A A I I TA X G U I D E

A A I I J o u r n A l D E C E M B E R 2 0 2 1 5

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made to it reflect tax code revisions that impact how much

tax is owed.

The charitable deduction for those who itemize is a

good example. Married joint filers who take the standard

deduction can deduct up to $600 of cash donations made

to qualified charitable organizations in 2021. Single filers

and married individuals filing separate returns who do

not itemize can deduct to up $300 in 2021. A draft of the

2021 Form 1040 places this deduction after adjusted gross

income (AGI) is calculated.

In 2020, up to $300 of cash donations to qualified chari-

ties could be deducted by both joint and single filers. This

deduction appeared before AGI was calculated.

Put another way, the deduction reduced AGI last year,

but it will not reduce it this year. This seemingly subtle

difference could push some taxpayers into higher brack-

ets for determining things like how much of their Social

Security benefits are taxed or how much they will pay in

2023 Medicare Part B premiums. A line for determining

how large of a recovery rebate (aka stimulus check) you

might be owed in 2021 is also listed on the Form 1040. If

your 2021 income is lower than the 2019 or 2020 income

used to determine your eligibility earlier this year, you

can potentially claim additional stimulus money on your

tax return. If your income rose in 2021 or you otherwise

received more than you should have, you do not have to

pay back the difference.

The stimulus check does not count as income and is not

taxable.

The child tax credit for 2021 is $3,600 for each child

under age 6 and $3,000 for each child ages 6 to 17. The full

credit can be claimed by married joint filers with modified

adjusted gross income (MAGI) of up to $150,000, single fil-

ers with MAGI of up to $75,000 and heads of household

with MAGI of up to $112,500.

Advance child tax credit payments started being sent in

July and will end this month, December 2021, if not extended

by legislation. Taxpayers who did not opt out of receiving

the monthly advance payments and have higher MAGI

this year than last year may have to repay excess amounts

received. This would happen if your MAGI rose above one

of the phaseout thresholds. (A decline in MAGI could result

in a larger credit.) The adjustment will be made on your

2021 tax return. The IRS’ Advance Child Tax Credit Eligibil-

ity Assistant can help you determine what your payments

The Individual

Investor’s Guide to

Personal Tax Planning

2021

The tax rules this year are staying largely

unchanged, with modest ination adjustments.

BY AAII STAFF

Following the significant changes we’ve seen made

to the tax code over the past few years, this year’s changes

have been limited in scope. Another round of stimulus

checks was issued early this year, the child tax credit

was increased, advance child tax credits were sent out

monthly (for just 2021, so far) and cash charitable deduc-

tions can once again be taken by taxpayers who do not

itemize. Next year we will see larger inflation adjust-

ments made to both tax brackets and various line items

than this year.

The one asterisk is President Biden’s Build Back Bet-

ter proposal. The legislation was still being debated in

the House of Representatives as we went to press. The bill

could raise the current $10,000 cap for deducting state

and local taxes (SALT) and extend both the increased and

advance child tax credits. Taxes could potentially be raised

on the wealthiest Americans, though in what form and by

how much remains to be seen. Should the bill pass both

the House and the Senate and then be signed into law, we

will update this guide on our website at www.aaii.com/

guides/tax-guide.

Form 1040 is being slightly revised for the 2021 tax year.

Even though the more than 90% of taxpayers who file elec-

tronically may not directly fill out the form, the changes

AAII staff Charles Rotblut, CFA, Matthew

Bajkowski, Jean Henrich, Annie Prada and

Anine Sus contributed to this guide.

A special note of thanks goes out to Mark Luscombe,

a principal analyst at Wolters Kluwer Tax & Accounting,

for previous assistance in answering detailed questions

about the tax code. Sources of information used for this

year’s guide also include the Internal Revenue Service,

Healthcare.gov, Medicare, the Social Security Adminis-

tration, the Federal Register, The Kiplinger Tax Letter and

The New York Times.

6 A A I I J o u r n A l D E C E M B E R 2 0 2 1

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should have been: https://www.irs.gov/

credits-deductions/advance-child-tax-

credit-eligibility-assistant.

The dependent care credit was also

increased to $4,000 for one child and

$8,000 for two or more children for the

2021 tax year. The phaseout level for the

full credit starts at $125,000 for mar-

ried, joint filers.

The ability to deduct mortgage insur-

ance premiums was extended into 2021

by the Consolidated Appropriations Act

of 2021. It has yet to be extended into

2022 or beyond.

The reduced tax rates and expanded

tax brackets for individual taxpayers put

into place by the Tax Cuts and Jobs Act

(TCJA) are set to expire at the end of 2025.

It is possible that this expiration could be

addressed before the 2024 elections. Any

proposed change would likely require

bipartisan compromise in an environ-

ment that has largely lacked it.

If you worked remotely or resided in

a state other than your primary work/

residence state, you may owe state taxes.

Whether you do depends on how you

worked or resided in a different state.

If you owed more than expected or

received a larger-than-expected refund

for the 2020 tax year and haven’t

adjusted your withholding, consider

doing so. The IRS’ Tax Withholding

Estimator (www.irs.gov/individuals/irs-

withholding-calculator) can help

you run the numbers. Make note of

any changes in your income for this

year attributable to the coronavirus

pandemic.

Early statistics from CapGains-

Valet show 2021 not being friendly to

those holding mutual funds in taxable

accounts. As of November 12, 471 mutual

funds have announced estimated distri-

butions over 10% of net asset value. In

comparison, 137 and 154 mutual funds

announced distributions over 10% at

similar points in 2020 and 2021, respec-

tively. Mark Wilson, who runs the Cap-

GainsValet website, thinks we could see

the largest number of funds with capital

gains distributions higher than 10% in

at least eight years.

TABLE 1

An Overview of Tax Changes in the Coming Years

2021 2022 2023*

Long-Term Capital Gains Rate

Maximum Taxable Income Breakpoints for Married Filing Jointly

0% Below $80,800 Below $83,350 Below $83,350

15% $80,800–$501,600** $83,350–$517,200** $83,350–$517,200**

20% Above $501,600** Above $517,200** Above $517,200**

Qualied Dividends Rate

Maximum Taxable Income Breakpoints for Married Filing Jointly

0% Below $80,800 Below $83,350 Below $83,350**

15% $80,800–$501,600** $83,350–$517,200** $83,350–$517,200**

20% Above $501,600 Above $517,200** Above $517,200**

2021 2022 2023*

Marginal Income Tax Rates

First Bracket 10% 10% 10%

Second Bracket 12% 12% 12%

Third Bracket 22% 22% 22%

Fourth Bracket 24% 24% 24%

Fifth Bracket 32% 32% 32%

Sixth Bracket 35% 35% 35%

Top Bracket 37% 37% 37%

Child Tax Credit

$3,600/$3,000 $2,000 $2,000

Standard Deduction

Married Filing Jointly $25,100 $25,900 $25,900

Single $12,550 $12,950 $12,950

Personal Exemption Phaseouts

— — —

Limitation on Itemized Deductions

— — —

AMT Exemption

Single $73,600 $75,900 $75,900

Married Filing Joint $114,600 $118,100 $118,100

Head of Household $73,600 $75,900 $75,900

Estate Tax

Exemption $11.70 mil $12.06 mil $12.06 mil

Maximum Rate 40% 40% 40%

*Subject to change based on inflation.

**3.8% net investment income tax (NII) surtax applies when MAGI is above $250,000/$200,000.

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These distributions are taxable for shares held in a

taxable account—even if you don’t sell your shares of the

mutual fund issuing the distribution or choose to have the

distributions reinvested. You can find the tax-cost ratio—

the percentage of returns given up to taxes—for a mutual

fund or an exchange-traded fund (ETF) on our mutual fund

and ETF evaluator pages. To access the evaluator, just type

a fund’s name or ticker symbol into the search box located

at the top of any page on AAII.com.

The TCJA mandated the use of the chained consumer

price index (CPI) for measuring inflation. The impact of

using this measure can be seen in the inflation adjust-

ments made for 2022 tax brackets and thresholds. While

the traditional CPI reflected a 12-month increase of 6.2%

as of October 2021, the tax brackets and many line items

will only increase by 3.1% in 2022. This is because the

chained CPI is a slower measure than the traditional CPI.

The actual impact will depend on how close you are to vari-

ous thresholds.

Revised life expectancy tables used to calculate

required minimum distributions (RMDs) will go into effect

in 2022. They assume longer life-spans and will lead to

modestly smaller RMDs. Many retirees may not notice

a change, however. This is because RMDs are calculated

based on account balances. To the extent that a retiree’s

balance increased for an account subject to the RMD rules,

the amount of the mandatory distribution will increase as

well.

Those of you who were affected by hurricanes, wild-

fires, tornados, flooding or drought may be eligible for

some form of tax relief. The IRS has a dedicated section on

its website with links to specific pages for each disaster:

www.irs.gov/newsroom/tax-relief-in-disaster-situations.

No matter how the tax laws (and tax forms) evolve in

the future, one thing is constant: You will still have to pay

taxes. Even with the simplifications made by the TCJA, the

tax code is complex, hence the need for tax guides. As has

been the case in years past, our tax guide provides an over-

view of the tax rates and deductions likely to impact the

majority of AAII members. Since there are many details,

loopholes and pitfalls within the tax code, it is impossible

for this guide to provide enough details to cover specific

tax situations. If you have questions, consult a tax pro-

fessional. It is your tax return, and the IRS will hold you

responsible for any errors made on it.

Estimate Your Taxes on AAII.com

You can estimate your 2021 and 2022 tax liabilities on

our Tax Forecasting Worksheet. This downloadable Excel

spreadsheet will calculate the results based on the data you

enter and can be saved for your records. See page 18.

What’s New?

The TCJA’s revised marginal tax brackets remain in

effect. They are 10%, 12%, 22%, 24%, 32%, 35% and 37%.

These reduced rates are presently set to expire after 2025.

