December Letter to Clients
It’s been another unexpected year, and certainly one, where I think many of us had hoped the world’s uncertainties would be behind us. We certainly hope next year provides the movement and flexibility to travel and see family that we know many of you are craving.
In our effort to continually hope to bring you more ease, and clarity to help you make the impact you want to with your families and community, we are doing our best to help support you through our meetings, discussions, weekly commentary, monthly newsletters, videos & Nourish content. Below you will find a few thoughts on year end, and the economy. We are also doing our best to continually deepen the depth of planning and engagement we offer you. We always welcome feedback, so if you have any new content or ideas for how we can better support you, please send those along!
We also wanted to share another accomplishment from the year, Kerry was recently featured in Fortune’s Magazine in their Women in Wealth section.
We are so incredibly honored to work with you and wish a truly wonderful holidays and New Year Season.
Bob Meath, Founder & Wealth Advisor
Kerry Meath-Sinkin, Partner & Wealth Advisor
Looking to Year-End
A number of questions about proposed changes in the tax code have come our way. As the Build Back Better Act winds its way through Congress, [[https://www.schwab.com/resource-center/insights/content/congress-drops-most-individual-tax-increases-revised-economic-package early proposals have fallen by the wayside]].
Changes in individual income tax rates, increases in rates for long-term capital gains, and updates to estate taxes are unlikely to be enacted into law.
But we may see a big increase in the cap for state and local tax (SALT) deductions, and a surtax for those with very high incomes may land in the tax code. As currently proposed, a 5% surtax would apply to individuals with income over $10 million, increasing 3% above $25 million.
There is also bipartisan support for updates to retirement rules—what’s being called SECURE Act 2.0. Recently, however, the legislation has lost momentum, as Congress deals with tight deadlines on taxes and new spending.
Perhaps the SECURE Act 2.0 will pass next year. Comprehensive bills don’t pass quickly, even if support is bipartisan. Instead, let’s focus on tying up loose ends as the year comes to a close.
8 end-of-year tax facts and tips to save you money
- Tax brackets have changed. Every year, the tax brackets for taxable income are adjusted based on the rate of inflation. Table 1 illustrates the marginal tax bracket based on taxable income. This is income after all deductions.
Table 1: Tax Brackets for 2021
|Rate||For Single Individuals||For Married Individuals Filing Joint Returns||For Heads of Households|
|10%||Up to $9,950||Up to $19,900||Up to $14,200|
|12%||$9,951 to $40,525||$19,901 to $81,050||$14,201 to $54,200|
|22%||$40,526 to $86,375||$81,051 to $172,750||$54,201 to $86,350|
|24%||$86,376 to $164,925||$172,751 to $329,850||$86,351 to $164,900|
|32%||$164,926 to $209,425||$329,851 to $418,850||$164,901 to $209,400|
|35%||$209,426 to $523,600||$418,851 to $628,300||$209,401 to $523,600|
|37%||$523,601 or more||$628,301 or more||$523,601 or more|
Source: [[https://taxfoundation.org/2021-tax-brackets/ Tax Foundation]]
- Standard deduction rises for tax year 2021. The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year.
For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150. For heads of households, the standard deduction will be $18,800 for tax year 2021, up $150. ([[https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021 IRS provides tax inflation adjustments for tax year 2021.]])
- Child Tax Credit has changed. Each qualifying household is eligible to receive up to $3,600 for each child under 6, and $3,000 for each child between 6 and 17. You may receive half of the new credit between July and December 2021 and the remaining half in 2022, when you file a tax return.
Even if you don’t owe any federal taxes, you may still be eligible for the credit. If you have no income, you may still receive the credit.
The credit gradually declines starting at income of $75,000 for individuals, $150,000 for married couples, and $112,500 for heads of household.
