• Jonathan Amoia, partner and managing director, Sandhill Investment Management.
• Jill Colombo, partner, Dopkins & Company LLP.
• Jeffrey Hahn, president and owner, SC Parker LLC.

Outlook for year end

The financial markets are defined in part by the activity in the stock market and the bond market, Hahn said.

At the time of the discussion, investors were enjoying a recent rally of the stock market, but Hahn said there should be no expectations of a return to the highs of July. He predicted the market is going to be “sideways for an extended period of time.”

And the bond market is bleak, he said.

“Nobody talks about this too much, but the bond market is the worst bond market in the history of country,” he said. “It is going on two years since it reached its peak and there has been a steady decline. As a firm, we have moved the vast majority of bond holdings over to money markets, where we will take 5.5% and not put up with the fluctuations. It will be a while before the bond market changes significantly.”

Most professionals are surprised how well the market performed overall over the course of the year, Amoia said.

“What has mostly driven that is consumers are spending really aggressively and more than they can afford,” he said. “What we are seeing is default rates at the highest they have been since 2011, aggregate savings is dwindling from the Covid peaks.”

Inflation is partially to blame, but so is a fear that prices will continue to rise, so people are more apt to buy now and lock in a price.

“Those forces are causing economic concerns going forward,” Amoia said. “The stock market largely trades on what the Federal Reserve is doing, what interest rates are doing. The Fed appears to be at or near rates peaks. With these dynamics, we are seeing interest rates at or near peak.”

Amoia’s view is that the situation presents a great opportunity in bonds to take more duration to extend the rate environment. Sandhill clients are advised to invest in bonds and take longer maturities and lock in rates.

He said the New York municipal bond market is the best it has been in more than a decade with about 4.5% tax-free rates of returns, something that is valuable to those in higher-income brackets.

The Fed at its next meeting will likely lower rates not raise them, so in anticipation Sandhill is rotating clients into more growth-leaning stocks, he said.

Approaching year end, Amoia said he has been reviewing his clients’ positions and ensuring they understand where their gains and losses are and then executing tax-loss harvesting strategy.

Also important at year end is understanding that the rate environment is different today than a year or two ago, and that might afford opportunities that can aid in planning for the next year, he said.

Federal, state implications

The Tax Cuts and Jobs Act 2017 created favorable tax provisions for individuals and businesses, which will begin to sunset in 2025, so advisers should be positioning clients for the adjustments.

Among the changes: individual tax rates will increase, Colombo said. For example, the highest rate of 37% is expected go back to 39.6 % based on adjusted gross income. In planning for the future, she advises clients to identify income that can be made now before the rates start to increase.

High net-worth individuals also should consider gifting some of their wealth to the next generation in the next few years, she said.

The largest gift amount that can take advantage of the tax break this year is $12.92 million. That is expected to increase to $13.61 million in 2024 but will be reduced to about half of that thereafter, she said.

For businesses, the corporate tax rate was made permanent at 21% for C corporations and is unlikely to change, she said.

The bonus depreciation, which has been 100% for the past few years, is beginning to decrease each year by about 20% until it is gone.

“So, if there is any business equipment that you want to put into service, it is advisable to put it in by the end of the year,” she said. “Being placed in service is the key component. It must be up and running.”

Also sunsetting is the QBI, or qualified business income, deduction, Colombo said. Individuals who own pass-through entities will no longer get the 20% offset tax deduction in two years.

Consider, too, that the IRS recently announced new thresholds for the 401k and IRA contributions for 2024.

“You can start talking to some of your investment advisors about increasing your investments for next year and make sure you are able to put away as much of your money as possible,” Colombo said.

The Inflation Reduction Act of 2022 includes more than 70 investment, production and excise credits designed to encourage the adoption of clean vehicles, promote advanced manufacturing and facilitate the transition to cleaner energy production.

The most relevant credit for individuals and businesses is the energy efficiency credit, which offers, through 2032, a 30% credit on doors, water heaters and the like.

“As people are doing year-end renovation or summer projects next year, start to think about what the efficiency is on some of these items and do they qualify for the credits. Why not get a tax break if you can,” Colombo said.

There is another 30% available for clean energy solar and wind-powered initiatives, and there are credits for the purchase of new and used clean vehicles for individuals and businesses that use the vehicles in a commercial fleet, she said.

Companies that have hired employees working remotely from other states could have tax implications that they have not encountered previously.

“Some states have just a gross receipts tax, so if you are a business owner going into a new state, it’s not just on your activity. It could be just the amount of money you are earning in that state,” Colombo said.

Further, many states are enacting pass-through entity tax credits to give businesses deductions.

“Make sure you are asking the questions about what these states have and is there anything you can take advantage of to get deductions at the corporate level,” Colombo said.