As discussed, Form 1040 has undergone further revi-

sion. A draft of the 2021 form shows the $600/$300 chari-

table deductions for those who take the standard deduc-

tion as not reducing AGI. Taxpayers will also now be asked

if they received, sold, exchanged or otherwise disposed

of any cryptocurrency. The currency may be virtual but

the taxes—and the penalties from not reporting gains on

cryptocurrency sales—are real.

The cap on deducting cash charitable donations for

those who itemize has been suspended again for 2021.

Cash donations up to one’s contribution base (typically

AGI) can be deducted. The 60% of AGI cap will return in

2022 and will be in effect through 2025.

The limit on IRA contributions will be unchanged in

2022. It was last raised in 2019. A total of up to $6,000 can

be contributed to a traditional and/or Roth IRA for 2021

and again in 2022. The additional catch-up contribution

limit is not indexed to inflation and remains at $1,000.

The SECURE Act removed the age limit on making IRA

contributions, but you must have earned income to make

a contribution.

Allowable contributions to a 401(k) plan and similar

types of employer-sponsored retirement accounts will

increase to $20,500 in 2022 from $19,500 in 2021. The

catch-up contribution will stay at $6,500 in 2022 after

being last raised in 2020. The total allowable amount for

qualifying workers age 50 or older will be $27,000 in 2022.

The deduction for state and local taxes remains capped

at $10,000. The limit applies to state and local income,

property and sales taxes. The TCJA put this limit into effect

in 2018 and it is not indexed to inflation. It will remain at

this level through 2025, barring a legislative change. Rais-

ing the cap has been discussed as part of the negotiations

for the Build Back Better legislation, but no change has

been made as of press time.

The Social Security tax is 6.2% for employees and 12.4%

for those working in self-employed positions on the first

$142,800 of wages. In 2022, the cap on maximum taxable

earnings will rise to $147,000, an increase of 2.9%. Retirees

younger than full retirement age who have claimed Social

Security benefits can earn up to $18,960 without benefits

being withheld. This limit will rise to $19,560 in 2022.

The alternative minimum tax (AMT) exemption is

$114,600 for married couples filing jointly and $73,600

for single filers in 2021. In 2022, the exemption will rise to

$118,100 and $75,900, respectively. The phaseout levels for

2021 are $1,047,200 for married filing jointly and $523,600

for singles. They will increase to $1,079,800 and $539,900,

8 A A I I J o u r n A l D E C E M B E R 2 0 2 1

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The American Rescue Plan Act of 2021 raised the child

tax credit to $3,600 for children under the age of six and

$3,000 for children between age 6 and 17 in 2021. It is

phased out for joint filers with modified adjusted gross

income (MAGI) above $150,000 and single filers with

MAGI above $75,000. The credit is fully refundable in

2021. Without new legislation being passed, the $2,000

maximum child tax credit will return in 2022. It was

phased out for married couples filing jointly with MAGI

above $400,000 ($200,000 for all other filers). Both the

credit and the phaseout amounts are in effect for 2022

through 2025 and are not indexed to inflation. The credit

is refundable up to $1,500 in 2022. The refundable portion

only applies when the full $2,000 credit cannot be used to

offset the taxpayer’s tax liability. Qualifying children must

have a Social Security number for the $2,000 credit to be

claimed. See IRS Publication 972 for more information.

The rate at which your long-term capital gains and divi-

dends will be taxed depends on your taxable income and

not your marginal tax bracket. Under the TCJA, married

respectively, in 2022. The TCJA’s higher levels are in effect

through 2025 and are indexed to inflation.

The TCJA eliminated the personal exemption for the

period of 2018 through 2025.

Married couples filing jointly can claim a standard

deduction of $25,100, and single filers can claim a standard

deduction of $12,550 on their 2021 tax returns. In 2022,

the standard deduction will rise to $25,900 and $12,950

for married and single filers, respectively. The additional

standard deduction for those who are aged or blind and are

married or a qualifying widow will increase from $1,350

in 2021 to $1,400 in 2022. It will rise from $1,700 in 2021

to $1,750 in 2022 for those who are also single and not a

qualifying widow. The standard deduction was raised con-

siderably by the TCJA with the adjustment for the so-called

“marriage penalty” maintained. The higher level simpli-

fies reporting for some taxpayers by making it more dif-

ficult to claim individual deductions. Depending on family

size, it may or may not make up for the loss of the personal

exemption.

Health Care Reform’s Impact on Taxes

The tax impact of the Affordable Care Act includes sur-

charges, higher limits on medical expense deductions and

changes to flexible savings account contributions and carry-

overs. All of these will remain in effect unless repealed by new

legislation.

A 0.9% additional Medicare tax applies to wages, com-

pensation and self-employment income above $250,000

for married persons filing jointly and qualifying widow(er)s,

$200,000 for single persons and heads of household and

$125,000 for those who are married but filing separately.

The tax applies to wages that are subject to the Medicare tax

and does not depend on adjusted gross income. Should the

additional tax not be withheld from wages (a situation that

could occur for dual-income couples or individuals working

more than one job), the tax could be subject to a penalty if

not paid with estimated taxes or through additional withhold-

ings (you can request that your employer increase the income

tax withholding on your W-4). More information about the

additional Medicare tax can be found on the IRS website at

www.irs.gov/businesses/small-businesses-self-employed/

questions-and-answers-for-the-additional-medicare-tax.

A 3.8% surtax on net investment income (NII) applies to

the lesser of NII or modified adjusted gross income (MAGI)

exceeding $250,000 for married persons filing jointly and

qualifying widow(er)s, $200,000 for single persons and heads

of household and $125,000 for those who are married but fil-

ing separately. (These thresholds are not indexed to inflation.)

Investment income subject to the tax includes, but is not limited

to, taxable interest, dividends, non-qualified annuities, rents

and royalties, capital gains and passive income from partner-

ships. Capital gains from the sale of one’s primary residence

are subject to the tax to the extent that the income exceeds the

applicable home sale exclusion ($500,000 for joint filers and

$250,000 for single filers). Excluded are tax-exempt interest

(e.g., municipal bond interest payments), distributions from

individual retirement accounts (IRAs) and distributions from

qualified retirement plans [e.g., 401(k) plans]. The IRS has

answers to common NII surtax questions at www.irs.gov/uac/

Newsroom/Net-Investment-Income-Tax-FAQs.

The 2021 Appropriations Act made the 7.5% of adjusted

gross income floor for deducting medical expenses perma-

nent. The floor applies to all individuals regardless of age.

Flexible savings arrangement contributions for 2021 are

limited to $2,750 annually. This limit is indexed to inflation

and will increase to $2,850 in 2022. At the election of their

plan sponsors, employees can either carry over unused bal-

ances into the next plan year or take a grace period of up to

two and a half months. The carryover amount is indexed to

inflation and will increase from $550 in 2021 to $570 in 2022.

As part of the coronavirus pandemic relief included in the

2021 Appropriations Act, employers can alternatively opt to

give employees up to 12 months to spend any FSA or depen-

dent care funds left over from 2021.

A provision included in the TCJA essentially eliminates the

individual mandate to have qualifying health insurance start-

ing in 2019. The former penalty no longer exists but could be

reinstated by new legislation.

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self-employment income above $250,000 for married per-

sons filing jointly and $200,000 for single persons for both

2021 and 2022. More information about these taxes can be

found in the box on page 8.

Medical Expenses

The 2021 Appropriations Act made the 7.5% of adjusted

gross income floor for deducting medical expenses perma-

nent. The 7.5% floor will remain in effect until changed by

legislation.

Medical insurance premiums for the self-employed

are deductible and can be used to reduce adjusted gross

income on Form 1040.

Workers participating in flexible savings accounts

(FSAs) can carry over up to $550 ($570 beginning in 2022)

of unused amounts into the next plan year if their plan

sponsor allows them to. Plan sponsors have the choice of

either offering employees the ability to carry over up to

$550 ($570 beginning in 2022) or allowing employees a

grace period of up to two and a half months. Dependent

care is also eligible for the grace period option, but not

the carryover option. As part of the coronavirus pandemic

relief included in the 2021 appropriations act, employers

can alternatively opt to give employees up to 12 months

to spend any FSA or dependent care funds left over from

2021.

Contributions to a health savings account (HSA) are

allowed for those covered by a high-deductible health

care plan (HDHP) and not enrolled in Medicare. The mini-

mum annual deductible for self-only coverage is $1,400;

it is $2,800 for family coverage. These amounts will stay

unchanged in 2022.

The maximum limits for annual deductible and other

out-of-pocket expenses in 2021 are $7,000 and $14,000,

respectively. They will rise to $7,050 and $14,100, respec-

tively, in 2022.

HSA contributions cannot exceed $3,600 for indi-

vidual coverage and $7,200 for family HDHP coverage in

2021. In 2022, the maximum contributions will be $3,650

and $7,300 for individual and family coverage, respec-

tively. See “Health Savings Accounts” in the July 2016 AAII

Journal for more information about these accounts.

Ination Adjustments for 2022

As previously stated, many deductions, exemptions and

limits that are indexed to inflation under current tax law

either will or are projected to increase by approximately 3.1%.

couples filing joint returns with taxable income below

$80,800 ($40,400 if single) will not owe taxes on capi-

tal gains or qualified dividends. Couples with incomes of

$80,800 to $501,600 ($40,400 to $445,850 for singles) will

pay a 15% tax rate. Filers with income above those levels

will pay a 20% tax on long-term capital gains and divi-

dends. These levels are indexed to inflation and will rise

in 2022: 10% tax up to $83,350/$41,675 for married and

single filers, respectively; 15% up to $517,200/$459,750 for

married and single filers; and 20% for those with taxable

income above those levels.

To be eligible for the long-term capital gains rate, you

must have owned the eligible asset for at least 12 months.

The discounted qualified dividend tax rate applies to stock

dividends and requires a holding period of at least 61 con-

secutive days during a 120-day period beginning 60 days

before the ex-dividend date. (There is no capital gains

tax or dividend taxes for securities held within a retire-

ment account, such as an IRA. See Robert Carlson’s article,

“Do’s and Don’ts of IRA Investing,” in the March 2010 AAII

Journal for investments that can cause an unexpected tax

problem; the article is available at AAII.com.)

