Written by Chuck Carroll, TFO Family Officer Partners Chief Investment Officer

The holiday season is officially upon us, and with it comes our annual opportunity to gather with family and friends and share joy with those we love. If you’re anything like me, those family gatherings also provide a great opportunity to smile and raise a glass to fond memories and funny stories about loved ones who are no longer with us.

One of my most vivid memories of my late father was his passion for photography. A number-crunching, business-advising Certified Public Accountant by day, on the weekends (at least those he wasn’t working) he was passionate about all things photographic. During my youth–the late 1970s and 1980s– technology hadn’t yet blessed photographers with the digitalization and miniaturization that we take for granted in today’s mobile phones and digital cameras. As a result, serious photo hobbyists could easily acquire a closet full of camera bodies, various-sized lenses, light meters, and other related paraphernalia. When we traveled on family vacations, my father would pack a separate carry-on bag (think extra-large padded duffel bag) of camera gear, which never left his side. To this day, my mom just shakes her head and sighs when she describes us weaving through a crowded airport, she, my sister, and I carrying the bulk of our family luggage because no one other than Dad was allowed to handle “the bag.”

When I would ask him (as I think I did on every trip) why just one camera and one lens wasn’t enough, his response was always the same: “You never know.” I’ve since come to appreciate that phrase, because the photos in our digital frame that we cherish the most aren’t the meticulously posed, digitally enhanced images of family photo shoots. While we appreciate those, the photos that really make us smile are the candid snapshots taken in the waves, at a sporting event, or just doing something silly in our own backyard. The wonderful images that only exist because the person taking the picture had the foresight to think, “you never know.”

In the financial markets, the month of November was analogous to one of those memorable candid snapshots. November didn’t provide any dramatic newsworthy events to anchor in our memory: No great advance in treating a life-threatening human condition, no peaceful ending to a worrisome military conflict, no global economic boom. In fact, earlier this Fall many market pundits had been downright pessimistic about the impact that lingering inflation, falling commercial real estate prices and a host of other concerns might have on the global stock market.

But yet, in the face of that pessimism and without an obvious catalyst, the global stock market turned in one of its most impressive months in history. The 9.3% return achieved by the market in November was the best monthly return since 20201 and ranked in the top 3% of the 1,175 months of market history going back to 19261.

What was more surprising to many investors in the month of November was that the US bond market gave us a surprise that one-upped the stock markets. At the end of October, the US bond market had suffered through its worst three-year period history, falling over 15% during that time1. But investors betting on a continued decline in bond prices were surprised to see the bond market quickly reverse and post a 4.6% return in November, its best month since “Back to the Future” hit the theaters and “The Cosby Show” ruled the TV ratings1. In fact, November’s bond market performance was the 8th best monthly return in the past 1,175 months1.

While some pessimists might try to downplay November’s returns as just a meaningless one-month blip in a downward trend, the long-term impact on an investor who chose to be out of the market, and thus missed the significant one-month returns described above, could be quite dramatic. For example, a hypothetical investor who chose the comfort of their savings account over a 60/40 portfolio of stock and bonds didn’t just miss out on the unusually strong returns that the market provided in November. The opportunity cost of missing just those 31 days, when compounded over a multi-year or multi-decade time horizon, could potentially double or triple the initial amount.

Any great photographer knows that being prepared for life’s unpredictability can help to capture once-in-a-generation moments.  Staying fully invested in markets, even when recent results have been disappointing and the news seems bleak, can do the same thing for your wealth. After all, you never know.

Important Disclosure:

Note: Throughout this document, the Global Stock Market refers to the following blend on indexes: CRSP 1-10 US Market from 1926-1969, MSCI World from 1970-1987 and MSCI All-Country World from 1988-present. The US Bond Market refers to the following blend of indexes: US 5-Year Treasury from 1926-1972, Bloomberg US Govt/Credit Bond Index from 1973-1975, and Bloomberg US Aggregate Bond Index from 1976-present. Indexes are not available for investment and do not take into consideration fees and expenses.

1Data Source: Dimensional Returns

TFO Family Office Partners (“TFO”) is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.

This communication is intended to be informational in nature and is not intended to be construed as individualized financial advice or a specific recommendation. All expressions of opinion are subject to change and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned. We believe this information provided is reliable, but do not warrant its accuracy or completeness. It is provided for informational purposes only and should not be construed as legal or tax advice. TFO is not in the practice of law.

Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s portfolio. There are no assurances that a portfolio will match or outperform any particular benchmark.

Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this document.

This document may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of TFO or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

827-2023-12

As we head for the year’s home stretch, there is a host of planning items you should consider as well as some general information you should be aware of for the coming year.

PLANNING ITEMS

Wages and Payroll

Depending on the benefits that are offered through your employer, you may have access to an FSA, HSA, or both. Below are items to be aware of with each, be sure to check your benefits or consult your employer or your benefits handbook to determine what you have available.

