As 2019 comes to a close, it’s a good time to think about magic numbers – income 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, that are worth discussion 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: Tax Bracket Jump. There are two levels where the 2019 tax brackets make the biggest jumps – from 12% to 22% (at pretty low income for most people) and from 24% to 32%. For Married Filing Jointly (MFJ) that jump occurs at $168,400 and Single (S) at $84,200. Every $1000 over this amount means you pay another $80 in tax (until you hit the 35% bracket at $321,450 (MFJ) and $160,725 (S) when you then pay another $30 on top of the $80, and then one more bracket – 37% after that.)
Magic Number 2: Standard Deduction. The figures above are for taxable income – so, unless you are one of the few people who itemize, you could add the standard deduction (MFJ – $24,000 or S – $12,000) on top to reach your target magic income number to avoid the 32% bracket: (MFJ – $168,400 + $24,000 = $192,400 or S – $84,200 + $12,000 = $96,200). That’s a better number to manage.
Magic Number 3: Capital Gains Rate. There are only 3 brackets for capital gains income – 0%, 15%, and 20%. The 15% bracket is really wide – $78,750 to $488,850 (MFJ) and $39,375 to $434,550 (S). 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 – $321,400 and S – $160,700. If you can stay below these numbers, you 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: For 63+ – Medicare Brackets. Your Medicare Part B premium each year is based on your tax return from 2 years prior. You pay another $81.20/month, or $974/year for each bracket. On top of the base premium of $135.50/month, that’s a 40% increase – essentially a 40% tax. If you are 63 in 2019, then go on Medicare in 2021 but do not retire, your Medicare premium will be based on your 2019 income.
Here are the Medicare magic numbers (at each level you pay another $974/year):
MFJ – $170,000; $214,000; $267,000; $320,000; and $750,000
S – $85,000; $107,000; $133,500; $160,000; and $500,000
Part D (prescription drug coverage) also has brackets. 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
These are just 5 magic numbers to watch – others 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.