Tax loss harvesting update Q4 2023

Equity markets ended the year on a high note, with stocks rising dramatically during the fourth quarter. The sharp increase in the markets was driven by a number of factors, perhaps most notably the expectation that the Federal Reserve (Fed) is finished with its interest rate increase program. Although both short-term and long-term rates ended 2023 at levels that were very close to where they began the year, rates have come down fairly dramatically from the 15+ year highs we saw in October.

In Washington, there were a small number of near-term tax-related developments as both parties gear up for the 2024 elections. During Q4, the Senate and House avoided a government shutdown with a short-term funding bill that pushed any debt ceiling-related issues into 2024. Within the House, the Republicans also replaced Speaker Kevin McCarthy (CA) with Mike Johnson (LA). The leadership change could affect Congress’s approach to tax and spending initiatives including the FY 24–25 budget and aid requests for Ukraine, Israel, etc., but more significant changes will not likely take place until after the election.

Changes Coming to SECURE 2.0?

While little in the way of meaningful legislation is expected this year as Congress turns its attention to 2024 reelection campaigns, one moderately notable piece of draft legislation was published in early December that would make various amendments to SECURE 2.0. The goal of this legislation is to increase access to retirement savings. The changes would seemingly correct and enhance a number of areas within SECURE 2.0, including the expansion of Automatic Enrollment and adjusting the age for RMDs and catch-up contributions. But while many of the provisions have bipartisan support, the legislation may not ultimately be enacted, given Congress’s shrinking window to pass laws.

In terms of the candidates for president, Democrats are promoting higher taxes on the wealthy and corporations while most Republican candidates are arguing for lower tax rates for corporations and the middle class. Specifics from the various candidates will likely emerge in the coming months as we move through the primaries towards the general election. President Joe Biden (D) and former President Donald Trump (R) remain the favorites to win their respective party nominations, although we’re still a long way from the actual election.

Tax Case Reaches Supreme Court

Potentially as significant as the presidential tax policy platforms, the Moore v. United States Supreme Court case looms this fall. While the stakes of the actual case are relatively small ($15,000 in taxes are in question), the implications could be far-reaching. The case involves a provision of the Tax Cuts and Jobs Act (TCJA) that taxed corporate earnings that had accumulated overseas. If the court rules in favor of the plaintiffs, this has the potential to reduce tax revenues by over $300 billion. Any new precedent established could also affect other provisions of the tax code, both existing and proposed, that involve the taxation of unrealized income. Existing taxes on partnerships and pass-through entities, zero-coupon bonds, constructive sales, futures contracts and any other mark-to-market accounting could be impacted. Proposals put forth by Democrats, such as wealth taxes or the taxation of unrealized capital gains, could also be ruled out.

Strong Quarter for Stocks

Equity markets moved up fairly dramatically in the fourth quarter, which pushed the return for the S&P 500® into significantly positive territory for the full year. The strong performance of a handful of US large cap growth stocks continued to have an outsized impact on overall large cap index returns. The market did experience one 10.3% drawdown earlier in the year, but the strength throughout the rest of 2023 tended to move equity markets in a positive direction.

FIGURE 1: Annual Total Return and Max Drawdown for the S&P 500® by Calendar Year