 

Flexible Spending Account (“FSA”)

Look to use up your “FSA” funds before year-end. Depending on the plan, employers allow a carryover from 2023 to 2024 of “FSA” funds of up to $610. Some plans also include a 2 ½ month “grace period” that extends the balance of your “FSA” into 2024. Employers are not required to offer these extensions. Please check with your employer to determine if your “FSA” includes either of these benefits.

Goal – To use and not lose the money you contributed to your “FSA.”

 

Health Savings Account (“HSA”)

Maximize your pre-tax “HSA” contributions. $7,750 is the maximum you can contribute to your “HSA” in 2023 for family coverage. $3,850 is the maximum amount you can contribute for self-only coverage.

Goal – To maximize pre-tax savings and save for future healthcare needs. You have until 4/15/2024 to make these contributions effective for the 2023 tax year if you are self-funding. If your HSA is funded via your employer, funding is typically limited to the calendar year. The statutory deadline for contributing to your HSA is through the un-extended deadline for filing your income tax return. Normally, that’s April 15th after the close of the tax year.

There is also a $1,000 catch-up contribution for individuals aged 55 or older.

 

401(k) Contributions

Maximize contributions to 401(k) plans of $22,500 and $30,000 if age 50 and older.

Goal – To maximize pre-tax savings and save for retirement.

 

Also, the IRS just announced the 2024 contribution limits for qualified retirement plans. The employee contribution limit rises from $22,500 to $23,000. The catch-up contribution for individuals 50 or older stays the same as this past year at $7,500.

The defined contribution limit, which is the combined total between employee and employer contributions climbs to $69,000 which is an increase of $3,000. The employee compensation limit which restricts the amount of compensation eligible for calculating contributions is going up by $15,000 to $345,000.

Year-End Tax Payments

If, while doing year-end planning, it is determined you have underpaid tax throughout the year, you can change your withholding for your last pay period or two.

Goal – To avoid underpayment penalties. Withholding is deemed to be paid evenly throughout the year, so by withholding a larger amount at year-end, you might be able to reduce or eliminate the underpayment penalty.

 

INCOME AND PORTFOLIO PLANNING

Roth Conversions

If you/your household is in a lower tax bracket for 2023 (due to business loss or other known changes) and you have an IRA(s), you may want to consider converting a portion or all of the IRA to a Roth IRA. Individuals should consult their tax advisor regarding their specific situation.

Goal – To pay less tax on the amount converted today vs. what you might have to pay someday in the future when you take it out. Roth accounts grow tax-free.

 

Tax Loss Harvesting

If you have securities/stocks in a loss position close to year-end, consider selling them to realize the capital loss.

Goal – To use the capital losses to offset capital gains and if they are not fully used, carry forward indefinitely.

Note – To avoid complicated tax rules (“wash sales”), it may be recommended that you reinvest the proceeds in something similar to the security/stock you sold, but not the same one.

 

Trust Distributions

Trusts reach their highest tax bracket of 37% at $14,451 of taxable income. Distributions from a tax-paying Trust shift income from the Trust to the Beneficiary. If you are in a lower tax bracket, you could reduce your overall taxes paid between you and the Trust.

Goal – Pay fewer tax dollars between you and a trust for your benefit. Distributions through March 6, 2024, can be counted for 2023 if elected.

 

SCHEDULE A – MAXIMIZING ITEMIZED DEDUCTIONS

Bunch Medical Expenses

If you and your family have incurred a large number of medical expenses this year, make sure the majority, if not all, are paid before year-end.

Goal – If itemizing, this would maximize the amount you could deduct on your return.

 

January’s Mortgage Payment

Make January’s mortgage payment at the end of December.

Goal – If itemizing, this would move more deductible mortgage interest to the current year.

 

Investment Interest Expense

At year-end, if you are looking to pay down a line of credit or loan, make sure you are first paying off any accrued deductible interest. For example, accrued interest on credit lines or margin loans used for business or investment purposes. Any additional paydowns should be applied to the line of credit that has been used for personal purposes. Your Certified Public Accountant (CPA) or financial advisor should be able to help you with that determination.

Goal – To maximize the tax deduction for interest paid.

 

Charitable Giving and Standard Deduction Planning

If you donate to charities but notice on your tax returns you are not itemizing, you might want to consider “Charitable Stacking.” You can discuss this strategy more with your tax adviser.

Goal – Optimize your giving while utilizing the increased standard deduction.

 

Cash Charitable Contributions

Contributions made to public charities are deductible up to 50% of AGI. This limit is increased to 60% of AGI for cash gifts and 30% of AGI for appreciated non-cash assets held more than one year. Contributions more than these deduction limits may be carried over up to five subsequent tax years.

Goal – To eliminate income tax liability in 2023 through cash gifts to charities.

