Mark on the Markets
May 2024

Fed Fudge Recipe

Have you ever made fudge? Nothing fancy, nothing complicated. You obtain a recipe, follow the instructions, bake, let it cool, and done. Fudge ready to enjoy. Smooth and delicious! Simple, right?

The fudge recipe includes specific instructions on the required baking time and temperature.

Well, the Federal Reserve has an anti-inflation recipe it has been following. It consists of one primary ingredient: interest rates.

However, the Fed’s recipe for interest rates is not as straightforward.

The Fed must use its knowledge and know-how, making an educated guess at the appropriate interest rate level (temperature) and how long it should maintain that rate (how long in the oven) so that it may achieve its goal of price stability (let is cool) without throwing the economy into a recession. It’s a tall order.

Too low a temperature and not enough time in the oven, or too high a temperature and too long in the oven, will not produce the desired results. You end up with a gooey mess.

In today’s post-pandemic, high-deficit, AI-powered world, the correct time and temperature in the oven may have changed.

Despite a lackluster Q1 GDP, most metrics suggest the economy continues to expand at a solid clip.

Job growth is strong, layoffs, as measured by first-time claims for unemployment benefits, are low, and consumers aren’t shy about spending on items they desire.

But last year’s remarkable progress on inflation has stalled.

Inflation makes it tougher for consumers and those on a fixed income to make ends meet. For investors, hopes for a series of rate cuts, which have helped power stocks this year, are fading. We’ll be watching to see if and when the Fed cuts rates. 

Higher for Longer? Maybe Not

Last year, the Fed often talked about keeping rates “higher for longer.” As inflation improved, chatter about rate cuts increased.

But inflation is no longer following the Fed’s script. Progress has stalled. And in some cases, we’re witnessing an acceleration.

Consequently, the expected rate cuts have been delayed, and market volatility has risen in response.

What’s going on with inflation? Well, it’s the tale of two cities. On the one hand, price hikes for consumer goods have ended, according to the U.S. Bureau of Labor Statistics, which releases the monthly Consumer Price Index.

In fact, prices have actually fallen, as mucked-up supply chains have righted themselves.

But services are what economists call “sticky.” In fact, price hikes have started to accelerate.

And here lies a problem, as services such as insurance and health care are more resistant to Fed policy.

It’s possible that the recent uptick in inflation is temporary, and the road to price stability is just bumpier than many had anticipated. Come August or September, we may be having a different conversation.

Economic growth is solid, and that’s reflected in stronger corporate profits, which limited the downside in April.

Mark on the Charts

The S&P 500 pulled back, and this was largely expected given that sharp rise we’ve seen since October of last year. I have been watching for a pullback for a few months now, and the length of this trade has surprised not only me, but many other market technicians. As I mentioned last month, pullbacks can be expected in an uptrend. The question is always when, and short-term indicators signaled more than once in the past couple of months that we would see this. But it did not happen – until now. As I mentioned above, job growth and economic indicators remain strong. Again, the bottom line – it’s still a bull market.

The Value Line Geometric Index breakout was short-lived. We were watching whether this was a confirmed breakout. When digging below the charts, I see a dichotomy in the broader market – stocks that are showing strength, and others that are languishing. It’s often never a “stock market”, but a “market of stocks”. That’s why I believe in finding and keeping those that work, and forgetting about the rest. (The Value Line Geometric Index is a broad index of around 1,700 stocks, where each stock is given an equal weight of the index.)

The important thing to consider is the adjusted basis. Figuring out the basis is the easy part. Determine what you paid for the home. Include the mortgage if you financed the purchase and add in certain settlement fees. This number will be on your settlement sheet from the purchase.

Here’s a Tip: Your home’s tax basis isn’t static. It can change over the time that you own it. And you can adjust your basis upward when considering these items:

• Additions & Improvements:
  Additions made to your home and improvements add to its value and can increase your home’s basis. Renovating a kitchen or bath, adding a room, installing new air-conditioning, or putting in new landscaping or a pool. Other items such as new windows, built-in appliances, water heaters, and other small ticket items can also increase the basis. 
  
  
• Energy Saving Upgrades:
  Energy-saving improvements that qualify for tax credits or subsidies can be added to the basis. However, you must first reduce the cost of the upgrade by the tax credit or subsidy that you received before increasing your home’s tax basis. 

