The Internal Revenue Service (IRS) adjusted about sixty 2023 tax-related provisions, including tax brackets and the standard deduction, to account for high inflation. The IRS makes inflation adjustments annually to prevent bracket creep. These are some of the largest adjustments since 1985. These modifications will allow you to keep more of your money for the 2023 tax year.
That’s some relief for American consumers who are feeling the pain of higher prices everywhere, from the gas pump to vacations to the grocery store. Unfortunately, it’s tough to buy eggs, milk, and childcare today with a 2024 tax refund.
The tax brackets did not change; the IRS increased the income levels at which the rates kick in by about 7 percent from 2022 to 2023. The IRS taxes Americans along a progressive system with seven brackets, each bracket having its own rate. Income tranches are taxed at progressively higher rates, ranging from 10 percent to 37 percent. The first income tranche is taxed at the lowest rate, the next tranche at the second highest rate, and so on. If someone says they fall into the 37 percent tax bracket, it doesn’t mean that all their income is taxed at the top rate—it means that the top tier of their income is taxed at that rate.
According to Baird Financial Corporation, due to the bracket adjustments, a married couple with taxable income of $200,000 in both 2022 and 2023 would see a reduction in their tax of nearly $900 next year. A couple earning $500,000 of income would see a tax reduction of over $3,700.
The larger standard deduction will also give Americans a bigger tax break. Eighty-six percent of U.S. taxpayers took the standard deduction in 2019. The standard deduction for married couples filing jointly for the tax year 2023 rises to $27,000 from $25,900 in 2022.
Of importance to readers of “Capital Ideas,” the larger standard deduction could help more Americans pay a zero rate on capital gains. Depending on your income, you may focus on the 15 percent or 20 percent capital gains tax rate. However, the lowest capital gains tax rate is zero. For those married and filing jointly, the income threshold for paying a zero percent capital gains rate jumps up nearly $6,000 to $89,250.
There are earnings reports, and there are earnings reports
‘Tis earnings season! On Thursday, October 20, Robert Half released its earnings report for the third quarter of 2022.
Robert Half is a job staffing company large enough to have secured a place among the companies in the S&P 500 Index. At the time of writing, 74 percent of S&P 500 companies are beating expectations. (There were a lot of additional earnings reports in the last couple of days, so that percentage likely shifted a bit in one direction or another.) However, Robert Half’s earnings came in at $1.53 per share versus an expected $1.62. Revenue of $1.8 billion came in below the expected $1.92 billion. There has been zero growth in profit over the past year.
That’s the quantitative side, which doesn’t bode well for future hiring. The qualitative side isn’t much better. Robert Half’s management says its clients who are hiring are being more selective, compared to a year ago when employers across the country were taking whatever warm body they could get.
Robert Half’s observations are consistent with 703 startup companies so far laying off 92,559 employees in 2022.
A slowing job market is good news for the Federal Reserve, which is trying to slow down the economy to reign in inflation. It’s not good news for stock investors who continue to hold out for a soft landing and avoid a recession in 2023.
It’s the final countdown
U.S. mid-term elections are Tuesday, November 8, 2022. On October 21, 2022, political pollster Frank Luntz said he is “scared to death” about midterm elections.
As I’ve reminded readers throughout the year, the stock market typically declines heading into mid-term elections as it frets about the outcome. After the market prices in the worst and then finds more clarity on what will happen, the markets typically rally into year-end. Luntz doesn’t expect that to happen this time. He says, “I’m warning the markets now that I don’t think we’re going to have a clear result on Election Day 2022.”
In 2000, there was a period when we didn’t know who the next President of the United States would be—Bush or Gore. Recounts and court rulings contributed to market volatility. From Election Day 2000 through year-end, the S&P 500 fell by 7.8 percent. After the stock market drop this year, that almost seems quaint. But it’s enough to stall a hoped-for year-end rally.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
