It may be surprising to hear, but many people are so anxious to get their filing done ahead of time, they file their taxes before receiving all the proper documentation they need to ensure their information is accurate. This can lead to mistakes and processing delays.
MISTAKE #2: Missing Eligible Credits and Deductions
There are many credits and deductions you may be eligible for. But some of these, like the Earned Income Tax Credit, the Child Tax Credit, energy tax credits, and various itemized deductions, can be difficult to figure out, causing some to skip out on them entirely. This is why working with a good tax professional can really pay off.
MISTAKE #3: Forgetting to Contribute to an IRA
Some taxpayers forget to contribute to an Individual Retirement Account each year. These contributions are tax-deferred, meaning they can help reduce your taxable income. For the 2023 tax year, the contribution limit is $6,500 for those under age 50 and $7,500 for those over.*
MISTAKE #4: Not Reporting All Income
Many taxpayers only think of their paycheck when reporting income, forgetting to factor in dividends, bank interest, and other income sources. This information is critical for both calculating the credits and deductions you can take as well as the refund you are entitled to.
* “IRA Contribution Limits” – Internal Revenue Service
Every January, it’s customary to look back on the year that was. What were the highlights? What were the “lowlights”? What events will we remember? Most importantly, what did we learn?
As you know, many noteworthy and historic events happened in 2023. Conflicts in Gaza, Ukraine, and Sudan. India surpassed China as the most populous country in the world. New temperature records were set all around the globe. The use of “artificial intelligence” exploded and turned multiple industries on their heads. Chinese spy balloons and deep-sea submarines grabbed the headlines. The “Barbenheimer” phenomenon reinvigorated Hollywood.
But in some ways, one of the most notable occurrences of 2023 is what didn’t happen: We never entered a recession.
When 2023 began, the fear of a recession was so widespread that it almost seemed inevitable. According to one survey, 70% of economists expected a recession to hit the U.S. in 2023.1 Another survey found 58% of economists believed there was a more than 50% chance of a recession. 1 For politicians, pundits, and analysts, it was practically all they could talk about.
But it never happened. Instead, the economy grew by 2.2% in the first quarter, 2.1% in the second, and 4.9% in the third.2 (As of this writing, the numbers for Q4 are not yet available, but it’s expected to go up again.) None of this is to say that our economy is perfect, or that we won’t have a recession in the future. But for 2023, all the gloomy forecasts simply didn’t come to pass.
Now, let’s be fair to all those economists who got it wrong: They had very good reasons for expecting a recession. Reasons based on data, logic, and history.
You see, when the year began, the U.S. was coming off a nasty 2022. While consumer prices were already coming down from their earlier highs, the national inflation rate was still 6.5%.3 Interest rates, meanwhile, had risen dramatically, from just above 0% at the beginning of 2022 to over 4% by the end.4 It was already the highest level we’d seen in fifteen years – just before the Great Recession, in fact – and every indication was that rates would continue to rise higher. All this economic pain was reflected in the stock market. The S&P 500, for example, dropped over 19% in 2022.5
For economists, all this data seemed to point a clear way forward. The Federal Reserve is mandated to keep consumer prices as stable as possible. (Its target has long been to hold inflation to around 2%.) When inflation runs hot, the Fed’s main tool for lowering it is to raise interest rates. Higher rates often lead to lower consumer spending. Lower spending, in turn, prompts businesses to decrease the cost of the goods and services they provide. Essentially, higher rates create an environment where supply is greater than demand, thus cooling inflation.
But there’s a side effect to this. If spending drops too much, businesses are often forced to cut back on expansion, investment, and labor costs. This leads to a rise in unemployment…and a contracting economy. In short, a recession.
This string of events isn’t just logical. It’s supported by history. When inflation has skyrocketed in the past, the Fed’s playbook has usually worked to bring prices down…but it’s usually triggered a recession, too. Economists call this a “hard landing.”
Look at these two charts. The top shows interest rate levels since 1955.3 The gray bars indicate a recession. Notice how often a gray bar appears in the aftermath of a sharp rise in rates? Similarly, the bottom chart shows the unemployment rate.6 See how the gray bars always coincide with a major spike in unemployment? It’s clear that, historically, fast-rising rates often trigger a rise in unemployment…which contributes to a recession.
What about when prices come down, but the economy does not? Economists call that a soft landing, and it’s proven to be very difficult to achieve. It’s no surprise, then, that most economists predicted a hard landing in 2023.
One year later, that hasn’t happened. Interest rates did continue to rise. As of this writing, they’re at 5.3%.4 Inflation has continued to cool, albeit slowly. As of November, the inflation rate was 3.1%. That’s a 3.4% drop from the beginning of the year.3 But consumer spending has remained steady. The labor market has remained strong. The unemployment rate was only 3.7% as of November.6 And, as we’ve already covered, the economy has continued to grow.
From a financial standpoint, this, to us, is the major storyline of 2023. Which means we must ask ourselves: “What can we learn from it?” As financial advisors, we’ve taken the time to jot down a few lessons we think are worth remembering as we move into the New Year. Here they are:
#1: Always emphasize preparation over prediction. The economists who predicted a recession weren’t stupid. They used the best data they had to make the best predictions they could. But 2023 shows that even the most well-informed people simply can’t see the future. Even the near future! There are simply too many variables to consider. That’s why, as investors, we must always emphasize planning over predicting. We can’t predict when the markets will drop nearly 20%, as they did in 2022.5 Or, when they’ll rise by well over 20%, as they did in 2023.5 What we do at Minich MacGregor Wealth Management is plan ahead for what each of our clients should do if the markets fall, or if they rise. We help our clients prepare mentally and financially for both market storms and market sunshine. So that they can weather the former and take advantage of the latter.
