attention to the money that we might have on the sideline of those reserves and make sure we’re getting some interest out of that because there are options that are out there. Now, there is a pretty big distinction. What I’ve noticed is with a lot of the bigger banks, you know, the well-known ones, they haven’t raised interest rates too much on savings. It’s still a pittance. However, there are banks that are out there, especially some of the online banks, like the allies and the capital ones where they’re paying, you know, decent interest on savings, and then you can even get more on CDs.

Alex Okugawa 4:26
I think as of the recording of this video, right allies paying 2.25% Capital One is another online bank that we may recommend 2.3% You know if you were to ask people about our people asked us well, where should we park our cash? You know, two, three years ago, honestly, it really just didn’t matter. Yeah, you know, it didn’t matter whether you had an ally or you had it at Wells Fargo, it’s just you’re earning the same amount. Now, these things can matter. As you said, now you can generate meaningful yield, but it takes being intentional. It takes being intentional knowing what you’re doing and saying, Okay, I’m gonna keep my cash or you get all the same FDIC insured There’s limits that you traditionally get at a brick-and-mortar bank, but you can actually earn some meaningful yield now, which is important.

Anthony Saffer 5:05
Definitely pay attention to it and be wise with that. All right. So Alex treasuries, in some cases down more than stocks.

Alex Okugawa 5:12
Yeah, let’s pull up this chart here. This is going to compare the S&P 500, the NASDAQ 100, and a 30-year treasury bond and the 30-year treasury bond, you may not believe it, it’s the orange line, right? That looks more like a stock to me than in bonds that are supposed to be so safe. Exactly. Government Bonds should not be down 30%, it’s a shock to the market, it disproportionately hurts retirees who likely have more income or more assets. And excuse me, in bonds. The thing is, this is going to take a while to play out, if you’ve gone down this much, it’s going to take a while to earn back that money in your bonds if you’re just going to hold on. This is why I mean, we have written this in our investment philosophy, we posted it on our website because we say this is what we believe this is how we invest money. Money that you put in bonds should not be any type of real risk asset. You want to get your returns in stocks, and you want to have more safe money in bonds. And that’s why we skew towards the more stable side, which would be shorter-term bonds, higher quality bonds, right? We’re not reaching for yield, we want that stability. So the 30-year treasury bond, as of the recording of this video, or I think this was through Yeah, 1020 is down over 34% short term bonds, I think are down probably in that six to 7% range, depending on which one you look at.

Anthony Saffer 6:38
Now you mentioned the length of time that it’s going to take for those bonds to come back because they don’t mature for 20 to 30 years, shorter-term bonds, maybe down some haven’t dropped as much in value even that’s not fun. But the thing is, they’re going to mature the face value pays out and then you can reinvest at higher rates

Alex Okugawa 6:54
The point is this is why we avoid long-term bonds. This is exactly why and now let us know what you think about the standard deduction going up. Are you taking the standard deduction, or are you itemizing your deductions? And are you making sure that you’re getting the most out of your tax breaks? Let us know your thoughts in the comments down below. And if you enjoyed today’s video, please like and subscribe for more. Thanks for watching.

Transcribed by

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