How your tax rates can change
As we enter the last part of 2021, Congress is debating a series of changes to the tax code. Whether you find the proposed changes disconcerting is largely a function of how the changes affect you specifically. From our perspective as advisors, changes in the tax code can alter both strategy and tactics employed by our clients. We are monitoring the legislation negotiations and have already contemplated what will need to be done if various provisions pass. As of this writing, while still significant, the current proposals represent a less dramatic tax increase than proposed during the presidential election.
Regardless of what Congress does, we recognize that changes to our tax profiles are inevitable. In fact, Congress could do nothing and a household’s tax profile can still change, either by what is already in the law or through changes in personal circumstances.
…Congress could do nothing and a household’s tax profile can still change, either by what is already in the law or through changes in personal circumstances.
As it stands, unless Congress acts before 2026, tax brackets will revert to the brackets of 2017. All else being equal, this means every taxpayer that is currently in the 12% or higher bracket will see their marginal tax rates rise. The chart below shows the tax brackets applied to various levels of taxable income in 2017 and 2018. We can’t know exactly what these brackets will be in 2026 because the ranges are adjusted annually for inflation. Nonetheless, the chart is helpful in illustrating the adjustments to the underlying structure. Just compare the brackets and rates of 2017 to that of 2018 and you have an understanding of the potential increases should Congress make no change to this structure before 2026.
To understand how rates can fluctuate due to personal circumstances even if Congress takes no action, we will see what would happen to a hypothetical married couple, Jack and Jill, both age 65. For simplicity purposes we will ignore state income taxes and assume they live off a steady $100,000 of taxable income in 2018 dollars. Taxable income is the income after deductions are applied. Using the chart above for 2018 married filing joint returns, the tax bill on $100,000 is $13,879 ($8,907 plus 22% of the amount over $77,400). They will pay at least $220 of tax on the next $1,000 of taxable income, such as wages or a withdrawal from an IRA or retirement account.
Jack dies in 2023. Jill will file as a single taxpayer in 2024 so she must use the 2018 single chart above. Her tax bill on $100,000 of taxable income is $18,289. She would pay at least $240 of tax on a $1,000 IRA distribution.
Due to the automatic reversion to the prior structure, in 2026 her $100,000 of taxable income is subject to the single scale of 2017. Her tax bill goes to $20,982. That’s a lot more than $13,879. Further, a $1,000 IRA distribution costs at least $280.
If her taxable income rises another $90,650, she will start paying at least 33% on additional income. This could easily happen to her. First in 2028, she becomes subject to Required Minimum Distributions from her retirement accounts, except her Roth IRA. In addition, she could sell a piece of property or inherit taxable money such as an IRA, U.S. Savings Bonds, or annuity contracts for instance.
Real life is not this straightforward and the change in a tax bill may not be as high. Single taxpayers often find they spend less than when they were married. Taxable income typically drops as Social Security and pensions adjust at the death of a spouse. If Jill got remarried, she’d use the married scale but also must include her new husband’s income. Maybe the tax bill goes down, maybe not.
Younger households are not immune to fluctuations in tax rates either. In addition to inheritances and changes in health or marital status, children can bring tax breaks that end when they are no longer dependents. Salaries, bonuses, and benefits can all fluctuate with promotions, layoffs, or job changes.
Again, all of these differences are in play even if the current tax proposals go nowhere and whether or not Congress acts in the future. This is a large part of why we emphasize that good tax planning is an ongoing process. Done well, the tax planning works in concert with other financial planning issues and is not just about reducing taxes now – it is about trying to reduce taxes over multiple years or a lifetime even.
News & Notes
Dan Moisand to Chair CFP Board The board of directors of the Certified Financial Planner Board of Standards Inc. has elected Dan Moisand, CFP® as its chairman-elect for 2022, serving as Chairman for 2023. Dan has more than three decades of financial planning and investment experience and a long list of contributions to CFP Board and the financial planning profession. Certified Financial Planner Board of Standards, Inc. is the professional body for personal financial planners in the U.S. and sets standards for financial planning and administers the prestigious CFP® certification. The news was picked up by several national publications in the financial planning profession and locally by the Orlando Sentinel and Florida Today.
Mike Salmon guests on podcast Commercial real estate services firm, Lee & Associates recently had Mike Salmon, CFP® EA on their podcast. Mike discussed some unique aspects of personal financial planning facing commercial real estate brokers such as dealing with fluctuating income, retirement savings opportunities from being self-employed, and managing taxes as an independent contractor. Mike has led our firm’s efforts in providing specialized services for commercial real estate brokers. You can listen to the show or read the transcript here.
Charlie Fitzgerald joins UF Advisory Council. Charlie Fitzgerald, CFP® has joined the inaugural Advisory Council for the new Wealth Management program at the Warrington College of Business at the University of Florida. Charlie first approached his Alma Mater about starting a program in 2014. After several years of conversations and meetings, a very generous unrestricted multimillion dollar gift was given to the business college from one of its celebrated professors. This gift allowed the college to introduce and fund a Wealth Management program as a specialization under the college’s Bachelor of Arts in Business Administration degree. Upon completion a graduate could sit for the Certified Financial Planner Board of Standards exam, a critical element to earning CFP® Certification. The program was rolled out in the fall of 2020 and is gaining traction with the students.
Social Security payments and allowable retirement plan contributions to rise. The Social Security Administration has set the increase at 5.9%. The increase, a result of the increase in inflation indexes, should also raise the amounts one can contribute to retirement plans and change several other items in the tax code which are tagged to inflation readings.
November 1: Start of open enrollment for existing Health Insurance Marketplace enrollees
December 7: End of open enrollment for existing Medicare enrollees
- End of open enrollment for existing Health Insurance Marketplace enrollees
- Q4 estimated tax payment deadline for C-corporation and multi-member LLCs that elect to be treated as a corporation
December 20: Last date to submit paperwork to be certain processing will be complete for end of calendar tax year deadlines such as:
- Making Required Minimum Distributions from retirement accounts and IRAs
- Completing gifts and charitable donations for 2021 tax year
- Completing conversions to Roth IRA accounts
- Dividing retirement accounts with multiple beneficiaries in order to use separate accounting
December 24-January 2, 2022: Offices of Moisand Fitzgerald Tamayo are closed. As has been our custom for many years, all staff has this time off so they can spend it with their families.
- Start of General Enrollment Period for Medicare Part A and B
- Start of Open Enrollment Period for Medicare Advantage
- Q4 estimated payment deadline for 2021 tax year
- First date to file the Free Application for Federal Student Aid (FAFSA) for upcoming academic year
Please remember to call us: When anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.
The Team at Moisand Fitzgerald Tamayo, LLC
Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on Facebook, LinkedIn, or Twitter.
Important Additional Information & Disclosures
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Moisand Fitzgerald Tamayo, LLC-“MFT”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from MFT.
Please remember that if you are a MFT client, it remains your responsibility to advise MFT, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. MFT is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. Tax advice is given only to clients and only when agreed to by MFT. A copy of the MFT’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request.
Please Note: MFT does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to MFT’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Please Note: Limitations: While MFT does NOT pay for recognition, awards, or publicity, neither rankings and/or recognition by unaffiliated rating services, publications, or other organizations, nor the achievement of any designation or certification, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if MFT is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers. No ranking or recognition should be construed as a current or past endorsement of MFT by any of its clients. ANY QUESTIONS: MFT’s Chief Compliance Officer remains available to address any questions regarding rankings and/or recognitions, including providing the criteria used for any reflected ranking.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your MFT account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your MFT accounts; and, (3) a description of each comparative benchmark/index is available upon request.