Cryptocurrency is treated as property for tax purposes.

According to the IRS, “A taxpayer generally realizes capital

gain or loss on the sale or exchange of virtual currency.”

Collectibles, which include gold coins and bars, are

taxed at a maximum 28% rate. Funds investing in precious

metals, including ETFs, may also be subject to the collect-

ibles tax rate. Check with the fund company if you have

questions about the tax status.

Short-term capital gains are taxed as ordinary income.

Married couples filing joint returns with net investment

income (NII) and modified adjusted gross incomes (MAGI)

above $250,000 and single filers with NII and MAGI above

$200,000 also must pay the additional 3.8% NII surtax on

capital gains and dividends. Collectibles are also eligible

for the 3.8% surcharge as well. The $250,000/$200,000

thresholds are not indexed to inflation and will remain the

same in 2022.

The Affordable Care Act’s Impact

The shared responsibility mandate of the Affordable

Care Act that required adults and children to have mini-

mum essential health coverage expired on December 31,

2018. Since the start of 2019, there is no tax penalty for not

having qualifying health insurance. Visit www.irs.gov/aca

and www.healthcare.gov for more information. The latter

website also has a calculator for determining whether or

not a person or family qualifies for Medicaid or subsidies

for purchasing insurance.

Though the mandate has been repealed, the NII and the

additional Medicare tax remain in effect. The 0.9% addi-

tional Medicare tax applies to wages, compensation and

For a complete tax guide to the buying and selling of

your personal investments, go to our Personal Invest-

ments 2021 Tax Guide in the online version of this

article.

10 A A I I J o u r n A l D E C E M B E R 2 0 2 1

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bought a stock, fund, option or bond before the aforemen-

tioned dates, your broker is not required to report the cost

basis.

Certain debt instruments, particularly those that are

more complex than traditional bonds, purchased after Jan-

uary 1, 2016, fall under the cost basis reporting rules. These

include variable-rate bonds (including inflation-adjusted

bonds), stripped bonds and convertible bonds. Excluded

from this rule are debt instruments where the principal is

subject to acceleration (e.g., mortgage-backed securities)

and debt instruments with a fixed maturity date not more

than one year from their date of issue.

If you sold a capital asset in 2021, you will need to fill

out Form 8949. See the special write-up in the “Cost Basis”

box for details on the reporting rules.

Some items will increase more on a percentage basis

because of how adjustments are incremented. The exclu-

sion for gifts exemption will rise 6.7% from $15,000 in

2021 to $16,000 in 2022.

Pay attention to the details because the inflation adjust-

ments are not being made uniformly. This can be particu-

larly apparent when adjustments are made in round num-

bers. Plus, not all items are indexed to inflation.

Capital Gains Reporting

Brokers are required to report the cost basis for stocks

purchased after January 1, 2011; mutual fund, ETF and divi-

dend reinvestment program (DRP) shares purchased after

January 1, 2012; and options and traditional bonds bought

and sold by their clients on or after January 1, 2014. If you

Cost Basis Reporting for Stocks, Bonds, Funds and Options

Brokers are required to report cost basis for stocks pur-

chased on or after January 1, 2011; mutual fund, exchange-

traded fund (ETF) and dividend reinvestment plan (DRP) shares

purchased on or after January 1, 2012; and options and tradi-

tional bonds purchased on or after January 1, 2014. Brokers

are also required to state whether any gain or loss on a sale is

short-term or long-term. The rules do not apply to securities

and funds purchased before the aforementioned dates.

Traditional bonds and debt instruments purchased on or

after January 1, 2014, are subject to the reporting rules. The

cost basis of and the proceeds for variable-rate bonds, inflation-

indexed bonds, convertible bonds, stripped bonds and other

complex debt instruments purchased on or after January 1,

2016, fall under the same reporting rules. Excluded are debt

instruments where the principal is subject to acceleration (e.g.,

mortgage-backed securities) and debt instruments with a fixed-

maturity date not more than one year from their date of issue.

Investors have the option of notifying their broker as to how

market discounts or interest are treated. Brokers will follow a

default method of amortizing bond premiums if not otherwise

notified. The rules are complex and we suggest speaking with

your brokerage firm about the application of the rules, as well

as with a tax professional about the best tax treatment to use.

The type of option owned alters how cost basis is reported.

Index options may be subject to different cost basis reporting

rules. Again, we suggest speaking with your broker if you have

questions about how the cost basis is reported.

A default accounting methodology known as first-in, first-

out (FIFO) is used when the purchase of securities (other than

a mutual fund or DRP shares) involves more than one transac-

tion. The FIFO method treats the first shares purchased (“first

in”) as also being the first shares sold (“first out”). Depending

on how the stock has performed, this treatment can result in

a larger tax bill (the shares appreciated in value) or a bigger

capital loss (the shares fell in value).

For mutual funds and DRP stocks, the adjusted basis must

be reported in accordance with the broker’s default method—

average cost basis—unless you specify otherwise. As the

name implies, the average purchase price for your shares,

regardless of when they are acquired, is used to determine the

cost basis. You can specify FIFO instead of average cost basis.

Another option is specific identification. The specific identifica-

tion method allows you to choose the specific shares that are

sold. This treatment can also result in a larger or a smaller tax

bill, depending on how the fund has performed relative to the

purchase price of the selected shares. You may be able to use

other methods such as highest-in, first-out (HIFO) or last-in,

first-out (LIFO). Contact your broker, fund family or DRP pro-

gram to determine what their default methodology is and what

choices you have for selecting methodologies.

If you want your broker or fund family to use a specific

methodology other than their default methodology (e.g., FIFO

for stocks or average cost for mutual funds), you must notify

them. In order to do this, you must provide written instructions

to your broker or fund administrator detailing your intentions

before the order is executed, not afterward.

Dustin Stamper at Grant Thorton’s National Tax Office

emphasized the importance of providing these instructions in

writing. If you give your broker or fund family specific instruc-

tions and they report a different methodology to the IRS, the

only way you can dispute what is on Form 1099-B is to provide

a dated copy of your instructions. Stamper said that investors

will not be able to retroactively determine which shares were

sold; they must provide written instructions at or before the

time the shares are sold.

A A I I J o u r n A l D E C E M B E R 2 0 2 1 11

A A I I . C O M / J O U R N A L

federal tax purposes if they were married in a U.S. or a

foreign jurisdiction whose laws authorize the marriage

of individuals of the same sex. As such, same-sex spouses

must file using either married filing separately or married

filing jointly status (certain exceptions apply).

Those in common-law marriages are treated as being

married for federal tax purposes if they are living together

in a common law marriage recognized in the state where

they now live or in the state where the common law mar-

riage began.

Couples in domestic partnerships, civil unions or other

similar formal relationships recognized but not denomi-

nated as marriage under state law are not considered to be

married for federal tax purposes.

Effective January 1, 2019, divorced spouses making ali-

mony and separate maintenance payments can no longer

deduct them, while the payee spouse no longer will report

the payments as income. This change applies to divorces

Tax Software, Books and

Guides

If you use a software program (e.g.,

TurboTax), a book (e.g., “J.K. Lasser’s Your

Income Tax 2022”) or a related aid, check

for updates before filing. Doing so will

help to ensure that you are using the most

up-to-date forms and information.

Specic Tax Guidelines

Part of the complexity of the tax code

is determining how taxes will be affected

by certain situations. This section gives

information on scenarios that poten-

tially may be experienced by many indi-

vidual investors.

Medicare Part B

The rule of thumb for how taxable

income determines Medicare Part B pre-

miums is that your modified adjusted

gross income from two years prior will

determine your premiums for the cur-

rent tax year (e.g., 2022 premiums will

be determined by 2020 income). See the

box to the right for information about

2022 premiums.

Marriage, Widowhood and Divorce

Under the tax code, a couple is con-

sidered married for the whole year if, on

the last day of the tax year, both people

are married and living together, living

together in a recognized common law marriage, married

and living apart without being legally separated under a

decree of divorce or separate maintenance or separated

under an interlocutory (not final) decree of divorce.

Widow(er)s are considered married for the whole year

in which their spouse died and can file a joint return with

their deceased spouse. (If there is a dependent child, other

filing statuses may be preferable.) For widow(er)s who

remarry before the end of the same tax year, a joint return

can be filed with the new spouse. The deceased spouse’s

filing status would be married filing separately in this case.

A person’s filing status may be single if they were wid-

owed before the start of the calendar year and did not

remarry before the end of the calendar year.

A person who becomes divorced under a final decree by

the last day of the year is considered to be unmarried for

the whole year.

Same-sex couples are treated as being married for

Income, Medicare Part B and Social Security

Percent of

Combined Income SS Benefits Taxed

Below $25,000 Single & Head of Household 0%

Below $32,000 Married Filing Jointly

$25,000 to $34,000 Single & Head of Household up to 50%

$32,000 to $44,000 Married Filing Jointly

Above $34,000 Single & Head of Household up to 85%

Above $44,000 Married Filing Jointly of benefits + other income

The premiums for Medicare Part B are determined by the amount of modified

adjusted gross income (MAGI) reported. MAGI is adjusted gross income plus

tax-exempt interest (e.g., interest from municipal bonds). Adjusted gross income

(AGI) can be found on IRS Form 1040. AGI includes the taxable portion of Social

Security benefits plus taxable distributions from retirement accounts such as

required minimum distributions (RMDs).

Medicare Part B premiums are determined by MAGI from two years prior.

In 2022, the standard Medicare Part B premium will be $170.10 for indi-

viduals filing married joint returns with 2020 household MAGI of $182,000 or

less. The monthly premium for 2022 rises to $544.30 for 2020 MAGI above

$340,000 but less than $750,000. Couples with MAGI of $750,000 or more will

pay $578.30 per month. Individuals filing as singles with 2020 MAGI of $91,000

or less will pay the standard premium of $170.10. Premiums rise to $544.30 for

singles with 2020 MAGI of $170,000 up to $500,000 and top out at $578.30 for

MAGI of $500,000 or higher. The premiums for various income levels can be

found at www.medicare.gov (click on “Your Medicare Costs”).