Keep all your major home improvement receipts and invoices in one folder. If you do not have the original receipts, estimate the costs by looking at old financial and bank statements, or call the company that did the remodeling or upgrade.

Point-of-Sale Electric Car (EV) Rebates

Did you know that IRS has reimbursed EV car dealerships over $580 million of tax rebates on EVs that were sold so far this year.

If you are an eligible buyer, and the EV qualifies, you can monetize up to a $7,500 credit by transferring it to the dealer at the time of purchase. This lowers the amount you pay for the car. Auto dealers are required to register with the IRS’s Energy Credits Online to receive an advance credit payment from the government for eligible EV sales.

Here are the rules:

• The credit is $7,500 for new EVs that meet rules for critical minerals and battery components. The credit drops to 3,750 if only one criterion is met.
  
  
• The buyer’s modified adjusted gross income (MAGI)cannot exceed $300,000 for joint filers, $225,000 for household heads and $150,000 for singles. The MAGI cannot exceed $150,000, $112,500 and $75,000 respectively for buyers of used EVs.
  
  
• Final assembly of the EV must occur in North America.
  
  
• The manufacturer’s suggested retail price cannot exceed $55,000 for sedans. The MSRP cannot exceed $80,000 for vans, SUVs, and pickup trucks.
  
  
• Used EVs are eligible for a credit up to $4,000. There is no credit if you lease an EV.
  
  
• The tax credit applies only to EVs purchased by the taxpayer - title to the vehicle must change hands.

For leased EVs, the credit goes to the manufacturer or the dealer.
Here’s a Tip: Price negotiation is on your side. Request your dealer to reduce the price of the leased EV by all or part of the dealer’s credit amount.

10-Year IRA Rule

For non-spousal beneficiaries of IRAs inherited after 2019, the IRA must be distributed to beneficiaries within 10 years of the owner’s death. There are some exceptions, and lots of confusion. 

The IRS has not yet finalized its proposed regulations on this, which is one reason there is so much confusion.

Consequently, the IRS has recently given taxpayers some relief for 2021 through 2024. Beneficiaries of IRAs inherited after 2019, for which the deceased owner was already subject to RMDs, won’t be penalized for not taking annual distributions in 2021, 2022, 2023, or 2024. 

Here’s how the proposed 10-year inherited IRA rule works.

• It’s for IRAs inherited after 2019.
  
  
• The beneficiary must take distributions during the 10-year period.
  
  
• The rules differ based on whether the original IRA owner dies before or after his or her beginning date for taking required minimum distributions.
  
  
  1. If the IRA owner dies before the start date of the first RMD, then the beneficiaries do not need to take distributions from the inherited IRA each year. They can instead skip years or wait until year 10 to withdraw all the money. The beneficiary can decide how to withdraw the money in the 10-year period.
     
     
  2. If the owner dies on or after the start date for taking RMDs, then annual distributions must be paid to the beneficiary in years 1 through 9, with the balance of the account fully depleted by year 10. In this situation, the beneficiary would compute annual RMDs based on his or her life expectancy.
     
     
     • Given this, the younger the beneficiary, the smaller the annual distribution amounts in years 1 through 9.
     
     
     • Of course, the beneficiary can choose to withdraw larger amounts each year. This is where tax planning is critical.

Here’s a Tip: We offer tax planning for our clients. Let us review your inherited IRA to eliminate confusion and see if we can find tax savings or efficiencies in your distribution or financial strategy.

Do You Work Overseas?

There is Housing Tax Relief Available for YOU!

In 2024 you can claim an exclusion or a deduction from gross income for your foreign housing amount if your tax home is in a foreign country and you qualify under either the bona fide residence test or the physical presence test.
*This is in addition to the foreign earned income exclusion.

The ceiling on the foreign housing exclusion in 2024 rises by $910 to $17,710.

Those who work in many high-cost locations around the world qualify for an even higher exclusion.

Look at IRS Notice 2024-31 for all the details.

A Powerful Gifting Strategy: Qualified Charitable Distributions (QCDs)

QCDs are tax-free, but limitations apply…

If you are an IRA owner, and are at least age 70½, you can donate up to $105,000 in 2024 as qualified charitable distributions (QCD) from your IRAs.

What is a QCD? It’s a distribution (a gift) to a qualified charity that is tax-free.

There are exceptions that could affect how much is excluded from your income if you are a donor.

