Posts made in January 2022

Whether you own your own company or want to start making some side income off a hobby, there are some important tax considerations to know:

• The form of business determines what kind of tax return you will need to file.
• The most common business structures are: sole proprietorship, partnership, corporation, S corporation, and Limited Liability Company (LLC).
• Choose a tax year for your annual accounting period. Your tax year can be either 12 consecutive months starting January 1 and ending December 21 or 12 consecutive months ending on the last day of any month except December.
• Apply for an Employer Identification Number used to identify your business.

* This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from IRS.gov⁷

Footnotes

7. ^{IRS.gov, September 13, 2021}

Stocks extended their January retreat as worries over inflation and rising bond yields continued to exert downward pressure on prices.

The Dow Jones Industrial Average slid 4.58%, while the Standard & Poor’s 500 sank 5.68%. The Nasdaq Composite index dropped 7.55% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, slipped 0.61%.^1,2,3

Another Turbulent Week

After the holiday weekend, stocks found little respite from this month’s selling pressures. The week began with the 10-year Treasury yield hitting a two-year high that triggered a broad retreat in stocks, with technology and other high-growth companies bearing the brunt of the losses. The Nasdaq Composite officially entered correction territory and closed below its 200-day moving average for the first time since April 2020.⁴

Stocks struggled throughout the week, rallying in early trading on both Wednesday and Thursday on solid corporate earnings and stabilizing bond yields, only to end lower on late-day selling. While last year may have been distinguished by “buying on the dip,” this week reflected a different mindset, “selling on the rebound.” Stocks extended their losses in the final hours of the Friday trading session to conclude a difficult week.

Rate Hike Expectations Rise

Recent market volatility has stemmed predominantly from inflation concerns and how aggressive the Fed will be in fighting it. This reaction reflects the market’s pricing of rate hike probabilities, and their estimation of the Fed’s reaction.

Last week’s interest rate futures suggested that investors expect four or five rate hikes this year, up from three to four the previous week. Markets are pricing a 32% probability of 4-5 rate hikes by December and a nearly 28% probability of 5-6 rate hikes by year-end. Of course, the Fed will act independently of the market, but it provides insight into the recent run-up in yields and continuing pressure on high-growth stock valuations.^5,6

1. ^{The Wall Street Journal, January 21, 2022}
2. ^{The Wall Street Journal, January 21, 2022}
3. ^{The Wall Street Journal, January 21, 2022}
4. ^{CNBC, January 17, 2022}
5. ^{The Wall Street Journal, January 18, 2022}
6. ^{CME, January 19, 2022}

The IRS sends letters and notices for many different reasons. Some letters need a response or action item, while some are just notices to keep you informed.

Here’s what to do if you receive mail from the IRS:

• Don’t throw it away.
• Don’t panic.
• Don’t reply unless directed to do so.
• If a response is needed, respond in a timely manner.
• Review the information to make sure it’s correct.
• Respond to a disputed notice. If you need to call the IRS, use the phone number printed in the upper right-hand corner of the notice.
• Avoid scams through email, social media, or text messages.

* This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from IRS.gov⁶

Footnotes and Sources

6. IRS, August 16, 2021

Deteriorating investor enthusiasm for high-valuation growth companies and a mixed start to the fourth-quarter earnings season made for a volatile week.

The Dow Jones Industrial Average lost 0.88%, while the Standard & Poor’s 500 slipped 0.30%. The Nasdaq Composite index fell 0.28% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, gained 1.31%.^1,2,3

Stocks Struggle

Stocks were under pressure all week as investors grappled with higher bond yields and talk of possibly four rate hikes this year. Initially, intraday declines would bring out buyers and pare the losses. Investors were particularly heartened by Fed Chair Powell’s congressional testimony on Tuesday that softened the hawkish tone found in the minutes of the Federal Open Market Committee’s December meeting.

After digesting the hot inflation reports released mid-week, stocks were unable to resist the selling pressures on Thursday. A weak retail sales number, a resumption in the rise in yields, and mixed earnings from some of the big money center banks weighed on the market during Friday’s trading.

Inflation and the Fed

Inflation reports last week continued to reflect upward momentum in consumer prices. The Consumer Price Index posted a 7.0% year-over-year jump–the biggest increase since 1982, while the Producer Price Index rose 9.7% from a year earlier–the fastest pace since 2010 when the index was reconstituted.^4,5

Markets responded calmly as both numbers were in the neighborhood of expectations and the monthly increase for each moderated from previous single-month increases. The price pressures are expected to remain in the face of continuing supply chain constraints and wage growth. The pace and persistence of price increases may influence the speed at which the Fed may tighten in the year ahead.

