From geopolitical factors like the war in Ukraine to domestic policy decisions like interest rate hikes and the bonus depreciation phase out, our economic landscape has changed dramatically since the start of 2022.
There’s no way to know for sure what 2023 will hold. But the wisest investors are those who are able to make a plan based on current information and remain willing to adapt as new information becomes available.
In particular, here are a few of the circumstances we’re keeping the closest eye on as we reflect on 2022 and prepare for the start of the new year.
Inflation Continues to Decline in the Midst of High Interest Rates
Inflation has continued to decline each month ever since it hit a peak of 9.1% in June. In November, the annual inflation rate dropped to 7.1%, the lowest it’s been since December 2021.
Though this is a significant improvement from earlier in 2021, 7.1% is still a relatively high rate of inflation. In a Dec. 14 statement the Federal Reserve said its committee members are working to return inflation rates to 2%. In order to do so, they expect they’ll need to continue increasing interest rates throughout 2023, from the current rate of 4.5%.
So what do these numbers mean for investors?
With interest at the highest rates we’ve seen since 2008, and inflation continuing to meet the typical rate for real estate returns (7-8%), now is likely not the best time to purchase new, real assets like real estate. We do continue to believe, however, that real estate assets can present a valuable opportunity for long-term appreciation when chosen wisely.
Make Plans Today for Next Year’s Taxes
Most people don’t put too much thought into their tax strategy until the last minute — after all, you may not have even started filing your 2022 taxes. But keep in mind that every investment decision you make from Jan. 1 to Dec. 31 can impact the taxes you’ll pay once 2023 ends.
This is especially important for Accredited Investors, who are typically taxed at some of the highest rates. For these individuals, tax efficient investing is a key differentiator for building wealth more efficiently and holding on to more of your earned income at the end of each year.
Before investing in something new, make sure you understand the specific tax rules and advantages that will affect that investment. And remember, investing in real assets like real estate may help you generate passive income that’s taxed at a lower rate, but in most cases it will not decrease the 32%+ income tax you’ll have to pay on your earned, W-2 income.
You should also take time to consider the specific goals you hope your investments will help you achieve. Once you’ve clearly defined your goals, it’s much easier to select the investment vehicles that can help you reach those goals most efficiently.
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