2021 tax tips

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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 -…

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Year-End Tax Questions

Year-end tax questions are those questions to ask yourself, your accountant, or your CERTIFIED FINANCIAL PLANNER™ this time of year. Asking the questions in early November provides time to make year-end decisions before it's too late. Some decisions can wait until Christmas week, but several are best done with a few weeks to spare. Generally, they fall into 3 categories:Year to date income?Year to date deductions? andWhat to do now? Year to Date Income? First, figure out your year to date income. How much have you made year to date? What does it look like you will make for this year? Common items that are forgotten: Capital gain distributions from mutual funds (More info here: https://www.hollydonaldsonfinancialplanner.com/fourth-quarter-tax-help-check-your-fund-distributions/)Bonuses, including stock grants or optionsQuarterly dividends on stocks and ETFsQuarterly interest on individual bondsCapital gains on assets soldRequired distributions from IRAs or 401Ks Year to Date Deductions? Next, look at year to date deductions. Everyone gets a 2021 standard deduction of $12,550 Single/$18,800 Head of Household/$25,100 Married Filing Jointly. Other deductions to consider, or if you itemize: $300 charitable contribution (available even if you take the standard deduction)Unusual/high medical expensesLong term care premiums (Depends on your age - see chart here: (https://www.aaltci.org/news/long-term-care-insurance-association-news/2021-tax-deductibility-limits)"Harvesting" losses that might offset unusually high capital gains What To Do Now? Finally, the goal with tax planning is to avoid reporting taxable income that's barely over some kind of threshold or bracket. For example, though a bit extreme: A couple in their 60s with one spouse still working and one over 65 on Medicare reports $177,000 in 2021 taxable income. This is $1,000 over the threshold of $176,000 for the first (of 6) Medicare income brackets. The additional $1,000 in income costs the couple $713 in Medicare premium surcharges in 2023. That's a marginal tax rate of 71.3%! If your taxable income is on a critical tax threshold, you can strategize. A few easy examples: Make sure you have maxed out your retirement account contributions for the year.Or, turned 50? You get an extra catchup contribution to your retirement account.Turned 55? You get an extra catchup contribution on a Health Savings Account (HSA). (More info here: Why an HSA Beats an IRA Any Day)If you show business income, can you defer income or accelerate expenses between December and January?If you believe you are in a lower tax bracket now than you will be in retirement, and additional income won't bump you up against any of the other thresholds, consider a Roth conversion. But do it soon. It can take several weeks to accomplish, depending upon which company holds your accounts. And year-end gets busy for these. Charitable Giving Options If you are over 70 1/2, would it make sense to make a Qualified Charitable Distribution from your IRA? (More info here: https://www.hollydonaldsonfinancialplanner.com/keep-charitable-deduction/)Instead of giving cash to charities, give them an asset with a large capital gain. You get a deduction instead of showing the gain.Need a deduction but not sure which charity(ies) yet? Set up a donor-advised fund, get the deduction…

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