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Magic Tax Numbers for 2021

Magic tax numbers for 2021: As 2021 comes to a close, it’s a good time to think about magic numbers that could affect your taxes in April. Before December 31, there might be adjustments you could make. Below are just 5 examples, but there are many more. They might be worth discussing with your CFP, CPA, or run through a tax calculator. Ask what you can do to get your income down to these magic numbers. You could save hundreds or thousands of dollars.

Magic Number 1: Income Bracket Jump

There are 7 different ordinary income brackets, but two levels that make the biggest jumps – from 12% to 22% and from 24% to 32%. For Married Filing Jointly (MFJ) those jumps occur at $81,050 and $172,750 and Single (S) at $40,525 and $86,375. An additional $1000 over these amounts means you pay either $100 or $80 in additional tax. Every additional $1000 after that incurs the same additional tax until you reach the next bracket.

Magic Number 2: Standard Deduction

The figures above are for taxable income – so, unless you itemize, you could add the standard deduction (MFJ – $25,100 or S – $12,550) on top to reach your target magic income number to avoid the big jump brackets: (MFJ – $81,050 + $25,100 = $106,150 and $172,750 + $25,100 = $197,850 or S – $40,525 + $12,550 = $53,075 and $86,375 + $12,550 = $98,925). That’s a better number to manage.

Magic Number 3: Capital Gains Bracket Jump

There are only 3 brackets for capital gains income – 0%, 15%, and 20%. The 15% bracket is really wide – (MFJ) $80,801 to $501,600 (MFJ) and (S) $40,401 to $445,850. Say you have a really low income year. Maybe you just retired but haven’t claimed Social Security yet, or for a health or economic reason you earned so much less that you are actually close to the bottom of the 15% capital gains bracket. AND you own something that has a capital gain – perhaps something you bought or inherited a long time ago. You could pay NO capital gains taxes by selling it in the year in which you have the low income. This is definitely one to run by your CPA or financial professional before making that sale, though, to make sure.

Magic Number 4: For Business Owners – QBI/199A Deduction

It’s too complex for here, but the magic numbers to keep in mind are (MFJ) – $329,800 and (S) – $164,900. If you can stay below these numbers, you might get a special extra deduction. Definitely worth it to run by a CPA to see what you can do before year-end to get this bonus.

Magic Number 5: Medicare Surcharges (Age 63 and over. Yes. 63.)

Medicare premiums have 6 brackets. Your Medicare premium for 2023 is based on your 2021 income, because Medicare looks at your tax return from 2 years prior (unless you appeal due to a life event such as retirement – more info here: https://www.aarp.org/retirement/social-security/questions-answers/medicare-premium-irmaa.html). If you turned 63 in 2021 and do not retire or have another life event by 2023, this year’s income will be what Medicare uses to assess surcharges, or not.

You pay a surcharge of $89.10/month, or $1069/year for each income bracket. In other words, going $1000 over the income bracket can cost you an extra $1069 per year.

Here are the Medicare Part B magic numbers for 2021 (at each income level you pay another $1069/year):

MFJ – $176,000; $222,000; $276,000; $330,000; and $750,000

S – $88,000; $111,000; $138,000; $165,000; and $500,000

Part D (prescription drug coverage) also has surcharges, though not as high as Part B. Avoiding the Part B brackets will also avoid the Part D surcharges.

For an excellent explanation of Medicare brackets, see Mary Beth Franklin’s article in InvestmentNews: https://www.investmentnews.com/article/20181120/FREE/181129997/medicare-high-income-surcharges-to-increase-in-2019

Now is the Time to Think About Taxes

These are just 5 magic tax numbers for 2021 to watch – other examples include optimal itemizing numbers; alternative minimum taxes; qualifying for ACA subsidies; and phaseouts for Roth IRA contributions.

Some people wait until February or March to think about taxes, when income for the prior year is already set. Instead, before the year is over, see if you can manage to hit a magic number and save a few bucks.

Schedule a 30-minute call to talk more about taxes or other money topics: https://bit.ly/3GWZNrc

Holly Donaldson

Holly P. Donaldson, CFP® writes and consults on the psychology of money. Her fee-only, product-free financial planning practice focuses on increasing financial self-efficacy for those seeking a financial navigator to help them make good decisions. She is the author of The Mindful Money Mentality: How to Find Balance in Your Financial Future (Porchview Publishing, 2013) and publisher of the award-winning monthly e-letter, "The View From the Porch." With a fully virtual practice in Seminole, Florida, she primarily serves clients located in the Tampa, St. Petersburg, and Clearwater areas. Holly will also work with clients who are a good fit located elsewhere in the United States.

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