Happy tax season! I realize that’s probably an oxymoron for most people, but I have a confession: I like it. Suppose you’re obsessed with numbers and details like me. In that case, digging through diligent records in your file cabinet at home, ticking and tying every dollar of income, dividends, and interest, and accounting for every possible deduction is not a bad day, in my opinion (and it just might be how I spent my Sunday afternoon this weekend. There’s no more football, what else am I supposed to do?). And when the amount due matches precisely what you had calculated six months earlier… boy, does that feel good.
I know I’ve lost most people by now, but to anyone who has read this far, I reward you with some last-minute reminders as you gather up your tax documents to send to your CPAs (or for the brave, as you fire up your preferred tax preparation software and do it yourself!).
- You probably hear this every year, but there is still time to make a 2023 contribution to an IRA or Roth IRA! You have until the date that you file your 2023 taxes to contribute. We generally prefer the Roth IRA if you’re below the gross income limits for 2023 (single filers: $138,000 / joint filers: $218,000). If you’re above the income limits, you can still choose to make a Backdoor Roth contribution. This would involve making a nondeductible 2023 IRA contribution and then immediately converting that amount to Roth. These rules can vary from person to person, so please reach out to us if you’d like to discuss this!
- Don’t forget about Roth IRAs for your kids! The only requirement to contribute to a Roth IRA is “earned” income. Babysitting, mowing lawns, washing cars…it all counts, even if no W-2 or 1099 is issued. There is no age limit as long as there is real earned income. I emphasize real because doing chores around the house or babysitting for siblings one night doesn’t count. As a general rule of thumb, the Roth IRA is fair game if you have your kids file a tax return for their income. Each child is limited to the higher of $6,500 or their earned income (so if they earned $1,000, the limit is $1,000). Another great benefit is that they don’t have to use their money. You can make the contribution on their behalf.
- If you have a high-deductible health plan with a Health Savings Account, ensure you and your employer contributions have hit the 2023 maximum ($3,850 for self-only coverage and $7,750 for family coverage). Add an extra $1,000 to that if you’re over 50. You have until your tax filing date to top off those contributions with after-tax funds.
- If you live in a state with no state income tax (where two of our three Hill offices reside – sorry, St. Louis), you will likely get a deduction for sales taxes you paid in 2023. You could collect every receipt and total the sales tax on every item you purchased in 2023 (and I would not judge you), or you can do what most people do and take the IRS’s estimated amount. Most people don’t realize, however, that you can also add sales tax from significant purchases on top of the estimated amount. If you bought a car, boat, or Super Bowl tickets (really anything that made you wince when you swiped the credit card), don’t forget to tell your tax preparer! Unfortunately, state and local taxes are limited to a total deduction of $10,000, so there’s a good chance your property taxes already exceed that limited amount anyway.
- If you have self-employment income (as reported on Schedule C), don’t forget to make a SEP-IRA contribution. The limit is based on your amount of self-employment income, but the contribution itself will also count as an “expense” against your self-employment income. Your tax preparer can tell you how much you can contribute to a SEP IRA.
- Lastly, here’s a list of a few pesky little forms that can be missed. Don’t forget to send these to your tax preparer!
- Form 5498: If you have an IRA, you have a 5498! This is an informational form that tracks contributions and distributions from IRAs and Roth IRAs. You can file your taxes without it, but giving these to your CPA will ensure that your IRA cost basis information is kept accurate year over year, especially if you’ve ever made nondeductible (after-tax) IRA contributions.
- Form 1099-SA: If you took money out of a Health Savings Account in 2023, this form will report that amount. A copy of this is also sent to the IRS, so you might get a letter in the mail if you forget it.
- Qualified Charitable Distributions (QCD): If you sent any portion of a required minimum IRA distribution directly to a 501c(3)charity, your form 1099-R will NOT specify that. It’s the tax preparer’s responsibility to note any QCDs. If HIG facilitated a QCD for you in 2023, you have nothing to worry about. We’ll let your tax preparer know.
And if you’ve made it THIS far, I applaud you and thank you for sticking it out. I leave you with a quote: “Of life’s two certainties, there is only one where you will be granted an extension.” –Anonymous.
This information is educational and does not intend to make an offer for the sale of any specific securities, investments, strategies, or tax advice. Investments involve risk and, past performance is not indicative of future performance. Return will be reduced by advisory fees and any other expenses incurred in the management of a client’s account. Consult with a qualified financial adviser or CPA before implementing any investment or tax strategy.
I had something else planned for my introduction to this month’s newsletter, but that will have to wait until February for reasons you’ll soon understand.
As I’ve mentioned before, this newsletter is read by more than just our clients. We have 2,000 subscribers and a monthly open rate of 65 to 70 percent. This means every month, 1,400 people are taking a peek at what we share. But there weren’t 2,000 people in the beginning, or even 200. As some may have read in Odds On, we started Hill Investment Group with 0 clients. Rick and I made an agreement with our former firm that allowed us to talk with a small number of relationships, many of whom decided to join us.