While the increase in the credit is currently temporary and only for 2021, just passed legislation in the House preserves the credit for 2022, [[https://www.cbpp.org/research/federal-tax/build-back-betters-child-tax-credit-changes-would-protect-millions-from with advance monthly payments]] of $300 for a younger child and $250 per older child for all of 2022. ([[https://www.taxoutreach.org/tax-credits/child-tax-credit/whats-new-about-the-child-tax-credit-in-2021/ What’s New About the Child Tax Credit in 2021?]])
- Limitations on itemized deductions. If cash expenses that are eligible to be itemized fail to top the standard deduction, skip Schedule A and take the standard deduction. It’s that simple.
If you itemize, please be aware that state and local income taxes, property taxes, and real estate taxes are capped at $10,000. Anything above cannot be written off against income.
However, the [[https://www.cnbc.com/2020/11/18/thisthe-irs-is-blessing-workaround-that-allows-business-owners-to-deduct-state-and-local-taxes.html IRS does grant a workaround for some taxpayers]].
Taxpayers that use [[https://www.forbes.com/sites/taxnotes/2021/09/09/recapping-workarounds-to-the-state-and-local-tax-deduction-cap/ pass-through entities]], including S-corporations, may benefit.
It’s a complex maneuver, but one that’s being [[https://www.accountingtoday.com/opinion/tax-strategy-more-states-enacting-salt-limit-workarounds]] offered by more states.
For 2022, the cap may rise and be subject to income limits. We’ll revisit this next year.
For charitable contributions, subject to certain limits, taxpayers who itemize may generally claim a deduction for charitable contributions made to qualifying charitable organizations.
These limits typically range from 20%-60% of adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization.
For example, a cash contribution made by an individual to a qualifying public charity is generally limited to 60% of the individual’s AGI. Excess contributions may be carried forward for up to five tax years. [[https://www.irs.gov/newsroom/expanded-tax-benefits-help-individuals-and-businesses-give-to-charity-during-2021-deductions-up-to-600-available-for-cash-donations-by-non-itemizers IRS: Expanded tax benefits help individuals and businesses give to charity during 2021; deductions up to $600 available for cash donations by non-itemizers.]])
If you don’t itemize, a deduction up to $600 available for cash donations in 2021.
The IRS also allows taxpayers to deduct the https://www.nerdwallet.com/article/taxes/medical-expense-tax-deduction total qualified unreimbursed medical care expenses for the year that exceeds 7.5% of their adjusted gross income. You must itemize to take advantage of this deduction.
- Estates of decedents who die during 2021 have a basic exclusion amount of $11,700,000, up from a total of $11,580,000 for estates of decedents who died in 2020. The annual exclusion for gifts is $15,000 for calendar year 2021, as it was in 2020. ([[https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021 IRS provides tax inflation adjustments for tax year 2021.]])
- The maximum credit allowed for adoptions for tax year 2021 is the amount of qualified adoption expenses—$14,440, up from $14,300 for 2020.
- Changes to the AMT. Trump-era tax reform failed to do away with the alternative minimum tax (AMT), but it snags far fewer people.
The AMT exemption amount for tax year 2021 is $73,600 and begins to phase out at $523,600 ($114,600 for married couples filing jointly for whom the exemption begins to phase out at $1,047,200).
The 2020 exemption amount was $72,900 and began to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption began to phase out at $1,036,800).
It’s confusing, but most tax software programs run both calculations for you.
- Take advantage of a 20% deduction for business owners. The law provides “flow-through” business owners, such as sole proprietorships, LLCs, partnerships, and S-corps, a 20% deduction on income earned by the business.
This is a valuable benefit to business owners who aren’t classified as C-corps and can’t benefit from 2018’s reduction in the corporate tax rate to 21% from 35%.
Individual taxpayers and some trusts and estates may be entitled to a deduction of up to 20% of their net qualified business income (QBI) from a trade or business, including income from a pass-through entity.
In general, total taxable income in 2021 must be under $164,900 for single filers or $329,800 for joint filers to qualify. In 2022, the limits rise to $170,050 for single filers and $340,100 for joint filers.