When investors predict, they’re essentially swinging for the fences on every pitch. Occasionally, a prediction can lead to a home run…but it can also lead to a lot of strike outs. By planning, we don’t have to swing at all. Since we can’t control the situation, we simply make the best out of every situation. We control only what we can control – ourselves.
#2: Be wary of confirmation bias. Earlier in the year, we spoke to many people who were convinced a recession would happen. Because of that, they tended to disregard all data that pointed away from a recession, and only valued information that confirmed what they already believed. As a result, many investors missed out on a stellar market recovery. Thankfully, our clients did not. This is another example of why preparing is much better than predicting. It removes emotion from decision-making. At Minich MacGregor Wealth Management, we’re not so focused on “being right” as we are on “being ready.”
#3: Remember that past performance is no guarantee of future results. You’ve probably seen this line in the past, and 2023 is a great example of why.Just because rising interest rates have led to recessions in the past doesn’t mean they always will. Just because the markets went one direction yesterday doesn’t mean they’ll go the same direction tomorrow. While history isa great resource to draw from when making decisions, it’s just a guide, not a guarantee.
#4: At the same time, don’t anchor to the present. As humans, we have a natural tendency to think that the way things are today is how they’ll be tomorrow. When 2022 ended, many investors felt that 2023 would be much the same. Now, investors run the risk of thinking that just because a recession didn’t happen last year, it won’t happen this year.
Again, it all goes back to planning and preparation. Here at Minich MacGregor Wealth Management, we will continue to prepare for all possible outcomes. We’ll help our clients plan for how to reach the outcomes they want and avoid the ones they don’t. We would love to help you, too! But instead of predicting, instead of assuming, instead of anchoring, we will accept that the future is written in clay, not stone. Only when it becomes the past does it harden. By doing this, we can help shape your future into whatever it is you want it to be.
So, that’s 2023! We hope it was a wonderful year. If you ever need any help making 2024 even better, know that we are always here. In the meantime, we wish you a Happy New Year!
As you know, this is a time of year when many people make New Year’s resolutions. Lose weight, stop smoking, save more, learn a new skill, get more sleep, visit a new place, get finances in order, etc. You name it, chances are, someone has resolved to do it.
As financial advisors, people often come to us for help with any financial resolutions they have – or resolutions that require some change in their financial situation to achieve. But often, people come onlyafter they have tried and failed to keep those same resolutions on their own.
This got us thinking: Why are New Year’s resolutions so hard to keep? In most cases, our resolutions are goodfor us. We want to do them. So why aren’t they easier?
There are many reasons for this, but one of the most important can be best explained by Aesop’s classic fable about…
The Dog and His Reflection
It happened that a Dog, after much hunger and long labor, had finally procured for himself a chunk of meat, and was carrying it home in his mouth to eat in peace. On his way home, the Dog had to cross a fallen tree trunk lying across a running brook. As he crossed, he looked down and saw his own reflection in the water beneath. Thinking it was another dog with an equally large piece of meat, he made up his mind to have that also. So, he snapped at the reflection in the water. But as he opened his mouth, his own meat slipped out, fell into the brook, and was never seen by the Dog again.
While some have interpreted this fable to be a warning against greed, we look at it a little differently. Despite being halfway to his goal – enjoying a nice meal – the Dog became distracted by a different goal, and in pursuing that, lost sight of his own.
In our experience, this happens to most of us every year. We set a goal we want to achieve, something we truly care about. But it takes time to accomplish our resolutions, and it’s very easy to get distracted by the newest, shiniest things. For example, imagine someone resolves to save $200 per week, so that they can finally take that trip to the Caribbean they’ve always dreamed of. But after doing this for three months, they see another person enjoying the latest iPhone that came out, so they decide to go for that instead. After all, the Caribbean will always be there. So, they spend all the money they’ve saved – and suddenly, they’ve sabotaged their own resolution.
This happens on a larger scale, too. we’ve seen people who dream of a retirement spent in the sun…only to go chasing shadows instead. We’ve seen people with grand plans to start their own business one day…only to spend their time watching television.
Of course, there’s nothing wrong with buying a new iPhone or relaxing in front of the TV. But to truly change our lives for the better, we must learn discipline. We must hold ourselves accountable. We must keep our eye on what’s truly important, and not be distracted by reflections.
There are several ways we can do that. Here are a few we’ve found to be especially helpful:
Be specific with your resolutions. People who set specific goals are more likely to achieve them. For example, instead of resolving to save money, resolve to save $200 per week.
Put it in writing. Write down your resolutions and post them in a place where you will see them every day. This will help remind you of what you’re working towards, so you won’t end up like the Dog in the fable.
Set realistic goals. Set goals that are within your reach, and don’t try to take on too much at once. Be mindful of your finances and schedule. Account for the fact that sometimes, you need to kick back and relax or spend money on a whim. In addition, take your time. There’s no prize for finishing first, and anyway, to quote another one of Aesop’s fables, slow and steady wins the race.
Develop a plan. This is so important. Create a timeline with steps toward your goal. Set deadlines for each and cross them off as you go. This will help you generate both the momentum and themotivation you need to continue.
Ask for help. Whether it’s with a financial professional or a life coach, if you find yourself struggling to reach your goals, don’t think you need to do it alone! Find someone who can help keep you focused and accountable.
Reward yourself. Acknowledge even the smallest of achievements. Keeping resolutions is hard work, and you should be proud of everything you accomplish!
Regardless of what you do, always remember The Dog and His Reflection. It can make all the difference.