The calculation for how much of your Social Security benefits are taxed is

based on combined income for the current tax year. The Social Security Admin-

istration defines combined income as: MAGI + tax-exempt interest + one half of

your Social Security benefits. The amount of benefits subject to taxation for the

2021 tax year is determined by your 2021 combined income. The table below

shows how much of Social Security benefits are taxed.

12 A A I I J o u r n A l D E C E M B E R 2 0 2 1

A A I I . C O M / J O U R N A L

are given to the plan administrator in advance of the distri-

bution. See IRS Notice 2014-54 for more information and

examples of various scenarios.

The IRS’ Rollover Chart shows the types of retirement

savings accounts that funds can be rolled over from and

into a different type of retirement savings account. The

chart was recreated in the July 2016 AAII Journal (“IRA Roll-

over Chart: Rules Regarding Rollovers and Conversions”).

Be Vigilant About Tax Scams

The IRS continues to warn about tax scams. One newer

scam is tied to the stimulus payments. Prospective victims

are told they have received a direct deposit from a corona-

virus pandemic fund and are asked to disclose their bank

account information. The IRS is asking those who receive

such a message to send a photo of it along with the caller ID

and their phone number to phishing@irs.gov.

An ongoing common scam is a phone call requesting

immediate payment, commonly via prepaid debit cards

and/or a money wire. The fraudster will often threaten a

lawsuit, to call the police or involve federal authorities.

Hang up if you receive such a call even if your caller ID sug-

gests the phone number is from emergency services or a

law enforcement agency; the IRS never initiates contact

via a phone call or an email. If the IRS wants to contact you

about a tax matter, you will receive a physical letter sent

through the U.S. postal service.

Always restrict access to your Social Security number,

monitor your credit reports regularly, consider freezing

your credit report and use antivirus and firewall software

on your computer. Filing your tax return as early as is rea-

sonably possible can also help. For additional protection,

consider signing up for an Identity Protection PIN at www.

irs.gov/ippin. The IRS expanded this program to all taxpay-

ers in January 2021. Those in their retirement years should

be especially on guard, as the fraudsters are targeting your

demographic group. See the box on page 26 for more infor-

mation on how to protect yourself against fraud attempts.

Useful Tax Numbers

Here is a list of the tax rates, deductions, exemptions,

credits and other related items that may apply to your 2021

and 2022 taxes. These numbers reflect the changes made

by the American Taxpayer Relief Act of 2012 (ATRA), the

2017 TCJA, the American Rescue Plan Act of 2021, the Con-

solidated Appropriations Act of 2021 and the 2022 adjust-

ments released by the IRS as of November 10, 2021.

Standard Deduction

For 2021, the standard deduction is $25,100 for married

and legal separations executed after December 31, 2018,

and to previously executed agreements modified after

December 31, 2018, that expressly state that the tax law

change applies to the modification.

Money Market Funds With Floating NAVs

The U.S. Securities and Exchange Commission

(SEC) requires some money market funds, particularly

institutional prime money market funds and tax-free

institutional money market funds, to use floating net asset

values (NAVs). This means that their NAVs are not pegged

to $1 per share, but rather can move above or below that

benchmark.

The IRS responded to the SEC’s ruling by saying “No

gain or loss is determined for any particular redemption of

a taxpayer’s shares in a floating-NAV money market fund.

Without a determination of loss, a particular redemption

does not implicate the wash-sale rules.” The wash-sale

rules disallow a loss being claimed for tax purposes when

an investment is sold and a substantially identical invest-

ment is purchased within 30 days of the sale.

IRA Rollovers

IRA rollovers are restricted to one per person per

year. The limitation does not apply to trustee-to-trustee

transfers, meaning you can move funds from broker to

broker as many times as you would like. The key is that the

funds are transferred directly from one broker to another

without the assets being distributed to you. A check pay-

able to you instead of the receiving custodian would trig-

ger the 12-month rule.

Rollovers to or from a qualified plan [e.g., a 401(k) plan]

are excluded from the rule. Roth IRA conversions are not

subject to the one-year limitation and the IRS will disre-

gard them in terms of applying the one-rollover-per-year

limitation to other rollovers. Moving funds between Roth

IRAs would, however, trigger the one-year waiting period

if a check is made payable to you. (Roth IRA recharacteriza-

tions, which undid Roth IRA conversions, were banned by

the TCJA effective at the start of 2018.)

There is a 60-day deadline for completing a rollover.

Waivers to the deadline will be allowed if certain condi-

tions are met, including, but not limited to, an error by the

financial institution making or receiving the contribution,

a misplaced distribution check, severe damage to the tax-

payer’s principal residence and serious illness. Written

certification to a plan administrator or IRA trustee must be

submitted by the taxpayer within 30 days after being able

to make the contribution to take advantage of the waiver.

See IRS Rev. Proc. 2016-47 for more information.

Pretax and aftertax contributions from defined-

contribution plans [e.g., 401(k), 403(b) and 457(b) plans]

can be assigned to different accounts as long as directions

A A I I J o u r n A l D E C E M B E R 2 0 2 1 13

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credit is equivalent to 50%, 20% or 10% of retirement plan,

IRA or Achieving a Better Life Experience (ABLE) account

contributions totaling no more than $4,000 for married fil-

ing jointly, $2,000 for single filers. While the income thresh-

olds are indexed to inflation, the credit itself is not.

Qualied Plan Contributions

In 2021, the maximum annual contribution for quali-

fied plans, including SEP and Keogh plans, is $58,000 or

25% of your compensation, whichever is less; in 2022, the

maximum contribution will rise to $61,000 or 25% of your

compensation, whichever is less.

Estate and Gift Tax Limits

The estate tax exemption is both portable and indexed

to inflation. The exemption is $11.70 million in 2021. The

exemption will rise in 2022 to $12.06 million. The basic

exclusion amount will remain at the higher level through

2025, though increasing by the chained CPI, a slower

inflation measure. This is a per-spouse exclusion and it is

portable, meaning that if one spouse dies, the surviving

spouse can claim the deceased’s exclusion, resulting in a

total effective exclusion of $23.4 million in 2021 and $24.12

million in 2022.

The large figures will prevent most families from hav-

ing to pay estate taxes.

The maximum estate tax rate is 40%. The step-up basis

rule applies when an inherited asset is sold: The capital

gain resulting from the sale is calculated as the difference

between the proceeds at the time of the sale transaction

and the value of the assets at the time of the inheritance.

Executors have to report the fair value of the property

included in the gross estate to both the IRS and to the heirs.

Beneficiaries claiming a basis for inherited property above

the reported value may be subject to a 20% penalty.

The annual gift tax exclusion in 2021 is $15,000 and

$30,000 for consenting couples. (The IRS says “you prob-

ably must file Form 709” for gifts exceeding these lim-

its.) These limits are indexed to inflation and will rise to

$16,000 and $32,000, respectively, in 2022.

Required Minimum Distributions (RMDs)

The SECURE Act raised the age for taking mandatory

distributions from retirement accounts. Distributions are

mandatory from most retirement accounts by December

31 for those who are age 72 or older (70½ or older if born

before July 1, 1949). A person who turned 72 in 2021 can

wait until April 1, 2022, to take their first RMD but must

take their second one no later than December 31, 2022.

Accounts subject to RMDs include 401(k) plans, 403(b)

plans, 457(b) plans, traditional IRAs, SEP IRAs, SARSEP

IRAs, SIMPLE IRAs and Roth 401(k) plans. RMDs from

couples filing a joint return, $12,550 for those who are

single or married filing separate returns and $18,800 for

heads of household.

For 2022, the standard deduction will increase to

$25,900 for married couples filing a joint return, $12,950

for those who are single or married filing separate returns

and $19,400 for heads of household. The now higher

standard deduction is adjusted for inflation (in $50 incre-

ments) but will revert back to pre-TCJA levels at the end of

2025 if the legislation is not renewed.

The additional standard deduction for the elderly and

the blind who are married will increase to $1,400 in 2022

from $1,350 in 2021. For single taxpayers who are elderly

or blind and not a surviving spouse, the additional stan-

dard deduction will increase to $1,750 in 2022 from $1,700

in 2021.

Personal Exemptions

The TCJA suspended the personal exemption for the

years of 2018 through 2025.

Individual Retirement Accounts and 401(k) Plans

The maximum allowed IRA contribution for 2021 is

$6,000 ($7,000 for individuals age 50 or older). The con-

tribution limits will be unchanged in 2022 even though

they are indexed to inflation. The additional catch-up

contribution limit of $1,000 is not indexed to inflation. The

contributions can be fully deducted for modified adjusted

gross incomes (MAGI) below $105,000 and $66,000 for

married filing joint and single household returns, respec-

tively, for the 2021 tax year. The 2021 exemption is $198,000

for a person filing a married joint return who is not cov-

ered by a workplace retirement plan but whose spouse is.

In 2022, the phaseout levels for deducting contributions

will increase to $109,000 for married filing jointly and

$68,000 for singles. It will be $204,000 for those married

filing a joint return not covered by a workplace retirement

plan but whose spouse is.

In 2021, the maximum annual contribution limit to a

401(k) plan or similar type of defined-contribution plan is

$19,500 ($26,000 if you are age 50 or over). The maximum

contribution limit will rise to $20,500 and the catch-up

contribution will remain at $6,500 in 2022.

In 2021, the maximum annual contribution for SIMPLE

(savings incentive match plan for employees) plans is

$13,500 (those age 50 or over can make a maximum catch-

up contribution of $3,000). The contribution limit will rise

to $14,000 (plus the $3,000 catch-up) in 2022.

