Page 56 - BusinessWest November 24, 2021
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 sider the tax benefits of the electric-vehicle credit. The maximum credit for a qualified vehicle is $7,500. Be aware, however, that credits are no longer available for vehicles produced by certain manufacturers.
• Empty out your flexible spending accounts (FSAs) for healthcare or dependent-care expenses if you will have to forfeit unused funds under
the ‘use it or lose it’ rule. However, due to recent changes, your employer’s plan may provide a carryover to next year of up to $550 of funds or a two-and-a-half-month grace period or both.
FINANCIAL TAX PLANNING Securities Sales
Traditionally, investors time sales of assets like securities at year-end for optimal tax results. For starters, capital gains and losses offset each other. If you show an excess loss for the year, you can then offset up to $3,000 of ordinary income before any remainder is carried over to the next year.
Long-term capital gains from sales of securi- ties owned longer than one year are taxed at a maximum rate of 15% or 20% for certain high- income investors. Conversely, short-term capital gains are taxed at ordinary income rates reaching as high as 37% in 2021.
ACTION: Review your portfolio. Depending on your situation, you may want to harvest capital losses to offset gains or realize capital gains that will be partially or wholly absorbed by losses. For instance, you might sell securities at a loss to off- set a high-taxed short-term gain.
Be aware of even more favorable tax treatment for certain long-term capital gains. Notably, a 0% rate applies to taxpayers below certain income
levels, such as young children. Furthermore, some taxpayers who ultimately pay ordinary income tax at higher rates due to their invest- ments may qualify for the 0% tax rate on a por- tion of their long-term capital gains.
However, watch out for the ‘wash sale rule.’
If you sell securities at a loss and reacquire sub- stantially identical securities within 30 days of the sale, the tax loss is disallowed. A simple way to avoid this harsh result is to wait at least 31 days to reacquire substantially identical securities.
TIP: The preferential tax rates for long-term capital gains also apply to qualified dividends received in 2021. These are most dividends paid by U.S. companies or qualified foreign companies.
Required Minimum Distributions
Normally, you must take required minimum distributions (RMDs) from qualified retirement plans and traditional IRAs after reaching age 72 (701⁄2 for taxpayers affected prior to 2020). The amount of the RMD is based on IRS life-expec- tancy tables and your account balance at the end of last year. If you do not meet this obligation, you owe a tax penalty equal to 50% of the required amount (less any amount you have received) on top of your regular tax liability.
The CARES Act suspended the RMD rules for 2020 — but for 2020 only. The RMD rules are rein- stated for this year.
As a general rule, you may arrange to receive the minimum amount required, so you can con- tinue to maximize tax-deferred growth within your accounts. However, you may decide to take larger distributions — or even the full balance of the account — if that suits your needs.
TIP: The IRS has revised the tables for 2022 to reflect longer life expectancies. This will result in smaller RMDs in the future.
Net Investment Income Tax
Moderate- to high-income investors should be aware of an add-on 3.8% tax that applies to the lesser of net investment income (NII) or the amount by which MAGI for the year exceeds $200,000 for single filers or $250,000 for joint fil- ers. (These thresholds are not indexed for infla- tion.) The definition of NII includes interest,
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tax break for real estate. If this technique appeals to you, start negotiations that can be completed before the end of the year.”
dividends, capital gains, and income from passive activities, but not Social Security benefits, tax- exempt interest, and distributions from qualified retirement plans and IRAs.
ACTION: After a careful analysis, estimate both your NII and MAGI for 2021. Depending on the results, you may be able to reduce your NII tax liability or avoid it altogether.
For example, you might invest in municipal bonds (‘munis’). The interest income generated by munis does not count as NII, nor is it included in the calculation of MAGI. Similarly, if you turn a passive activity into an active business, the result-
Proposed legislation would eliminate the
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                                                                                  56 NOVEMBER 24, 2021
ACCOUNTING & TAX PLANNING
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