Prepare now for next year’s likely tax law changes.
In normal times, procrastinators would have been scrambling this past week in order to beat the April 15 tax-filing deadline. As we all know, these are not normal times, and the tax deadline has been pushed back to May 15. That’s good news for the procrastinators.
Not only is there extra time to file your tax returns, but you can also use that time to fund your 2020 Individual Retirement Account and Health Savings Account.
If you recently received a stimulus check and your bills are current and you’re financially comfortable, there’s an opportunity to do something smart with your found money.
For most, their 2020 returns were filed weeks ago. That means their notes are probably filed away and tax data stored on their computers. I suggest that this year you might want to do things a bit differently. Consider keeping your 2020 tax data readily available to review.
I say this because there are significant tax law changes being discussed in Washington. Knowing where you stood in 2020 could help you make wise decisions in 2021 because the changes are likely going to take effect in 2022.
Throughout the month of March many people were keenly aware of their college basketball brackets. And yet when I ask people what tax bracket they’re in, they seldom know the answer. That means they may not be making the best decisions with their money.
For example, in tax year 2020, if a married couple had taxable income between $80,251 and $171,050 they would be in the 22 percent bracket. Simply stated, for every dollar they make in this bracket, Uncle Sam takes 22 cents.
If you and your spouse were jointly making $90,000 and you wanted to convert $10,000 of your IRA into a Roth IRA, you know that since you are in the 22 percent bracket, the tax liability would be $2,200. However, if you made $171,050 and wanted to convert $10,000 you’d be in the 24 percent bracket and thus owe $2,400 in taxes. Was that additional $50 in earnings worth it? I know it’s complex, but knowing your bracket can help you make smarter money management decisions.
As the tax code is being debated in the coming months, we’ll often hear the phrase “fair share.” But what exactly is a fair share? are countless stories of parents working multiple jobs so their children could go to college and live a better life. When those children do become financially successful how much should Uncle Sam to take in taxes? Is it 40 cents of every dollar earned? Or 50 cents or even 60 cents?
Several other issues will be discussed and debated. Like how much money can a parent leave to their heirs without the nest egg being taxed? And are new taxes really needed, or should we just fix the multiple loopholes in the existing tax code? I’d love to get involved in that one. But of course, all points of view should be discussed and debated.
My concern is that politics seem to have overtaken mathematics.
Keep those tax returns handy and know your bracket. With changes on the horizon, that knowledge just might help you keep a few more dollars in your pocket rather than giving it go to Uncle Sam.
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Do you know someone who would like to meet with a financial advisor?
Ken Morris 248.952.1744
E-mail your questions to kenmorris@lifetimeplanning.com
Ken is a registered representative of LPL Financial. Securities and financial planning offered through LPL, a Registered Investment Advisor, member FINRA/SIPC. Ken is Vice-President of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. LPL and Society for Lifetime Planning are independent companies. Investing involves risk including loss of principal. No strategy assures success or protects against loss.
