5 Unexpected Insights from Your Tax Return

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

Now is the ideal time to review your current financial situation and consider changes for the year ahead. Here are a few of the most common areas to consider.

1. Review Your Refund (or Tax Bill Owed)

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

If you find yourself with a large tax refund or if you significantly underpaid and were charged a penalty, you may want to take another look at your withholdings to see if you should have more or less withheld throughout the year.

In the case of retirees, you may also want to review your distributions from retirement accounts. You may have taxes withheld from those distributions automatically, and it’s important to confirm if the withholding percentage is adequate.

2. Understand Your Effective vs. Marginal Tax Rates

There’s often a misconception around tax rates and how they work. When we talk about tax rates, we often talk about the marginal tax rate, or the highest bracket into which income falls. However, because the U.S. has a progressive tax system and not all of your income will be taxed at your marginal tax rate, your effective tax rate may be much lower.

For example, if you’re a single filer making $100,000 annually, you have reached the 24% marginal tax bracket, but only a small percentage of your income is actually being taxed at that 24% rate. In 2022, the first $10,275 of your income will be taxed at the 10% rate; income above $10,275 up until $41,775 will be taxed at 12%; the next tier is a 22% rate up to $89,075 and so on. Only income above $89,075 will be taxed at your marginal rate of 24%. To calculate your effective rate, take your tax liability and divide by taxable income. 

Knowing these “break points” can help you make financial decisions. For example:

  • You may want to be aware of how much more income you could potentially earn without being bumped into a higher tax bracket.
  • If you are anticipating a lower-income year, you could consider doing a Roth IRA conversion to “fill up” your marginal tax bracket.  This would entail paying income tax now on the conversion amount, rather than paying tax on IRA distributions in retirement when you may be in a higher tax bracket.
  • Or, if you are anticipating a higher-income year, you could consider giving more to charity to increase your tax deductions in a year when you are at a higher marginal tax rate.

3. Plan for Standard vs. Itemized Deductions

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

If you weren’t able to itemize this year but want to maximize future planning opportunities, think about updating your charitable giving strategy. If you’re currently giving to charity but not itemizing, you’re not getting the direct tax benefit. You could consider using a donor-advised fund to “bunch” charitable donations into one tax year to help bring your itemized deductions over the standard deduction threshold to optimize the tax benefit from giving.

For example, if you give $1,000 to charity every year, but you don’t itemize your deductions, there is no added tax deduction for making that gift.  Instead, consider bunching your giving into one large contribution that you make to a charitable donor-advised fund. With a donor-advised fund, you receive a tax deduction in the year the gift is made, but you can donate the money to charities of your choosing at any point in the future.

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

4. Consider Gifting in Stock

When reviewing charitable contributions in Schedule A, make sure to always take a look at the breakout between cash and non-cash contributions. If you have appreciated securities, like stock, it may be more advantageous to gift securities rather than cash.

There are a couple notable benefits here. First, if you donate to a charity with stock, you’re both able to take a charitable deduction and avoid incurring capital gains taxes normally associated with selling stock. Furthermore, if you have a concentrated stock position, this can be an easy way to reduce your position in a tax-efficient way.

5.  Revisit Your Retirement Contributions

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

For example, retirees who continue to earn income through consulting opportunities can contribute to a SEP IRA.  If you’re a solo entrepreneur and hoping to max out your retirement contributions, you could consider setting up a solo 401(k), which operates similarly to the plan one 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 lesser-earning) spouse to contribute to an IRA for themselves under the Kay Bailey Hutchison Spousal IRA Limit. If filing jointly, this could allow you and your spouse’s combined contributions to be as much as $14,000.

There’s much to be learned from reviewing your tax strategies while it’s top of mind 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 Adviser, SVB Private

Julia Vanzler, CFP® CPWA® specializes in working with individuals and families to manage and protect their assets. She is committed to delivering individualized, fully integrated financial solutions that aim to solve personal challenges and provide security and peace of mind. As a senior private wealth adviser at SVB Private, Julia works closely with her colleagues and her clients’ external advisers to provide thoughtful advice and guidance on investments, retirement income, philanthropic, estate and tax planning.

