Tax Season is Underway

Here are some interesting tidbits and advice you should know as we commence the 2022 tax return season:

• The deadline isn’t April 15—it’s April 18. The 15th lands on a Saturday this year, and the following Monday is DC Emancipation Day, so filers have until Tuesday, April 18, to file their taxes. Also, people who live in federally declared disaster areas in California, Georgia, and Alabama have until May 15 to file.
• Don’t rush. There’s a natural desire to file as soon as possible, particularly if you’re getting a refund, but you shouldn’t pull the trigger prematurely for two reasons. First, some tax forms may not arrive by the intended deadline of January 31. Second, some tax forms are still not finalized because the Feds changed the tax code in the eleventh hour.
• Expect a smaller refund. The COVID tax relief efforts from the past two years—including stimulus checks and the expanded Child and Dependent Care Tax Credit—no longer apply. So expect your refund to be smaller this year.
• Are you thinking about buying an electric car? The Inflation Reduction Act introduced an electric vehicle tax credit, awarding $7,500 to EV buyers who meet strict requirements. First, cars bought before August 16, 2022, don’t qualify. Then, the MSRP must be below a certain threshold, and the final vehicle assembly must be completed in North America. These narrow parameters greatly limit the ability to qualify for this tax credit.
• 1099-K reporting will change. Through 2022, small businesses and individuals only received a 1099-K for selling goods and services using third-party payment processors like Venmo, Cash App, and PayPal if they had over 200 transactions and sold over $20,000 worth of goods and services. Starting in 2023, this will change to receiving a 1099-K for payments of over $600. As you file your 2022 return, start thinking about what changes you might want to make in 2023 to prepare for or avoid a big tax hit.
• Don’t bother calling the IRS. The Internal Revenue Service is still grappling with about 6 million unprocessed tax returns, even as they’re about to receive 168 million new returns for the 2022 tax year. They did hire an extra 5,000 people to work the customer service lines, but avoid calling if you don’t want to deal with long wait times.

Investment Themes Carrying Over from 2022

Many of the investment themes we saw in 2022 are carrying over to 2023.

Interest Rates vs. Inflation

The battle rages on between interest rates and inflation. But some financial experts speculate that interest rates are right where they need to be because the inflation data is starting to trend down. Certainly, there’s been an improvement since June’s 9.1 percent inflation rate, which dropped to 6.5 percent by the end of January.

Value vs. Growth

Technology companies are classic examples of “growth companies” because their performance is more about the expectation of what their future might bring. In contrast, a “value company” is an established business that pays steady, predictable dividends.

Last year, fast-growing tech companies took a backseat to their more stable counterparts, resulting in the largest outperformance of value over growth in about 15 years. Even so, don’t necessarily throw out growth companies because things like cloud computing, digital infrastructure, and healthcare are expected to have tremendous opportunities for growth going forward.

Emerging Investment Themes

Some investment themes unique to 2023 are starting to emerge. Here’s what to be aware of.

Bonds

Bonds performed terribly in 2022. Typically, stocks and bonds trend oppositely. However, last year was the first time in 45 years that both stocks and bonds declined—and declined dramatically.

However, this scenario is quite the anomaly, so don’t start kicking bonds out of your portfolio. Be patient—history suggests that bonds, much like stocks, recover after a decline. In fact, bond funds have already started to show some positive overall results this year, and we suspect the trend to continue if the Feds stop raising interest rates like they did last year.

Dividends

Dividends account for about 40 percent of long-term returns dating back to 1926 and are particularly important during times of high inflation. Consider the 1970s, a highly inflationary decade where dividends accounted for nearly 70 percent of returns! Similarly, during the 2000s, dividends provided just about the only positive return due to the 2008 financial decline.

Healthcare

Big Tech has driven much of the market’s performance over the past decade, but pharmaceutical and healthcare companies may very well be the next leaders. Remember the Emergency Use Authorization (EUA) that allowed COVID-19 vaccines to roll out faster? This is just one example of how the pharmaceutical industry accelerated in 2020 and 2021.

Then, it’s estimated that by 2030, over one billion people worldwide will be obese. Obesity increases the risk of heart disease, diabetes, kidney disease, and many other debilitating conditions. The world will need a robust healthcare system to treat the influx of obesity-related diseases.

Infrastructure

After years of globalization, capital spending is finally turning inward. Expect to see increased investments in manufacturing, broadband internet, roads, power grids, and machinery—things that have long been neglected, fallen into disrepair, or simply put on the back burner.

The Weakened Dollar

Last year, the dollar weakened compared to other currencies. After trading at a 20+ year high in September 2022, the US dollar index declined by about 10 percent through the end of January 2023. This is only the sixth time since 1980 that the US dollar index has declined 10 percent or more from a five-year high.

The average company on the S&P 500 Index generates 50 percent of its revenue overseas. When the dollar is weak, these companies can translate international sales at a slightly stronger number when converting them back to the dollar. This could very well spell improved earnings for many companies in 2023.

Get More Help from Nelson Financial Planning

Do you need help adjusting your portfolio allocation based on tax changes and emerging investment themes? Turn to Nelson Financial Planning for a full investment analysis. Our Certified Financial Planners can help you change your life with a successful financial plan that provides peace of mind for the future.

To learn more, please contact us online or call our Winter Park, FL, office at 407-629-6477.