Tax Planning at Different Stages

It’s February and now you are receiving all of your tax forms because it’s tax time again. Completing your tax return each year is essentially a true–up to make sure you paid your share of income taxes. Because you are accounting for the previous calendar year, there are not too many things you can do to change your tax situation when it’s time to prepare your taxes. That is why it is important to understand your tax return once it is complete so that if there are any slight changes that you can make, you can do so during the tax year when it counts.

Ultimately, you have to know a little bit about taxes in order to notice where these changes may occur (or know enough to ask for help!)

What are we working with? Age, stage of life, current income, current assets, location of assets, tax thresholds in many different areas and tax law updates, just to name a few.

Working/Accumulation Phase of Life

While you are earning money and building your wealth, you want to be mindful of several things. Understanding the mechanics of the different things going on in your tax return can give you planning ideas for what you invest in, the different account registrations that you may or may not be able to utilize and look at the big picture to decide what could be more beneficial in the future. For example, you could be paying huge capital gains taxes in your individual accounts with mutual funds that are out of your control. A couple of things to look at would be reviewing what the estimated capital gains are and potentially moving out of that position (also reviewing that tax consequence) and into an ETF where taxes can be more controlled. Another planning item is making sure you are investing in different account types with different taxation. For example, if you only invest in your traditional IRA and traditional 401k, when you take the money out later on, it will all be 100% taxable versus maybe investing some in a ROTH IRA or ROTH 401k. Again, depending on your situation, this could be beneficial or not.

Retirement/Decumulation Phase of Life

Even if you are in the retirement/decumulation stage of life there are many things that are going on with your income. For example, your Medicare premiums are based on your AGI from 2 years ago. This means that you can jump Medicare premium surcharges every year even if you are $1 over the limit. If you are budding up close to one of these brackets, then you may be able to sacrifice a slightly lower distribution from an IRA in order to save yourself hundreds of dollars in Medicare premiums.

The Bottom Line

Every situation is different and should be looked at from different angles. If you do not understand your taxes, ask someone who does. Also, make sure you look at your tax return once it’s done and see if there is anything to do DURING the year that can help your situation.

Give Smarter and Make a Greater Impact with Philanthropy

What inspires you to give? Most of us give for the same basic reasons. We want to help others, make a positive difference in the world—and giving feels good. It makes us happy and connects us to the causes we care about. Studies show that most charitable folks give according to their values or to support causes they care about. But they don’t always have a strategy around giving or a way to monitor for impact.

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Charitable Giving

If you are charitably inclined, what is the most tax efficient way to give to those charities?

Let us start with standard deduction versus itemized deductions. Your itemized deductions must exceed your standard deduction for any tax benefit. There is a caveat for 2021, cash donations up to $300 for single filers and $600 for Married Filing Joint are allowed as above the line deductions.

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Biden’s Tax Plan

Following are some highlights from Biden’s Tax Plan. Some have been enacted with proposals for extension and others are still proposals.

Child Tax Credit

  • Enacted for 2021 (starts phasing out for single tax filers at $75K and married filing joint at $150K)
    • $3600 for children under 6
    • $3000 for children ages 6-17 (previously children aged 17 were excluded)
    • 50% of the eligible credit can be received with monthly installments from July thru December of 2021
  • Proposal to extend this thru 2025

Child & Dependent Care Credit

  • Enacted for 2021
    • Up to $4000 for one child
    • Up to $8000 for two or more children
  • Proposal to extend permanently

Federal Income Tax Rates

  • Current Top Tier is 37% Federal.  The proposal is to make the top tier 39.6%

Capital Gains Tax Rates-Proposed

  • For individual earning more than $1M, the top 20% would be the same as the ordinary income rate of 39.6% PLUS the existing net investment income surcharge of 3.8% PLUS state tax
  • Qualified Dividends for high earners would also be at this new capital gains rate
  • This CAN be passed retroactively

No Step Up In Basis

  • This proposal has to do with inherited assets.  For example, if your parent passes away with a house currently worth $500K, under current law the beneficiary’s new basis in the inherited house is the current date of death value–$500K.
  • The proposed change is to not increase the basis. So in the same house scenario above, the basis would be whatever the parent paid for the home.  So if the parent paid $100K for it, that would be the basis.  This matters when you sell the home.  You will have to pay tax on the gain.  In the first scenario, there would be no tax.  In the second scenario, there would be tax on $400K.

We will have to see what sticks with Congress and plan accordingly.  Taxes are just one piece of your financial plan that you navigate through on your Financial Journey.  Every situation is different and some of these will not affect you.  The important part is sticking to your plan and revisiting it on a regular basis to make sure you are on track with your goals and what is most important for you.

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.