5 unexpected things on your tax return

With the 2021 tax filing deadline behind us, it can be tempting to put taxes out of sight and out of mind. But by digging deeper into your tax return, you’ll uncover important insights and help identify opportunities for optimal planning in the future.

Now is a great time to review your current financial situation and consider changes for the coming year. Here are some of the most common areas to consider.

1. Check your refund (or your tax bill due)

People often look forward to getting a refund because it looks like a bonus, but it’s not. It’s an overpayment of your hard-earned money. Getting a large refund isn’t necessarily a good thing – you’re essentially giving the government an interest-free loan. It may be more advantageous to have this money throughout the year instead.

If you end up with a large tax refund or if you significantly underpaid and had to pay a penalty, you may want to review your deductions to see if you should have more or less deductions throughout. of the year.

In the case of retirees, you can also review your distributions from retirement accounts. You may have taxes withheld automatically from these distributions, and it is important to confirm whether the withholding percentage is adequate.

2. Understand your effective and marginal tax rates

There is often a misconception about tax rates and how they work. When we talk about tax rates, we often talk about the marginal tax rate, which is the highest income bracket. However, since the United States has a progressive tax system and not all of your income will be taxed at your marginal tax rate, your effective tax rate can be much lower.

For example, if you are a single filer and earn $100,000 a year, you have reached the 24% marginal tax bracket, but only a small percentage of your income is actually taxed at that 24% rate. In 2022, the first $10,275 of your income will be taxed at the rate of 10%; income over $10,275 up to $41,775 will be taxed at 12%; the next level is a 22% rate up to $89,075 and so on. Only income over $89,075 will be taxed at your marginal rate of 24%. To calculate your effective rate, take your tax payable and divide it by taxable income.

Knowing these “breaking points” can help you make financial decisions. For instance:

  • You might want to know how much extra income you could potentially earn without falling into a higher tax bracket.
  • If you’re anticipating a low-income year, you might consider doing a Roth IRA conversion to “fill in” your marginal tax bracket. This would involve paying income tax now on the conversion amount, rather than paying tax on IRA distributions in retirement when you might be in a higher tax bracket.
  • Or, if you anticipate a higher income year, you might consider giving more to charity to increase your tax deductions in a year when you are at a higher marginal tax rate.

3. Provide standard or itemized deductions

Take another look at Schedule A of the IRS form – were you able to itemize your deductions for 2021? After the Tax Cuts and Jobs Act 2017 increased the standard deduction amount and capped the amount you can deduct for state and local income tax, it became harder to exceed the standard deduction threshold. This is especially true if you don’t have other areas to itemize, such as mortgage interest or medical payments.

If you haven’t been able to detail this year, but want to maximize future planning opportunities, consider updating your charitable giving strategy. If you currently donate to charity without itemizing, you do not receive the direct tax benefit. You may consider using a donor-advised fund to “bundle” charitable donations into a single tax year to help bring your itemized deductions above the standard deduction threshold to maximize tax efficiency. tax benefit of donations.

For example, if you donate $1,000 to charity each year, but don’t itemize your deductions, there is no additional tax deduction for making that donation. Instead, consider consolidating your donations into one large contribution that you make to a donor-advised charitable fund. With a donor-advised fund, you get a tax deduction in the year the donation is made, but you can donate the money to charities of your choice at any time in the future.

If you contribute $5,000 to a donor-advised fund this year, you will receive the full $5,000 charitable deduction in 2022, which could help you exceed the standard deduction threshold. You could then donate that money to charities over a period of five years.

4. Consider offering in stock

When reviewing charitable contributions in Schedule A, be sure to always take a look at the breakdown between cash and non-cash contributions. If you have valuable securities, such as stocks, it may be more beneficial to donate securities rather than cash.

There are a few notable advantages here. First, if you donate to charity with stocks, you can both qualify for a charitable deduction and avoid incurring capital gains taxes normally associated with the sale of shares. Also, if you have a concentrated stock position, this can be an easy way to reduce your position in a tax-efficient way.

5. Review your pension contributions

Depending on your earned income level and eligibility, you may want to consider creative ways to increase your retirement contributions and reduce your taxable income. There are several lesser-known rules that might ultimately allow you to contribute more.

For example, retirees who continue to earn income through counseling opportunities can contribute to a SEP IRA. If you’re a solo entrepreneur and hope to maximize your retirement contributions, you might consider setting up a solo 401(k), which works similarly to the plan you would have under an employer. A solo 401(k) often allows for higher contributions than a SEP IRA given the different formula.

Another option could be for a non-earning (or less earning) spouse to contribute to an IRA for themselves under Kay Bailey Hutchison’s spousal IRA limit. If you are filing jointly, this could allow you and your spouse to contribute up to $14,000.

There’s a lot to learn from reviewing your tax strategies while it’s a priority this spring. Review these five steps as a starting point and don’t wait until the end of the year to make changes.

Senior Private Wealth Advisor, SVB Private

Julia Vanzler, CFP® CPWA® specializes in working with individuals and families to manage and protect their assets. It is committed to providing personalized and fully integrated financial solutions that aim to solve personal challenges and provide security and peace of mind. As Senior Private Wealth Advisor at SVB PrivateJulia works closely with her colleagues and her clients’ outside advisors to provide sound advice and guidance on investments, retirement income, philanthropic, estate and tax planning.