Married couples with adjusted gross incomes (AGI)

below $66,000 and singles with AGI below $33,000 in 2021

can qualify for the Saver’s Credit. Those limits are indexed to

inflation and will rise to $68,000 and $34,000 in 2022. The

14 A A I I J o u r n A l D E C E M B E R 2 0 2 1

A A I I . C O M / J O U R N A L

(continued on page 17)

defined-contribution plans, such as 401(k) plans, can be

postponed beyond age 72 for those who are still working,

contributing to a defined-contribution plan and own less

than 5% of the company. Roth IRA plans are exempt from

the RMD rules while the owner is alive.

The CARES Act suspended RMDs for 2020 only. RMDs

restarted in 2021.

According to the IRS, “Generally, an RMD is calculated

for each account by dividing the prior December 31st bal-

ance of that IRA or retirement plan account by a life expec-

tancy factor that the IRS publishes in tables in Publication

590-B, Distributions From Individual Retirement Arrange-

ments (IRAs).”

Child Tax Credit

The child tax credit for 2021 is $3,600 for each child

under age 6 and $3,000 for each child ages 6 to 17. The

credit was also made fully refundable in 2021. The child

tax credit will revert back to the maximum of $2,000 set

by TCJA in 2022 and through 2025 without new legislation

being passed. The refundable portion is indexed to infla-

tion and will be at $1,500 in 2022.

Kiddie Tax

The “kiddie tax” applies to children up to age 18 and

could apply to children up to age 23—depending on how

much earned income they have and whether or not they

are full-time students.

Under the kiddie tax rules, children with 2021 or 2022

investment income above a certain amount may have part

or all of their investment income taxed at their or their

parent’s tax rates, whichever is higher. (The SECURE Act

repealed the provision in the TCJA pegging the kiddie tax

to the trust and estate tax rates. The change was retroactive

to 2018.)

The kiddie tax applies if the child is age 17 or younger

by the end of the year. In 2021, the kiddie tax will apply if

the child’s total investment income exceeds $2,200. The

exemption is indexed to inflation and will increase to

$2,300 in 2022.

In addition, the kiddie tax can apply to older children,

depending on how much earned income they have and

whether or not they are full-time students.

» Starting in the year that your child turns 18, the

kiddie tax will apply if your child’s earned income

The Tax Impact of Investing for and in Retirement

Various parts of the tax code govern how much can be

saved for retirement, when withdrawals can be made and

how much has to be withdrawn.

There are three big birthdays you should be aware of. At age

50, the maximum amount allowed to be contributed to retire-

ment savings accounts increases (“catch-up contributions”).

At age 59½, you can take withdrawals from all retirement

accounts without incurring the 10% early withdrawal pen-

alty. Finally, once you reach age 72 (70½ if born before July

1, 1949), you must begin taking required minimum distri-

butions (RMDs). The age limit on making contributions to

an IRA was repealed by the SECURE Act but you must have

earned income to contribute.

The tax code incentivizes savings for retirement. Workers

can contribute up to $19,500 in 2021 and $20,500 in 2022 in

a defined-contribution plan [e.g., a 401(k) plan]. A higher limit

of $26,000 in 2021 $27,000 and 2022 exists for workers age

50 or older. Taxpayers and spouses covered by an employer

retirement plan can contribute up to $6,000 ($7,000 for those

age 50 or older) to a traditional IRA in 2021 and 2022, though

the deductions are subject to income phaseouts. Contribu-

tions to a tax-deferred retirement savings account reduce

adjusted gross income (and thereby your tax liability) as long

as they are within the designated limits.

Contributions to Roth IRAs and Roth 401(k) plans are not

tax-deductible. Like traditional IRAs, up to $6,000 ($7,000

for those age 50 or older) can be contributed to a Roth IRA

in 2021 and 2022. The maximum contribution is subject to

income phaseouts that start at 105,000 for married couples

filing jointly and $66,000 for singles for 2021. (The phaseouts

will increase to $109,000 and $68,000, respectively, in 2022.)

Contributions to IRAs and Roth IRAs for the 2021 tax year

can be made as late as April 15, 2022. When making a con-

tribution for the previous calendar year, ensure your broker

registers the deposit correctly.

Withdrawals from retirement accounts are considered

to be taxable income unless taken from a Roth IRA, a Roth

401(k) or similar types of accounts. RMDs are required from

most retirement accounts starting at age 72 (70½ if born

before July 1, 1949). [The first RMD can be taken as late as

April 1 of the calendar year following the year you turned age

72 (70½ if born before July 1, 1949), though the second RMD

must be taken by December 31 of that same year.] The per-

centage of retirement savings subject to the RMD increases

every year. Roth IRAs are exempt from RMDs, but Roth

401(k) plan savings are not. [A Roth 401(k) can be rolled to

a Roth IRA.] Those who are still working, contributing to an

employer-sponsored retirement plan and own less than 5%

of the company they work for can delay the first RMD from

a defined-contribution plan until April of the year they retire.

The CARES Act suspended RMDs for 2020; RMDs

returned in 2021 and will continue going forward.

A discussion of all the tax aspects of investing for and in

retirement is beyond the scope of this guide. Those seeking

greater detail should read IRS Publications 590-A and -B on

Individual Retirement Arrangements.

A A I I J o u r n A l D E C E M B E R 2 0 2 1 15

A A I I . C O M / J O U R N A L

For Single Taxpayers

Taxable Income The Tax Is

But Not Of the Amount

Over Over Over

$0 $9,950 $0 + 10% $0

$9,950 $40,525 $995 + 12% $9,950

$40,525 $86,375 $4,664 + 22% $40,525

$86,375 $164,925 $14,751 + 24% $86,375

$164,925 $209,425 $33,603 + 32% $164,925

$209,425 $523,600 $47,843 + 35% $209,425

$523,600 — $157,804.25 + 37% $523,600

For Married Taxpayers Filing Separate Returns

Taxable Income The Tax Is

But Not Of the Amount

Over Over Over

$0 $9,950 $0 + 10% $0

$9,950 $40,525 $995 + 12% $9,950

$40,525 $86,375 $4,664 + 22% $40,525

$86,375 $164,925 $14,751 + 24% $86,375

$164,925 $209,425 $33,603 + 32% $164,925

$209,425 $314,150 $47,843 + 35% $209,425

$314,150 — $84,496.75 + 37% $314,150

For Married Taxpayers Filing Joint Returns

and Surviving Spouses

Taxable Income The Tax Is

But Not Of the Amount

Over Over Over

$0 $19,900 $0 + 10% $0

$19,900 $81,050 $1,990 + 12% $19,900

$81,050 $172,750 $9,328 + 22% $81,050

$172,750 $329,850 $29,502 + 24% $172,750

$329,850 $418,850 $67,206 + 32% $329,850

$418,850 $628,300 $95,686 + 35% $418,850

$628,300 — $168,993.50 + 37% $628,300

For Individuals Filing as Head of Household

Taxable Income The Tax Is

But Not Of the Amount

Over Over Over

$0 $14,200 $0 + 10% $0

$14,200 $54,200 $1,420 + 12% $14,200

$54,200 $86,350 $6,220 + 22% $54,200

$86,350 $164,900 $13,293 + 24% $86,350

$164,900 $209,400 $32,145 + 32% $164,900

$209,400 $523,600 $46,385 + 35% $209,400

$523,600 — $156,355 + 37% $523,600

Income Tax

Capital Gains and Qualied Dividends

2021 Tax Rates

Maximum Taxable Income

Single Below $40,400 $40,400–$445,850* Over $445,850*

Married Filing Joint Below $80,800 $80,800–$501,600* Over $501,600*

Married Filing Sep Below $40,400 $40,400–$250,800* Over $250,800*

Head of Household Below $54,100 $54,100–$473,750* Over $473,750*

Short-Term Capital Gains taxed as income taxed as income taxed as income

Long-Term Capital Gains** 0% 15% 20%

Qualified Dividends 0% 15% 20%

Collectibles*** 28% maximum 28% maximum 28%

Real Estate Unrealized Gain

(Section 1250 Property) 15% maximum 25% maximum 25% maximum

*May also be subject to the 3.8% net investment income (NII) surtax.

**For investments held longer than one year.

***Includes art, rugs, jewelry, precious metals or gemstones, stamps or coins, fine wines and antiques.

Estates and Trusts

Tax Rates

First $2,650 10%

$2,650–$9,550 24%

$9,550–$13,050 35%

Over $13,050 37%

16 A A I I J o u r n A l D E C E M B E R 2 0 2 1

A A I I . C O M / J O U R N A L

Standard Deduction

Under Age 65

Married, Filing Joint $25,100

Single $12,550

Married, Filing Separate $12,550

Heads of Household $18,800

Additional—Age 65 or Older

Married (or Qualifying Widow $1,350

Single $1,700

Additional—Blind

Married (or Qualifying Widow $1,350

Single $1,700

Personal Exemption

Maximum Child Tax Credit

$3,600/child under age 6; $3,000/child ages 6 to 17 at the end

of the year

Standard Mileage Deductions

Business Standard Mileage Rate 56 cents

Medical Standard Mileage Rate 16 cents

Moving Standard Mileage Rate 16 cents

Charitable Serv Standard Mile Rate 14 cents

Deductible IRA Contribution

If taxpayer and spouse NOT covered by

employer-sponsored plan:

If younger than 50 $6,000

If 50 or older $7,000

Maximum 401(k) Employee Contribution

If younger than 50 $19,500

If 50 or older $26,000

Self-Employed Medical Insurance

Premium Deduction

100%

Annual Gift Tax Exclusion (per person)

$15,000

Estate Tax Exclusion

$11.70 million

2021 Other Tax Items

2021 Social Security Tax Rates

Employers Self- Wage

& Employees Employed Limits

Social Security 6.20% 12.40% $142,800

Medicare 1.45% 2.90% no limit

Total 7.65% 15.30%

2021 Itemizable Deductions

Among other items they include:

» Interest and taxes on your home

» Uninsured medical expenses above 7.5% of AGI

» Uninsured casualities attributable to a federally de-

clared disaster above 10% of AGI

» Contributions to qualified charities

» State and local income, property and sales taxes total-

ing up to $10,000

2021 Safe Harbor for Underpayment Penalty

Avoid underpayment penalties by paying (through witholding or

estimated tax payments):

AGI $150,000 or less ($75,000 married filing separate)

» 100% of prior tax liability or

» 90% of current year tax liability

AGI $150,000 or greater ($75,000 married filing separate)

» 110% of prior year tax or

» 90% of current year tax liability

2021 AMT Exemption Amount

Single $73,600

Married, Filing Joint $114,600

Married, Filing Separate $57,300

Head of Household $73,600

2021 Allowable Tax Benets

A A I I J o u r n A l D E C E M B E R 2 0 2 1 17

A A I I . C O M / J O U R N A L

(continued from page 14)

(continued on page 21)

(including salaries and wages, commissions, pro-

fessional fees and tips) does not exceed half of the

child’s overall support.