Footnotes and Sources

1. ^{The Wall Street Journal, January 14, 2022}
2. ^{The Wall Street Journal, January 14, 2022}
3. ^{The Wall Street Journal, January 14, 2022}
4. ^{The Wall Street Journal, January 12, 2022}
5. ^{CNBC, January 13, 2022}

Deductions or credits not used fully one tax year that may be eligible to be carried over into future years include:

• When you have a net operating loss
• When your total expenses for a permitted deduction exceed the amount you’re allowed to deduct in a given year
• When a credit you qualify for exceeds the amount of tax you owe in a year
• Adoption tax credits
• Foreign tax credits
• Credits for energy efficiency

Track these (or have your software do it) so that you don’t forget them from one year to the next.

* This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from Credit Karma⁶

Footnotes and Sources

6. ^{Credit Karma, December 9, 2020}

A jump in yields sparked by a more aggressive sounding Federal Reserve sent the market lower to start the new year.

The Dow Jones Industrial Average fell 0.29%, while the Standard & Poor’s 500 declined 1.87%. The Nasdaq Composite index was hardest hit, dropping 4.53% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, slipped 0.55%.^1,2,3 

The Tech Wreck

The perception of a more hawkish Fed put a hard stop to the year’s positive start and pushed bond yields higher and stocks into a broad retreat.

Technology and other high-valuation shares were particularly hard hit by rising yields. Even the larger-capitalization technology companies with strong cash flows and profits were damaged. As yields trend higher, investors are questioning if these companies can lead the market in 2022. Fueling this decline was a four-day sell-off of technology companies by hedge funds that, in dollar terms, represented the highest level in more than ten years. Stocks continued to struggle into the final trading day, unsettled by a renewed climb in yields and an ambiguous employment report.⁴

The Fed’s Surprise

Minutes of December’s Federal Open Market Committee (FOMC) meeting were released last week and it revealed a more hawkish Fed than investors had been expecting. One surprise was that the first hike in interest rates could occur as early as March. Another, and perhaps more consequential, surprise was the idea of beginning a “balance sheet run-off” by the Fed following the first hike in the federal funds rate.⁵

A balance sheet run-off means that maturing bonds won’t be replaced with new bonds, the result of which is a smaller Fed balance sheet. Many investors view this step as removing liquidity from the system, a departure from market expectations that the balance sheet would remain flat during the Fed’s pivot to monetary normalization.

Footnotes and Sources

1. ^{The Wall Street Journal, January 7, 2022}
2. ^{The Wall Street Journal, January 7, 2022}
3. ^{The Wall Street Journal, January 7, 2022}
4. ^{CNBC, January 6, 2022}
5. ^{The Wall Street Journal, January 5, 2022}

The IRS started the Volunteer Income Tax Assistance (VITA) program to provide free tax advice, preparation, return filing help, and other assistance to military members and their families. This also includes specific tax advice for military members on topics such as combat zone tax benefits, special extensions, and other special rules. VITA has convenient locations on and off base and even has offices overseas.

These offerings are just one way the IRS is striving to make tax information available to all. It also offers other free assistance programs to taxpayers who qualify, including the elderly, through its Tax Counseling for the Elderly (TCE) program.

* This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from militaryonesource.mil⁶

Footnotes and Sources

6. ^{militaryonesource.mil, June 1, 2021}

Stocks closed out the year on a mostly positive note, adding to the year’s gains as concerns about the economic issues of Omicron infections receded.

The Dow Jones Industrial Average rose 1.08%, while the Standard & Poor’s 500 picked up 0.85%. The Nasdaq Composite index was flat (-0.05%) for the week. The MSCI EAFE index, which tracks developed overseas stock markets, posted an increase of 0.80%.^1,2,3

Stocks Notch Record Highs

The end of the year is historically a strong period for stocks–a seasonal pattern dubbed “The Santa Claus Rally.” This year’s final week of trading did not disappoint as stocks posted healthy gains to kick off the week, despite a global increase in Omicron infections. Investors were buoyed by data that showed fewer associated hospitalizations, which helped ease fears of the variant’s economic impact.

The S&P 500 set multiple fresh record highs, with Wednesday’s new high representing the 70th such high in 2021, while the Dow Industrials recorded its first new record since November. Stocks drifted on low trading volume in the final two trading days of the year, capping a good week, a solid month, and a strong year for investors.⁴

Robust Holiday Sales

The market got off to a good start last week in part due to a strong holiday sales report. A major credit card issuer reported that consumer holiday spending rose 8.5% from last year’s levels, driven by an 11.0% gain in online sales. It was the biggest annual increase in 17 years. The spending by consumers exceeded pre-pandemic sales by 10.7%. The retail categories that experienced the highest sales increases were apparel (+47.3%) and jewelry (+32.0%).⁵

It was a particularly robust number in view of investor concerns about supply chain disruptions, port congestion, labor shortages, and wavering consumer confidence.

Footnotes and Sources

1. ^{The Wall Street Journal, December 31, 2021}
2. ^{The Wall Street Journal, December 31, 2021}
3. ^{The Wall Street Journal, December 31, 2021}
4. ^{CNBC, December 29, 2021}
5. ^{CNBC, December 27, 2021}