Shoppers grappling with a layoff or leaping into retirement might have some tax-planning alternatives because the 12 months winds down, high advisors say.
By the third quarter of 2020, 28.6 million child boomers reported being out of the workforce, out of a whole cohort numbering 71.8 million, in keeping with Pew Research. That is 3.2 million extra exits than throughout the identical interval in 2019.
Whether or not somebody leaves the workforce for good or plans to return for the appropriate alternative, their revenue and tax bracket could also be considerably decrease in 2022 in contrast with 2021, affecting year-end choices.
“When managing somebody’s cash, it’s extremely, essential to know their tax state of affairs,” mentioned Dale Brown, chairman of the board at Salem Funding Counselors in Winston-Salem, North Carolina, which ranked second on CNBC’s 2021 FA 100 checklist.
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Deferring revenue into 2022
Somebody leaving the workforce via retirement or a layoff in 2021 might search methods to push 2021 revenue into 2022.
For instance, if somebody between jobs must faucet appreciated portfolio property to cowl dwelling bills, they might wait till January 2022 to promote investments, bumping capital positive factors into the lower-income 12 months, Brown suggests.
And if a married couple’s taxable revenue is $83,350 or much less for 2022, they might pay 0% long-term capital gains on those profits, he said.
“Whether you’re retiring or laid off, it’s almost universally true that you want to defer income from a higher-tax year into a lower-tax year,” said Brown.
Other moves may be waiting until 2022 for retirement plan withdrawals, delaying year-end bonuses or postponing business income until January.
Accelerate deductions into 2021
If someone itemizes tax deductions, they may also explore ways to accelerate write-offs into 2021, Brown said, with charitable gifts typically offering the most flexibility.
For example, married investors may give multiple years of donations in 2021, a tactic known as “bunching,” to exceed the $25,100 standard deduction. The move covers multiple years of charitable gifts with a tax break for 2021.
Donor-advised funds, a popular way to bunch gifts, allow someone to make a large up-front contribution while giving from the account over multiple years.
“You really get the best of both worlds,” said Steven Check, president of Check Capital Management in Costa Mesa, California, which ranked No. 4 on the FA 100 list.
“You get the deduction in a higher-income year and take your time to give the money to where you’d like, even spreading it out over a few years,” he said.
While accelerating deductions or deferring income may reduce taxes for certain filers, the plan may backfire if someone rejoins the workforce and earns more than expected in 2022, triggering an even higher tax bill, among other consequences.
For example, a higher adjusted gross income may boost Medicare Part B and Part D premiums two years later.
“You have to sit down and look at the numbers,” Brown added. “That’s the only way of doing it.”