» Starting in the year your child turns 19, the kiddie

tax will apply if your child is a full-time student.

» The kiddie tax will stop applying in the year your

child turns 24.

» The kiddie tax will also not apply if your child is mar-

ried filing jointly.

Charitable Donations

Donations of clothing and other personal items must be

in “good condition” or better in order to be deducted. Form

8283 must be filled out if your total deduction for all non-

cash contributions exceeds $500.

In addition, charitable contributions of cash (regard-

less of the amount) to any qualified charity must be sup-

ported by a dated bank record (such as a canceled check) or

a dated receipt from the charity that includes the name of

the charity and date and amount of contribution.

Married joint filers taking the standard deduction can

deduct up to $600 worth of cash donations to qualified

charitable organizations in 2021. The limit is $300 for

single filers and married individuals filing joint separate

returns. This deduction has not been carried over to 2022.

Those age 70½ or older can distribute up to $100,000

from their traditional IRA to qualified charities in 2020

and 2021. The cap on donations is not indexed to inflation.

Qualified charitable distributions (QCDs) reduce required

minimum distributions. If no RMD was taken in 2020, a

QCD can still be taken. It will not impact 2020 taxes but

will reduce the account’s balance and thereby the basis

for determining future RMDs. See “The Tax Advantages

of Qualified Charitable Distributions From IRAs” in the

October 2016 AAII Journal for more information.

2021 Tax Benet Phaseout Levels

Personal Exemption—

Eliminated Through 2025

AGI Phaseout Level

Married, Filing Joint na

Single na

Married, Filing Separate na

Head of Household na

Itemized Deduction (“Pease” Limitation)—

Eliminated Through 2025

AGI Phaseout Level

Married, Filing Joint na

Single na

Married, Filing Separate na

Head of Household na

Coverdell Education Account

$2,000 maximum nondeductible contribution per beneficiary;

withdrawals are tax-free for qualified education expenses;

phaseouts are not indexed to inflation

Modified AGI* Phaseout Levels

Married, Filing Joint $190,000 to $220,000

Single $95,000 to $110,000

Married, Filing Separate $95,000 to $110,000

Head of Household $95,000 to $110,000

IRA Deductibility

For those covered by employer retirement plan

[$6,000 maximum contribution per taxpayer;

if 50 or older, maximum is $7,000]

Modified AGI* Phaseout Levels

Married, Filing Joint $105,000 to $125,000

Single $66,000 to $76,000

Married, Filing Separate $0 to $10,000

Head of Household $66,000 to $76,000

Married, Filing Joint not covered by

Pension plan, but spouse is $198,000 to $208,000

Roth IRA Eligibility

Maximum $6,000 nondeductible contribution; if 50 or older,

maximum is $7,000

Modified AGI* Phaseout Levels

Married, Filing Joint $198,000 to $208,000

Single $125,000 to $140,000

Married, Filing Separate $0

Head of Household $125,000 to $140,000

*Modified AGI starts with your AGI (adjusted gross income) and adds

back certain tax-exempt amounts including any IRA deductions.

18 A A I I J o u r n A l D E C E M B E R 2 0 2 1

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Income 2021 2022

1. Salaries per Form W-2 1. __________ __________

2. Non-qualified dividends and interest income 2. __________ __________

3. Net business income (losses) 3. __________ __________

4. Net capital gains and qualified dividend income

4. __________ __________

5. Other gains (losses) 5. __________ __________

6. Passive income (losses) (subject to limitations) 6. __________ __________

7. Other income, including 85% of Social Security benefits, if applicable 7. __________ __________

8. Total income

(sum of lines 1 – 7) 8. __________ __________

Adjustments

9. Keogh contributions 9. __________ __________

10. Deductible IRA contributions 10. __________ __________

11. Moving expenses (active duty military only, subject to limitations) 11. __________ __________

12. Other _______________ 12. __________ __________

13. Adjusted gross income (AGI)

(subtract lines 9 – 12 from line 8) 13. __________ __________

Deductions

14. Medical and dental expenses [excess over 7.5% of line 13; regardless of age] or

self-employed health insurance 14. __________ __________

15. Lower of sum of lines 15a and 15b_________ or $10,000 15. __________ __________

15a. State and local income taxes (or sales taxes) _______

15b. Real estate and property taxes (non-business property) _________

16. Home mortgage interest (for acquisition debt only, capped at $750,000 through 2025) 16. __________ __________

17. Investment interest (limited to investment income) 17. __________ __________

18. Charitable contributions if you itemize 18. __________ __________

19. Casualty losses (federally declared disasters only) 19. __________ __________

20. Total deductions (sum of lines 14 – 19) 20. __________ __________

OR 20a. Standard deduction

, if greater (lines 14 – 19 must all show $0.00) 20.a __________ __________

21. Charitable contributions (enter as negative value) if you take the standard deduction

(max $300 single/$600 for married filing joint in 2021 only) 21. __________ __________

22. Regular taxable income (subtract line 20—and line 21 in 2021—from line 14) 22. __________ __________

23. Regular tax (see tax rate tables)

23. __________ __________

24. Tax credits 24. __________ __________

25. Regular tax (net) (subtract line 24 from line 23) 25. __________ __________

26. Alternative minimum tax

26. __________ __________

27. Other taxes (self-employment tax, household help, and so forth) 27. __________ __________

28. Total tax (sum of lines 25, 26 and 27) 28. __________ __________

29. Total withholding and estimated tax payments 29. __________ __________

30. Recovery rebate credit (2021 only) 30. __________ __________

31. Balance due (refund) (subtract line 29—and line 30 in 2021—from line 28) 31. __________ __________

__________ __________

Tax Forecasting Worksheet

a. If your taxable income includes net capital gain and qualified dividend income, you may be eligible for a tax rate on that income that is lower than the tax

rate that applies to your other income. Refer to IRS Form 1040, Schedule D.

b. The standard deduction is not allowed when calculating the alternative minimum tax (AMT).

c. Use IRS Form 6251 as a worksheet and review the discussion on AMT in the online version of this article.

This worksheet is designed for estimation purposes only and does not cover all the possible adjustments that may be required to

arrive at actual taxable income or to compute final income tax liability.

Go to the online version of this article to download the Excel worksheet and use the calculating functionality.

n/a

A A I I J o u r n A l D E C E M B E R 2 0 2 1 19

A A I I . C O M / J O U R N A L

For Single Taxpayers

Taxable Income The Tax Is

But Not Of the Amount

Over Over Over

$0 $10,275 $0 + 10% $0

$10,275 $41,775 $1,027.50 + 12% $10,275

$41,775 $89,075 $4,807.50 + 22% $41,775

$89,075 $170,050 $15,213.50 + 24% $89,075

$170,050 $215,950 $34,647.50 + 32% $170,050

$215,950 $539,900 $49,335.50 + 35% $215,950

$539,900 — $162,718 + 37% $539,900

For Married Taxpayers Filing Separate Returns

Taxable Income The Tax Is

But Not Of the Amount

Over Over Over

$0 $10,275 $0 + 10% $0

$10,275 $41,775 $1,027.50 + 12% $10,275

$41,775 $89,075 $4,807.50 + 22% $41,775

$89,075 $170,050 $15,213.50 + 24% $89,075

$170,050 $215,950 $34,647.50 + 32% $170,050

$215,950 $323,925 $49,335.50 + 35% $215,950

$323,925 — $87,126.75 + 37% $323,925

For Married Taxpayers Filing Joint Returns

and Surviving Spouses

Taxable Income The Tax Is

But Not Of the Amount

Over Over Over

$0 $20,550 $0 + 10% $0

$20,550 $83,550 $2,055 + 12% $20,550

$83,550 $178,150 $9,615 + 22% $83,550

$178,150 $340,100 $30,427 + 24% $178,150

$340,100 $431,900 $69,295 + 32% $340,100

$431,900 $647,850 $98,671 + 35% $431,900

$647,850 — $174,253.50 + 37% $647,850

For Individuals Filing as Head of Household

Taxable Income The Tax Is

But Not Of the Amount

Over Over Over

$0 $14,650 $0 + 10% $0

$14,650 $55,900 $1,465+ 12% $14,650

$55,900 $89,050 $6,415 + 22% $55,900

$89,050 $170,050 $13,708 + 24% $89,050

$170,050 $215,950 $33,148 + 32% $170,050

$215,950 $539,900 $47,836 + 35% $215,950

$539,900 — $161,218.50 + 37% $539,900

Income Tax

Capital Gains and Qualied Dividends

2022 Tax Rates

Maximum Taxable Income

Single Below $41,675 $41,675–$459,750* Over $459,750*

Married Filing Joint Below $83,350 $83,350–$517,200* Over $517,200*

Married Filing Sep Below $41,675 $41,675–$258,600* Over $258,600*

Head of Household Below $55,800 $55,800–$488,500* Over $488,500*

Short-Term Capital Gains taxed as income taxed as income taxed as income

Long-Term Capital Gains** 0% 15% 20%

Qualified Dividends 0% 15% 20%

Collectibles*** 28% maximum 28% maximum 28%

Real Estate Unrealized Gain

(Section 1250 Property) 15% maximum 25% maximum 25% maximum

*May also be subject to the 3.8% net investment income (NII) surtax.