Source: kiplinger.com

Dear Penny: Can I Get My Ex-Husband’s Social Security Before He’s Eligible?

Dear Penny,

I was married to a man for almost 19 years when he decided (unbeknownst to me) that he wanted a divorce. I felt that we had a happy marriage the majority of those years. We only had the occasional disagreement, as most marriages do. 

In fact, he didn’t tell me until after the divorce was finalized his reasons for leaving me. He is the father of our two children. It was very devastating for me as well as our children when he left, although he has tried to be a good dad since the divorce and is very involved in their lives. I am 10 years 8 months older than him and am now 60 years old. He has remarried twice in the nine years since our divorce.

I have known for a long time that I can collect Social Security benefits based on his employment, since it will be much higher than my own benefit. However, I didn’t realize until recently (and wasn’t told by my financial planner) that I can’t start collecting Social Security benefits until HE is at full retirement age and not when I am at full retirement age. That would mean I will be in my 70s.

Please tell me exactly when I can start collecting my Social Security benefits based off his income. And is it based off his income when he retires, or his income when we got divorced? Also, is it possible for me to collect Social Security from my own work record when I am at full retirement age and then switch to his benefits when he is at full retirement age?


Dear S.,

Let’s get the bad news out of the way first: You have to wait until your ex-husband is eligible for Social Security benefits to collect on his record, but you don’t have to wait until he’s reached full retirement age. For anyone born in 1960 or later, full retirement age is 67. That means you’d be eligible for spousal benefits when your ex is 62, not 67.

Of course, that doesn’t do you much good. You’d still be at least 72 by the time you could start spousal benefits.

You can’t take your own benefits and switch to your ex-husband’s benefit later on. That’s an option that’s only available if you were born before Jan. 2, 1954. (The same rule applies for people who want to start with a spousal benefit and then switch to their own benefit later.)

Social Security allows divorced spouse benefits because both spouses contribute economically to a marriage, even if one person earns a lot more. But unfortunately, the rules leave the lower-earning spouse in a bind if they’re significantly older.

I get that all of this is difficult to accept, especially given that you were blindsided by the end of your marriage. But you need to focus on how to maximize your own retirement benefits. Claiming your ex’s benefits simply isn’t viable.

Even though your ex-husband outearned you, don’t assume that you’d collect more if spousal benefits were a possibility. The maximum spousal benefit is 50% of the spouse’s full retirement age benefit — and that’s only for spouses and ex-spouses who wait until their own full retirement age. Spouses who start at age 62 only receive 32.5%.

When you take your own retirement benefits, you can earn 8% delayed retirement credits for each year you hold off past full retirement age until you’re 70. But you can’t earn delayed retirement credits with spousal benefits. You’d collect your maximum benefit at 67, your full retirement age.

Many people will actually get more money taking their own benefit instead of spousal benefits, even when the spouse was the much higher earner. As of April 2022, the average monthly spousal benefit was just $837, compared to $1,666 for retired workers.

Social Security bases benefits on 35 years’ worth of earnings. If you work less than 35 years, your income for the non-working years is entered as zero. The more years you can work, obviously, the bigger your benefit will be.

You’ll probably want to delay benefits for as long as possible, especially if you’re in good health. Starting Social Security at age 70 results in a benefit that’s about 77% higher compared to starting as soon as you’re eligible at 62.

In the meantime, focus on saving as much as possible for retirement. Since you’re over 50, you can contribute $7,000 to a Roth IRA in 2022. The limits for most workplace plans, like 401(k)s and 403(b)s are even higher. You can contribute up to $20,500 plus an extra $6,500 catch-up that’s allowed for people 50 and older.

I’m sorry that you’ve been dealt this most difficult hand. But focus on what you can control.

There’s still a lot you can do to secure the comfortable retirement you deserve.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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Source: thepennyhoarder.com