Background

QCDs were introduced under the Pension Protection Act as a temporary provision in 2006. They were extended periodically after, and finally made permanent under the Consolidated Appropriations Act of 2016. Recent changes include the following:

• As provided under SECURE Act 2.0, the limit is now indexed for inflation as of 2024.
  
  
• The maximum amount per IRA owner was increased from $100,000 to $105,000 for 2024.

General Rules

• A taxpayer who is at least age 70½ may make a QCD from any of the following accounts.
  
  
• A Traditional IRA.
  
  
• A SEP IRA, providing a SEP contribution, was not made to the account during the QCD year.
  
  
• A SIMPLE IRA, providing a SIMPLE IRA contribution, was not made to the account during the QCD year.
  
  
• A Beneficiary Traditional IRA.
  
  
• A Roth IRA or a Beneficiary Roth IRA.
  
  
• Given the tax-free status of QCDs, we recommend that these distributions be made out of the above accounts first.

• QCDs may not be made from an employer plan such as a 401(k), pension plan, or 403(b).
  
  
• A distribution for a QCD must be made payable to an eligible charity but can be delivered to the IRA owner, who then delivers it to the charity. A charity is eligible for a QCD if it meets the definition under Internal Revenue Code Sec. 170(b)(1)(A).

Here’s a Tip: An individual who wants to make a QCD from an employer plan (401k, 403b, etc.) must first roll over the amount to an IRA. The rollover cannot include RMDs or any other amount that is not eligible for rollover.

Note of Caution: The age 70½ requirement is determined when the QCD is made. Therefore, if an IRA owner wants to make a QCD today but will turn age 70½ in July, they must wait until they turn 70 ½ in July. An individual attains age 70½ six months after their 70th birthday anniversary.

Here’s Another Tip: We recommend that the QCD check be delivered to your home address. You can then attach a note to the qualified charity indicating that the donation is coming from you and indicate your preference for how you would like the gift earmarked.

Additional Rules for Tax Treatment

1. Exception to pro-rata treatment
   
   If an individual’s IRA balance includes after-tax amounts (basis), distribution from their IRA includes a pro-rated amount of pretax and after-tax balances unless an exception applies. One of the exceptions is a QCD. Under the QCD rules, pretax amounts are allocated to the QCD before getting to the basis.
   
   
2. Prevention of double dipping with deductible IRA contributions
   
   The SECURE Act 1.0 removed the age restrictions on contributions to traditional IRAs. As a result, an IRA owner can contribute to traditional IRAs at any age. SECURE Act 1.0 also added a provision that prevents a taxpayer from making a deductible traditional IRA contribution for the year they reach age 70½ or later and use those amounts to make a QCD.

Reporting a QCD

Charles Schwab, our IRA custodian, must report QCDs like regular (non-QCD) distributions.

For example: A QCD of $10,000 from a traditional IRA would be reported on IRS Form 1099-R as follows:

1. Box 1: Gross distribution, and
   
   
2. Box 2a: Taxable amount.
   
   
3. Box 2b: Taxable amount not determined would be checked. This allows the tax preparer to explain how much of the amount reported in Box 2a is excluded from income due to being a QCD.
   
   
4. The $10,000 would be reported on line 4a of Form 1040, and only any taxable amount would be included on Line 4b.

Tracking is Essential

You or your tax preparer must ensure that any exception is accurately reflected on your tax return. IRS Form 8606 must be filed when required, and activity related to deductible traditional IRA contributions must be tracked.

Tax preparers should ensure that their clients provide copies of all 1099-Rs and specify the purpose for which the reported amount was used.

You want to ensure that your QCDs are accurately reported on your tax return to avoid any related issues with the IRS.

Being a generous steward of your resources and helping others is the key reason for using QCDs, and the nontaxable treatment is a benefit allowing you to increase the amount given to your charity!

Faith-Focused Investing

We’re committed to helping you experience financial contentment and peace through a plan that’s right for you. Part of planning, however, is understanding how you want to live and what you want to do. Whether you want to spend time with family, or volunteer to make the world a better place, we help you prepare to spend your time, talents, and resources on what matters most to you.

Implementing faith-based investing begins just like any other investment management process – we’re looking for great investments!

I hope you’ve found this review to be educational and helpful. Our goal is to be a guide to you as you run the race and keep the faith. 

"Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver." 2 Corinthians 9:7

Contact Us for a Free Consultation