**For investments held longer than one year.

***Includes art, rugs, jewelry, precious metals or gemstones, stamps or coins, fine wines and antiques.

Estates and Trusts

Tax Rates

First $2,750 10%

$2,751–$9,850 24%

$9,851–$13,450 35%

Over $13,450 37%

2 0 A A I I J o u r n A l D E C E M B E R 2 0 2 1

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Standard Deduction

Under Age 65

Married, Filing Joint $25,900

Single $12,950

Married, Filing Separate $12,950

Heads of Household $19,400

Additional—Age 65 or Older

Married (or Qualifying Widow $1,400

Single $1,750

Additional—Blind

Married (or Qualifying Widow $1,400

Single $1,750

Personal Exemption

Maximum Child Tax Credit

$2,000 per child under age 17

Standard Mileage Deductions

Business Standard Mileage Rate 58.5 cents*

Medical Standard Mileage Rate 18 cents*

Moving Standard Mileage Rate 18 cents*

Charitable Serv Standard Mile Rate 14 cents*

*Updated 12/29/2021.

Deductible IRA Contribution

If taxpayer and spouse NOT covered by

employer-sponsored plan:

If younger than 50 $6,000

If 50 or older $7,000

Maximum 401(k) Employee Contribution

If younger than 50 $20,500

If 50 or older $27,000

Self-Employed Medical Insurance

Premium Deduction

100%

Annual Gift Tax Exclusion (per person)

$16,000

Estate Tax Exclusion

$12.06 million

2022 Other Tax Items

2022 Social Security Tax Rates

Employers Self- Wage

& Employees Employed Limits

Social Security 6.20% 12.40% $147,000

Medicare 1.45% 2.90% no limit

Total 7.65% 15.30%

2022 Itemizable Deductions

Among other items they include:

» Interest and taxes on your home

» Uninsured medical expenses above 7.5% of AGI

» Uninsured casualities attributable to a federally de-

clared disaster above 10% of AGI

» Contributions to qualified charities

» State and local income, property and sales taxes total-

ing up to $10,000

2022 Safe Harbor for Underpayment Penalty

Avoid underpayment penalties by paying (through witholding or

estimated tax payments):

AGI $150,000 or less ($75,000 married filing separate)

» 100% of prior tax liability or

» 90% of current year tax liability

AGI $150,000 or greater ($75,000 married filing separate)

» 110% of prior year tax or

» 90% of current year tax liability

2022 AMT Exemption Amount

Single $75,900

Married, Filing Joint $118,100

Married, Filing Separate $59,050

Head of Household $75,900

2022 Allowable Tax Benets

A A I I J o u r n A l D E C E M B E R 2 0 2 1 2 1

A A I I . C O M / J O U R N A L

(continued from page 17)

limitation) was suspended for the years 2018 through 2025

by the TCJA.

State, Local and Sales Taxes

Taxpayers who itemize deductions have the option of

choosing between a deduction of sales taxes or income

taxes when claiming a state and local tax deduction.

Taxpayers cannot deduct both. A $10,000 limit ($5,000

for married filing separate returns) on state and local

tax deductions is in effect through 2025. This cap is not

indexed to inflation.

Tax-Exempt Interest Reporting

State and local governments are required to report

interest paid on tax-exempt state and local bonds on Form

1099-INT, Interest Income. This amount must be shown

on your tax return. While this income is generally exempt

from federal income tax under the current tax law, it is

Medicare

Taxpayers who itemize deductions can deduct (as a

medical expense) the premiums they pay for Medicare Part

B supplemental insurance and Medicare Part D prescrip-

tion drug insurance. Premiums for voluntary coverage

under Medicare Part A are only deductible by those over

the age of 65 and not covered by Social Security.

Medicare Part B premiums are based on MAGI as

reported on returns from two years ago. As such, the Medi-

care Part B premium will be $170.10 in 2022 for taxpayers

who file married joint returns with 2020 MAGI of $182,000

or less and single filers with 2020 MAGI of $91,000 or less.

The floor for deducting medical expenses is 7.5% of

adjusted gross income for 2021 and 2022. It will stay at this

level until changed by legislation.

Itemized Deduction Phaseouts

The phaseout of itemized deductions (the “Pease”

2022 Tax Benet Phaseout Levels

Personal Exemption—

Eliminated Through 2025

AGI Phaseout Level

Married, Filing Joint na

Single na

Married, Filing Separate na

Head of Household na

Itemized Deduction (“Pease” Limitation)—

Eliminated Through 2025

AGI Phaseout Level

Married, Filing Joint na

Single na

Married, Filing Separate na

Head of Household na

Coverdell Education Account

$2,000 maximum nondeductible contribution per beneficiary;

withdrawals are tax-free for qualified education expenses;

phaseouts are not indexed to inflation

Modified AGI* Phaseout Levels

Married, Filing Joint $190,000 to $220,000

Single $95,000 to $110,000

Married, Filing Separate $95,000 to $110,000

Head of Household $95,000 to $110,000

IRA Deductibility

For those covered by employer retirement plan

[$6,000 maximum contribution per taxpayer;

if 50 or older, maximum is $7,000]

Modified AGI* Phaseout Levels

Married, Filing Joint $109,000 to $129,000

Single $68,000 to $78,000

Married, Filing Separate $0 to $10,000

Head of Household $68,000 to $78,000

Married, Filing Joint not covered by

Pension plan, but spouse is $204,000 to $214,000

Roth IRA Eligibility

Maximum $6,000 nondeductible contribution; if 50 or older,

maximum is $7,000

Modified AGI* Phaseout Levels

Married, Filing Joint $204,000 to $214,000

Single $129,000 to $144,000

Married, Filing Separate $0

Head of Household $129,000 to $144,000

*Modified AGI starts with your AGI (adjusted gross income) and adds

back certain tax-exempt amounts including any IRA deductions.

2 2 A A I I J o u r n A l D E C E M B E R 2 0 2 1

A A I I . C O M / J O U R N A L

» Pay first-quarter estimated tax if you are not paying your

income tax through withholding or you will not pay enough

that way.

» File individual tax returns (or apply for an extension); resi-

dents of Massachusetts and Maine can file on April 19. If

you want an automatic six-month extension of time to file

the return, file Form 4868; or, you can get an extension (until

October 17) by phone or over the internet if you pay part or

all of your estimate of income tax due with a credit card.

June 15

» Pay second-quarter estimated tax voucher if you are not

paying your income tax for the year through withholding,

or if you are not withholding enough.

Third Quarter

July 15

» Make quarterly defined-benefit Keogh contribution for the

current year.

September 15

» Pay third-quarter estimated tax voucher if you are not pay-

ing your income tax for the year through withholding, or if

you are not withholding enough.

Fourth Quarter

General

» Begin your year-end tax planning:

» Project your current-year and next-year tax liabilities.

» Evaluate the applicability of the AMT (if not repealed by tax

reform) and other taxes.

» Adjust withholding, if necessary.

» Evaluate year-end capital transactions.

» Establish a separate Keogh plan for self-employment

income.

» Comply with minimum distribution rules for qualified

plans.

October 17

» If you extended your individual tax return, file your 2021

income tax return and pay any tax, interest and penalties

due.

» Make quarterly defined-benefit Keogh contribution for the

current year.

December 31

» Comply with RMD rules for qualified retirement plans.

Can delay until April 1, 2023, if you attained age 72 during

2022.

2022 Tax Planning Calendar

Tax and financial planning are activities best pursued year-round. Although the timing of some activities is critical, you should review

all tax considerations from the perspective of your specific needs and establish an individualized planning calendar.

If the last day for filing a return, paying tax or performing other activities falls on a Saturday, Sunday or legal holiday (in the District

of Columbia), you generally have until the next day that is not a Saturday, Sunday or legal holiday to perform that act. Use the following

list to remind yourself of important activities and dates.

First Quarter

General

» Complete Form W-4, Employee’s Withholding Allowance

Certificate, and adjust withholding, if needed.

» Evaluate before-tax and voluntary aftertax contributions to

retirement plans.

» Apply for a Social Security number for any child who does

not have one.

January 18

» Pay fourth-quarter 2021 estimated tax voucher if you did

not pay your income tax for the year through withholding,

or if you did not pay enough through withholding. You do

not have to make this payment if you file your 2021 return

and pay any tax due by January 31, 2022.

» Make quarterly defined-benefit Keogh contribution for pre-

ceding year.

January 31

» File your income tax return (Form 1040) for 2020 if you did

not pay your last installment of estimated tax by January

15. Filing your return and paying any tax due by January 31

prevents any penalty for late payment of last installment.

» Make sure you have received a Form W-2 from each

employer you worked for in 2021.

Second Quarter

April 1

» Comply with required minimum distribution (RMD) rules

for qualified retirement plans if you attained age 72 in the

previous year. (This deadline does not change when April 1

falls on a weekend or on a holiday.)

April 15

» Make prior-year Keogh or SEP plan contribution (unless

you applied for an extension of time to file your return).

» Make quarterly defined-benefit Keogh contribution for the

current year.

» Make prior-year IRA and Coverdell Education Savings

Account contributions.

April 18

» File Schedule H (Form 1040) with your tax return if you

paid cash wages of $2,300 or more in 2021 to a household

employee.

» Report federal unemployment (FUTA) tax on Schedule H if

you paid total cash wages of $1,000 or more in any calen-

dar quarter of 2020 or 2021 to household employees.

A A I I J o u r n A l D E C E M B E R 2 0 2 1 2 3

A A I I . C O M / J O U R N A L

You can make nondeductible contributions to quali-

fied tuition plans, also known as section 529 plans. (How-

ever, the contributions may be deductible from your state

income tax, depending on where you live.) These accounts,

offered by states or their designees, are maintained solely

for the qualified higher education expenses of a benefi-

ciary. Distributions are tax-free, provided that the distribu-

tions are used to pay qualified expenses.

