2021 has been another year of unknowns. Among those is what income tax and estate tax might look like after any new legislation is passed. As we are writing this article on September 14, 2021, the House Ways and Means Committee is preparing legislation to present to the House of Representatives for consideration. For a comparative view of various legislation options which have been discussed over the past few months, please see Jen Muckley’s article Tax Changes Looming?
While it is hard to plan when we don’t know the future, it’s been helpful to weigh various options with our clients throughout the year. While we reference the House Democrat Plan throughout this article, there are likely to be many changes before legislation is passed. Once legislation passes, we will update this checklist with any action items applicable to year-end planning. Rather than touch on all aspects of your financial planning you might revisit annually, this checklist will focus on income tax and health care planning items that are time-sensitive due to their December 31 or April 15 deadlines. As always, we suggest working with your CPA before making any significant changes to your strategy.
Consider your year-to-date realized capital gains in your taxable accounts. Are you close to the thresholds described below? Or has your CPA advised you to limit gains from your investment portfolio due to other income incurred this year? With anticipation of a higher capital gain tax rate in 2022 and beyond, some of our clients have decided to realize more gains in 2021 than in past years. Note the current draft of legislation proposes an increase in capital gain rates to 25% for married couples when income reaches $450,000 (and at $400,000 for individuals), retroactive to September 13, 2021.
|Long-Term Capital Gains Rate Brackets|
|Married Filing Jointly||0% – up to $80,800
15% – $80,800 to $501,600
20% – $501,601 and above
|Single||0% – up to $40,400
15% – $40,401 to $445,850
20% – $445,851 and above
|These brackets are based on your taxable income (after deductions are applied).|
If you are a Bragg client, we have an Investment Policy Statement for you on file, where we discussed and decided upon an annual realized capital gain tolerance. If you have significant unrealized gains in your taxable (non-retirement account) portfolio, we often suggest an increase in this gain tolerance in order to maintain diversification and your target equity allocation. Our new standard for capital gain tolerance is 2% of the total asset balances. Your portfolio manager watches this amount and works to stay below it all year. Also see Benton Bragg’s article Higher Tax Bills Ahead!
Mutual funds often make capital gain distributions in the fourth quarter. If you would like to know where your portfolio stands and what to expect, please don’t hesitate to call us to discuss. And, if you are not a client of Bragg, we recommend that you ask your Investment Advisor if they have a target on file for you and share this with your CPA.
|Medicare Part B Costs|
|Individual tax return||File joint tax return||You pay each month (in 2020)|
|$88,000 or less||$176,000 or less||$148.50|
|above $88,000 up to $111,000||above $176,000 up to $222,000||$207.90|
|above $111,000 up to $138,000||above $222,000 up to $276,000||$297.00|
|above $138,000 up to $165,000||above $276,000 up to $330,000||$386.10|
|above $165,000 and less than $500,000||above $333,000 and less than $750,000||$475.20|
|$500,000 or above||$750,000 and above||$504.90|
As we mentioned, this is not meant to be an exhaustive list of all items to consider, but a list of the most common tax items (and a few health care items) that may be within your control. Please reach out to us at Bragg with any questions or if you would like to discuss further. We also advise that you work with your CPA to run tax projections before implementing any significant changes. If you would like a more comprehensive list of questions to consider regarding your overall financial health and planning, please see the article Financial Planning 101.
1 Adjusted Gross Income (AGI) (line 11 on your 2020 Form 1040) is gross income less certain adjustments. AGI includes all taxable income, including wages, bonuses, self-employment income, taxable interest, dividends, capital gains, retirement distributions, annuities, rents and royalties, taxable social security income, alimony received (with agreement prior to 2019), etc. The most common adjustments that reduce your AGI include one half of self-employment tax paid, alimony paid (with agreements prior to 2019), pre-tax retirement/HSA plan contributions, student loan interest, and certain losses. Back to top
2 Modified Adjusted Gross Income (MAGI) then adds back to your AGI certain deductions from above. Back to top
3 Taxable Income (line 15 on your 2020 Form 1040) is AGI less Deductions (Standard or Itemized). Back to top
4 Above-the-Line Deduction: If a deduction is “above the line,” it is subtracted from gross income in order to calculate Adjusted Gross Income. Examples of these deductions are alimony paid, retirement plan contributions, health savings account deductions, etc. These deductions can be taken in addition to the standard or itemized deduction. Back to top
5 Below-the-Line Deduction: If a deduction is “below the line,” it will reduce your taxable income, which is the number that determines the amount of tax you will pay. Back to top
4 & 5 While both above-the-line and below-the-line deductions ultimately reduce your taxable income, above-the-line deductions have the advantage in that you can take them even if you don’t itemize on Schedule A and they reduce your AGI. Other calculations throughout your tax return are based on your AGI; these calculations include deductible medical expenses and various credits.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.