The deduction does not reduce earnings subject to the self-employment tax.
There are limitations to the new deduction and some aspects are complex. Feel free to check with your tax advisor to see how you may qualify. Most tax software programs perform the calculations. ([[https://www.irs.gov/newsroom/qualified-business-income-deduction IRS Qualified Business Income Deduction]], [[https://www.nerdwallet.com/article/taxes/qualified-business-income-deduction Qualified Business Income Deduction (QBI): What It Is & Who Qualifies.]])
The points above are simply a summary. You may see provisions that will benefit you. You may also see potential pitfalls. If you have any questions or concerns, let’s talk.
9 smart planning moves we are reviewing with you.
- Your M Guidance Retirement Forecast
- Portfolio Rebalancing
- Insurance & Beneficiary Reviews
- Tax Loss Harvesting. You have until December 31 to harvest any tax losses and/or offset any capital gains. It may be advantageous to time sales in order to maximize tax benefits this year or next. We may also want to book gains and offset with any losses.
- Mutual funds and taxable distributions
- Required minimum distributions (RMDs) are minimum amounts the owner of most
retirement accounts must withdraw annually.
The SECURE Act made major changes to RMD rules. If you reach age 70½ in 2020 or later, you must take your first RMD by April 1 of the year after you reach 72 ([[https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions IRS: Retirement Plan and IRA Required Minimum Distributions FAQs]]). Some plans may provide exceptions if you are still working. See ([[https://www.fidelity.com/retirement-ira/required-minimum-distribution-faq for IRA FAQs: Required Minimum Distributions]]).
If you reached the age of 70½ in 2019 the prior rule applies.
For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31.
While delaying the RMD until April 1 can cut your tax bite in the current year, please be aware that you’ll have two RMDs in the following year, which could bump you into a higher tax bracket.
The RMD rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs and SIMPLE IRAs.
They do not apply to ROTH IRAs.
Don’t miss the deadline or you could be subject to a steep penalty.
- Roth IRA or traditional IRA Contributions. A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax free withdrawals if certain requirements are met.
You may also be eligible to contribute to a traditional IRA. Contributions may be fully or partially deductible, depending on your income and circumstances. Total contributions for both accounts cannot exceed the prescribed limit.
[[https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits There are income limits]], but if you qualify, the annual contribution limit for 2020, 2021 and 2022 is $6,000, or $7,000 if you’re age 50 or older.
You can contribute if you (or your spouse, if filing jointly) have taxable compensation.
Starting in 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs.
As of now, you can make 2021 IRA contributions until April 15, 2022 (Note: statewide holidays can impact final date).
- College savings. A limited option called the Coverdell Education Savings Account (ESA) allows for a maximum contribution of $2,000. It must be made before the beneficiary turns 18. Contributions are not tax deductible.
Distributions are tax free if used for qualified education expenses. But beware of income limits ([[https://www.irs.gov/taxtopics/tc310 IRS: Coverdell Education Savings Accounts]]).
Contribution limits are phased out if the contributor has an AGI of $95,000 to $110,000. For joint filers, the AGI is between $190,000 to $220,000.
A 529 plan allows for much higher contribution limits, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary.
As with the Coverdell ESA, contributions are not tax deductible.
- Charitable giving. Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income.
Did you know that you may qualify for what’s called a “([[https://www.fidelity.com/learning-center/personal-finance/retirement/qcds-the-basics qualified charitable distribution (QCD)]]” if you are[[ https://www.schwabcharitable.org/non-cash-contribution-options/making-qcds 70½ or older]]?
A QCD is an otherwise taxable distribution from an IRA or inherited IRA that is paid directly from the IRA to a qualified charity.
A QCD may be counted toward your RMD up to $100,000. If you file jointly, you and your spouse can make a $100,000 QCD from your own IRAs. This becomes even more valuable in light of tax reform as the higher standard deduction may preclude you from itemizing.