 

Consider a Donor-Advised Fund (“DAF”)

A “DAF” is a charitable investment account. From this account, you can direct the funds to go to the majority of public charities. If you donate cash to the donor-advised fund, you get a deduction of up to 60% of adjusted gross income. If you donate appreciated securities to the donor-advised fund, you can deduct up to 30% of adjusted gross income.

Goal – Help the charity(s) of your choice, lower income taxes in a high-income year, and excess contributions carry forward five years.

Note – Talk to your adviser about possibly giving other appreciated assets like real estate, partnership interests, or private stock.

 

Non-Cash Property – Need an Appraisal?

If you have made a contribution of non-cash property worth $5,000 or more, you will need a qualified appraisal (Does not apply to stock/securities that are valued on an ongoing basis).

Goal – Properly document large non-cash gifts so they will be deductible on your tax return.

 

OTHER ITEMS

Fund 529 Plans Before Year-End

If considering a 529 plan contribution in the coming months, make it before year-end. There are a number of states which allow a deduction or credit for contributions. Growth in these funds is also tax-free.

Goal – Save for educational expenses and get a state tax benefit.

 

As always, if you have any questions relating to the above year-end considerations, please contact your TFO Family Office Partners adviser. We would be happy to help.

Important Disclosure:

TFO Family Office Partners is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

Information was obtained before official IRS release. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this document. It is provided for informational purposes only, and should not be construed as legal or tax advice. Laws may change pursuant to the administration’s legislative agenda. Always consult an attorney or tax professional regarding your specific legal or tax situation. TFO is not engaged in the practice of law.

This document may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of TFO Family Office Partners or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

829-2023-12

When you give $100 to your favorite charity, you are probably not overly concerned about how your donation is spent, as long as it advances the mission of the charity. On the other hand, if you are making a large donation, it is more likely that you have specific goals in mind, whether to fund a particular program or support another endeavor. This desire to specify exactly where your donation dollars will go may jeopardize your ability to claim an income tax deduction. Therefore, proper planning is essential.

If you want more control over how your donation is used, consider either donor advised funds or private foundations. Let’s take a closer look at these two options.


Donor Advised Funds

Many larger public charities, particularly those that support a variety of different charitable activities and organizations, offer donor advised funds. This type of charitable giving vehicle is based upon an agreement between the donor and the charity stating that the charity will consider the donor’s wishes with respect to the ultimate use of the donated funds. However, the agreement is non-binding, and the charity will exercise final control over the disposition of the funds, consistent with the organization’s mission.


Private Foundations

A private foundation is a nonprofit organization that typically has been created via a single donation from an individual or a business, and whose funds and programs are managed by its own trustees or directors. Through the choice of directors or trustees, the donor has greater control over the specific use of funds, rather than relying on a public charity.

Private foundations generally fit into two categories: private operating foundations and private non-operating foundations. Private operating foundations actually run the charitable activities or organizations they fund, while private non-operating foundations simply disburse funds to other charitable organizations. A private foundation can also serve as a “family enterprise,” whereby members of the family can work together in supporting charitable causes over the long term.

However, the benefit of increased donor control through the use of a private foundation may come at a price. The following rules are designed to ensure that private foundations serve charitable interests and not private interests:

  • Private foundations are generally required to pay out for charitable causes at least 5% of their asset value annually or be subject to a penalty.
  • Substantial penalties are imposed on transactions between the foundation and its donors or managers, although payment of reasonable salaries is permitted.
  • Private foundations are generally prohibited from benefiting a private individual.
  • A private foundation is responsible for ensuring that the funds it distributes to a private charity are expended properly. (Schools, hospitals, and churches are examples of public charities, to which this does not apply.)
  • An excise tax of up to 2% of investment income is imposed annually on investments.
  • There are restrictions on the types of investments made by private foundations.

 

The deductibility of contributions to private foundations is more limited than for contributions to public charities. Depending upon whether cash or property is being donated, deductions to private foundations are limited to 20% to 30% of adjusted gross income, whereas deductions to public charities have higher limits of 30% to 50%. Finally, the administrative and legal costs of creating and managing a private foundation need to be considered.

Depending on the circumstances, a private foundation may allow for greater control over how your charitable donation is spent. It can be highly rewarding to be involved in charitable endeavors, however, be sure to consult your tax and legal professionals for specific guidance.

Important Disclosure:

Information was obtained from www.align-wealth.com. We believe this information provided here is reliable, but do not warrant its accuracy or completeness. It is provided for informational purposes only and should not be construed as legal or tax advice. Laws may change pursuant to the new administration’s legislative agenda. Always consult an attorney or tax professional regarding your specific legal or tax situation. TFO Family Office Partners is not engaged in the practice of law. TFO Family Office Partners is an SEC-registered investment advisor and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.

372-2022-08

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