One of those “founding” clients passed away recently, and I want to tell you about him. His name was George.
George was a husband, a dad, a grandfather, a friend to many, a diehard North Carolina Tarheel basketball fan, an avid golfer, a former lawyer for the king of beers, a lover of his dog Maggie Mae, and someone who made a profound impact on Hill Investment Group. He also affected me, creating images and memories in my mind that will stay with me for the rest of my life.
Like most of us, George started as a very different investor. He was an old-school active investor, buying stocks and trading options and spending too much time and energy trying to outperform the market. All he got in return was too much stress and unsatisfying results.
It took three meetings over six months to convince him to convert to an evidence-based approach. It didn’t hurt that his former employer, Anheuser-Busch, had switched to index funds in the mid-80s, so elements of that story helped push George a little closer to accepting our data-driven approach. Once he made the change, he never looked back and became a raving fan.
When you had George on your side, he was an unstoppable force–the type to put his arm around you and emphatically introduce us by saying, “These are my guys. You should talk with them.” He suggested his family members work with us, neighbors, friends, golf partners, colleagues, and so on. Because he had both relationships and influence, people listened to him.
George approached everything he loved with that same enthusiasm. We once gave him a basketball signed by the coach of his favorite team. To make it perfect for him, we looked all over town for a plexiglass case to display the ball, then wrapped it and presented it as a special gift for all of his support. George tore open the paper, ripped the plexiglass apart, threw it all away, and carried the naked ball home. We tried to stop him and gather the plexiglass display case, but he didn’t want or need it. He blasted right through it and was on to his next adventure.
That was George’s typical speed. Once, he hollered at a golf marshal that play was too slow. The marshal calmly reminded George that he had just returned to St. Louis from Florida and may have forgotten to adjust his watch. The front nine had only taken two hours (right on time), not three. George laughed, saying, “Well, it felt long playing with these guys!”
Becoming a Hill Investment Group client gave George both peace of mind about his portfolio and more time to pursue the things he loved. He took trips worldwide, had a custom wooden boat crafted and named for his beloved wife, Joanie, and built a house on Martha’s Vineyard. Once the house was completed, he hosted a dinner to thank Hill Investment Group for helping make their dream home a reality. George’s generous toast at the dinner is still one of the highlights of my career.
George embodied everything we hope for our clients and validated why we started this firm: to improve our clients’ lives. George said it best when he uttered a famous line in Hill Investment Group lore: “The only thing I fear now is a downhill, sidehill three-foot putt. My worries are different thanks to you all.”
In 2019, John Reagan and I took our spouses to visit George and Joan on Martha’s Vineyard (see photo). George created an itinerary that wore us out (and I’m 30 years younger). I slept like a baby on that trip. George did, too, on the final night. He took us to a private club—one he didn’t even belong to (except through an old reciprocal that had long expired)—for a splendid dinner where we were treated like royalty. Afterward, we drank, told stories, laughed, and finally, he fell asleep in his chair with his dog at his side as I tried to keep my eyes open through the remainder of the documentary he had selected.
George lived a rich life. He made things happen. He used his influence for good. He created memories. He helped our firm. He took the long view and was proud of it.
I’m lucky to have known him.
Clients and long-time followers already know one year of performance is really a nano-second of investing time. However, it’s instructive to look back on 2023 to see what happened in that snapshot of time. The US stock market was up 26.1%1 for the year. Not bad. If you invested $1,000,000 in the US market on January 1st, 2023, fell asleep, and woke up on January 1st, 2024, your account would have a value of $1,261,000. This would have been quite a pleasant surprise to wake up to. However, if you checked your account every month, your experience (mental and financial) was very different. Your portfolio would have lost value in February, August, September, and October. One-third of the months, you would have been frustrated with the returns. From August through October, your portfolio would been down 9.1%! Seeing $1,000,000 fall to $909,000 in a short three-month period may have freaked you out. In October, we got a few calls from newer clients worried about the market and wondering if we should take action.
Then November and December happened. The market ended up returning 15.2% over those two months. 58% of the gain for the year occurred in November and December. If you had sold after the 9.1% market decline, you would have missed over half the entire market premium for the year. Bouncing in and out of the market is a loser’s game. Let me repeat: bouncing in and out of the market is a loser’s game. Staying committed to the long view is a winning strategy over time.
The market behaves unpredictably every year, but two things remain true. First, markets are volatile and can go up and down very quickly. Second, investors are compensated with higher returns by staying invested in the market and observing the risk of volatile equity markets.
Keep in mind that even a one-year time frame is a short period. Equity markets can underperform short-term government bonds for over a decade. Taking the long view means not just staying invested for months or even years, but throughout an investment lifetime.
This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies. Investments involve risk and, past performance is not indicative of future performance. Return will be reduced by advisory fees and any other expenses incurred in the management of a client’s account. Consult with a qualified financial adviser before implementing any investment strategy