You might also consider a [[https://www.fidelitycharitable.org/ donor-advised fund]]. Once the donation is made, you can generally realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.
A sharp acceleration in economic growth, increasing worries about inflation, a reluctant-to-act-against-inflation Fed, and a strong stock market were quickly displaced by news of a new Covid variant on Black Friday.
Table 2: Key Index Returns
|MTD %||YTD %|
|Dow Jones Industrial Average||-3.7||12.7|
|S&P 500 Index||-0.8||21.6|
|Russell 2000 Index||-4.3||11.3|
|MSCI World ex-USA**||-4.8||4.9|
|MSCI Emerging Markets**||-4.1||-6.1|
|Bloomberg US Agg Total Return||0.3||-1.3|
Source: Wall Street Journal, MSCI.com, MarketWatch, Bloomberg
MTD returns: Oct 29, 2021-Nov 30, 2021
YTD returns: Dec 31, 2020-Nov 30, 2021
**in US dollars
Dubbed Omicron and labeled [[https://www.cnbc.com/2021/11/26/who-labels-newly-identified-covid-strain-as-omicron-says-its-a-variant-of-concern.html a variant of concern by the World Health Organization]], the just-named variant first spotted in South Africa sent shudders through global markets on Black Friday.
Of course, it is not the [[https://www.cdc.gov/coronavirus/2019-ncov/variants/variant-info.html first variant]] to trouble the world. Covid cases have spiked with the highly contagious Delta variant already.
The Alpha variant spread into the U.S. early in the year but is of less concern today. The Beta, Gamma, Epsilon, Eta, Lambda, Mu and other variants have not caused much concern among investors amid the growing use of vaccines and therapeutics.
This is critically important to the economy and investors, as these tools have been used in place of economically destructive lockdowns and social distancing restrictions.
It’s not that they eliminate all danger of infection completely. They don’t. But lockdowns and various restrictions had been the preferred tool for government officials.
That said, Omicron is a not-so-subtle reminder that the ever-changing pandemic remains a health threat. And the recent market volatility stems from worries over the new variant’s unknown impact on the global and U.S. economy.
That volatility appears to be brought on by its apparent ease of transmission and anxieties that [[https://www.reuters.com/business/healthcare-pharmaceuticals/moderna-ceo-says-vaccines-likely-less-effective-against-omicron-ft-2021-11-30/ current vaccines]] and [[https://www.wsj.com/articles/covid-19-antibody-drugs-are-challenged-by-omicron-preliminary-testing-indicates-11638270003 therapeutics]] may be less effective against Omicron. But early reports suggest [[https://www.cnbc.com/2021/11/29/omicron-covid-variant-symptoms-heres-what-we-know-so-far.html milder symptoms]].
However, I must stress that these are early reports, and little is known about the new variant. Perhaps, the latest volatility could subside if additional bad news isn’t forthcoming, or updates to vaccines and treatments prove to be effective.
Let me also add that FedSpeak at the end of November intensified selling.
“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases… perhaps a few months sooner,” Fed Chief Jerome Powell said November 30 before a Senate committee.
In early November, the Fed said it would begin tapering its $120 billion in monthly bond purchases by $15 billion per month in November and again in December. Economic conditions would dictate the pace in 2022.
Though inflation has been stubbornly high, the Fed has been slow to react. As we enter December, Powell has opened the door to a faster taper, which could advance the Fed’s timing of its first-rate hike.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based index.
The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index represents 23 developed market countries.
The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.
The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
Copyright © 2021 by Horsesmouth, LLC. All rights reserved. IMPORTANT NOTICE: This reprint is provided exclusively for use by the licensee, including for client education, and is subject to applicable copyright laws. Unauthorized use, reproduction, or distribution of this material is a violation of federal law and punishable by civil and criminal penalty. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties expressed or implied are hereby excluded.
R e-balancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional.
Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult a tax or legal advisor.
Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.Ðnvestors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.”
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional retirement account to a Roth retirement account is a taxable event A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.”