The ATRA made the $2,000 per beneficiary contribu-

tion limit to a Coverdell Education Savings Account per-

manent. The contributions are not deductible, but they

grow tax-free in the IRA.

Coverdell accounts may be used to fund qualified

elementary, secondary and higher education expenses.

However, the amount that can be contributed is limited

for higher-income taxpayers and the phaseouts are not

adjusted for inflation.

Investment Strategies: 2022 and Beyond

Though the ATRA and the Consolidated Appropriations

Act of 2016 provided clarity in terms of current legislation,

the TCJA had a much bigger and broader impact on the tax

code. Not only did the tax brackets for individuals change,

but so did many deductions and exemptions.

The following are traditional tax planning strategies

that can help keep your tax bill down. It is important, how-

ever, to keep in mind that your goals and risk tolerance,

not just the income tax impact of an investment, should

drive your investment decisions.

used for determining how much of Social Security income

is taxable. Income from private activity bond interest is

included in alternative minimum tax calculations.

Health Savings Accounts

The 2021 minimum annual deductible for self-only

coverage is $1,400; it is $2,800 for family coverage. These

amounts are indexed to inflation but will remain at $1,400

and $2,800, respectively, in 2022. The 2021 maximum lim-

its for annual deductible and other out-of-pocket expenses

are $7,000 for self and $14,000 for family. They will rise to

$7,050 and $14,100, respectively, in 2022.

HSA contributions cannot exceed $3,600 for individual

coverage and $7,200 for family HDHP coverage in 2021.

In 2022, the maximum contributions will be $3,650 and

$7,300 for individual and family coverage, respectively.

More information on this can be found at AAII.com in

the online version of this article.

Education Savings

The maximum Hope Scholarship Credit (the American

Opportunity education credit) of $2,500 per year for the

first four years of post-secondary education for tuition and

related expenses (including books) was made permanent

by the Consolidated Appropriations Act of 2016. As such,

this credit can be claimed in both 2021 and 2022.

The Lifetime Learning Credit can be claimed for educa-

tion expenses beyond the fourth year of post-secondary

education and for non-degree courses intended to improve

job skills. The maximum credit is $2,000 annually and is

subject to income phaseouts.

2022 Federal Legal Holidays

(in the District of Columbia)

January 1* New Year’s Day

January 17 Birthday of Martin Luther King Jr.

February 21 Washington’s Birthday

April 15 D.C. Emancipation Day

May 30 Memorial Day

June 20 Juneteenth National Independence Day

July 4 Independence Day

September 5 Labor Day

October 10 Columbus Day

November 11 Veterans Day

November 24 Thanksgiving Day

December 26 Christmas Day

*Legally observed on December 31, 2021.

Throughout the Year

» Reevaluate your long-term strategies.

» Evaluate your tax and financial strategy for receiving dis-

cretionary and mandatory retirement plan distributions.

» Rebalance investment portfolio and reevaluate your uses

of debt.

» Consider making gifts up to the annual gift tax exclusion.

» Evaluate passive loss exposure and potential investment

shifts.

» If you have excess cash flow, consider how to invest those

funds.

» Optimize mix of interest expense items.

» Consider making charitable contributions of property.

» Consider ways to fund your children’s education.

» Evaluate your mix of portfolio and passive income.

2 4 A A I I J o u r n A l D E C E M B E R 2 0 2 1

A A I I . C O M / J O U R N A L

and 2022.

Similar rules apply to qualified dividends. For married

couples filing jointly with income above $501,600 and sin-

gle filers with income above $445,850 in 2021, dividends are

taxed at 20%. In 2022, the 20% qualified dividend tax rate

will apply to married couples filing jointly and single filers

with incomes above $517,200 and $459,750, respectively.

Though tax considerations should never be the primary

reason for selling a security, if you have large positions in

either gifted or inherited stocks, or stocks received from a

sale of a business, you should consider whether it makes

sense to sell shares over a period of time to take advantage

of the long-term capital gains rates and use the proceeds

from selling the stock to diversify your portfolio.

Use Losses Carefully

While tax considerations should not drive your invest-

ment decision, you can take advantage of losses in hold-

ings that you would prefer to either sell or reduce from an

investment standpoint.

Capital losses first reduce capital gains: long-term

losses reduce long-term gains first, and short-term losses

reduce short-term gains first. Any long-term losses left

over reduce short-term gains, and vice versa. If you still

have losses remaining after offsetting capital gains, you

can reduce your “ordinary” income by up to $3,000. Losses

not used this year can be carried forward to future years

until they are used up. See “Capital Pains: Rules for Capital

Losses” by Julian Block in the September 2010 AAII Journal

(available at AAII.com).

When planning, make sure you don’t run afoul of the

wash-sale rules. If you sell an investment at a loss and

then acquire a substantially identical security during the

30-day period prior to or the 30-day period following the

sale, the loss will be disallowed. If your loss is disallowed

by the wash-sale rule, you can increase the cost basis of

the new position of the substantially identical security by

the amount of the disallowed loss. The holding period for

the new position is also adjusted to include the holding

period of the position sold at the disallowed loss. You can-

not adjust the cost basis or holding period if you acquire

the investment in an IRA or Roth IRA, however. For more

information, see “Keeping Transactions Clean From the

Wash-Sale Rules” by R. Kevin Trout in the December 2014

AAII Journal (available online at AAII.com).

Be Aware of Holding Periods for Qualied

Dividends

In order to qualify for the reduced 15% (20% for higher

earners) tax rate on qualified dividends for common and

preferred stocks, a holding period must be satisfied. Spe-

cifically, common stocks must be owned for more than 60

Consider Roth IRA Conversion Opportunities

You have the option of converting all or part of your tra-

ditional IRA into a Roth IRA, regardless of your adjusted

gross income under existing law. Roth IRAs can provide

certain advantages: The converted assets can be withdrawn

tax-free at any time and future earnings are also tax-free

(with some limitations). Withdrawals do not impact how

much of Social Security benefits are taxed nor do they

count as income for determining Medicare premiums.

Additionally, Roth IRA owners are not required to take

any minimum distributions in retirement. The downsides,

however, are that the conversion amount is taxable in the

year it occurs, it can increase the amount of Social Security

benefits taxed in the year of conversion and can increase

Medicare premiums two years out.

While the benefits of a Roth IRA conversion could be

considerable, taxpayers must carefully weigh the upfront

tax costs against the long-term tax advantages. For more

on this, see “Retirement Planning Strategies Following

the 2017 Tax Act” and “Social Security and Medicare Can

Raise Retirees’ Tax Rates” by William Reichenstein and

William Meyer in the March 2018 and April 2018 AAII

Journal, respectively, as well as “Roth Versus Traditional

IRA” in the December 2019 AAII Journal. (All three are

available at AAII.com). You may also want to consult a tax

professional.

Conversions can no longer be undone (a “recharacter-

ization”); this was ended by the TCJA.

You cannot convert required minimum distributions

from your traditional IRA for a particular year (including

the calendar year in which you reach age 72) to a Roth IRA.

IRS Publication 590-A explains the rules for Roth IRA con-

versions and Publication 590-B covers the rules for RMDs.

Take Advantage of Lower Marginal Rates

Deferring income that is taxed at higher ordinary tax

rates makes sense. Most taxpayers will pay long-term

capital gains tax rates of 0% or 15%. For married couples

filing jointly with income above $501,600 and single fil-

ers with income above $445,850 in 2021, the long-term

capital gains rate is 20%. In 2022, the 20% long-term

capital gains tax rate will apply to married couples filing

jointly and single filers with incomes above $517,200 and

$459,750, respectively. Short-term capital gains, in con-

trast, are taxed at ordinary income tax rates of up to 37%

in 2021 and 2022. The 3.8% NII surtax applies to taxpayers

with income above the $250,000/$200,000 thresholds.

This tax applies to both short- and long-term capital gains,

as well as taxable interest, dividends, nonqualified annui-

ties, rents and royalties and passive income from partner-

ships. The NII surtax is not indexed to inflation, and the

$250,000/$200,000 thresholds are effective for both 2021

A A I I J o u r n A l D E C E M B E R 2 0 2 1 2 5

A A I I . C O M / J O U R N A L

These payments are reported on Form 1099, which speci-

fies the type of distribution.

You can read more on mutual fund distributions in the

online Personal Investments Tax Guide 2021.

Reconsider Taxable Versus Tax-Free Bonds

Interest from tax-free municipal bonds is generally

exempt from federal income taxes, unlike the interest

from taxable bonds, which is taxed as income. Like any

bond, credit quality matters, as you want to ensure that the

issuer will not default. Changing yields can also alter the

aftertax yield advantage, making municipal bonds more or

less attractive to taxable bonds.

Additionally, private-activity bonds (a type of tax-

free bond) could increase your exposure to the alterna-

tive minimum tax since their interest income is taxable

for purposes of the alternative minimum tax. There are

exceptions, including qualified 501(c)(3) bonds, and New

York Liberty bonds. Furthermore, the interest on qualified

bonds issued in 2009 and 2010 is not subject to the alterna-

tive minimum tax. Check with the bond issuer to find out

the bond’s tax status.

You should review your bond and money market

accounts to make sure that you are earning the highest

aftertax return. But don’t forget to consider the state tax

implications of switching from tax-free to taxable bonds

before making any final portfolio decisions.

Consider Increasing Retirement Savings

Increasing retirement savings makes sense from a

financial planning standpoint and, depending on your

adjusted income, may reduce your tax bill. You have until

April 15, 2022, to make an IRA contribution for the 2021 tax

year. See the box on page 14 for yearly contribution limits

to various types of retirement plans.

days during the 121-day period that begins 60 days before

the ex-dividend date. (The holding period is more than 90

days out of a 181-day period for preferred stocks with divi-

dends attributable to periods aggregating more than 366

days.) The ex-dividend date is generally one trading day

prior to the record date.

Not all dividends are qualified. Qualified dividends

are paid by common and preferred stocks. Real estate

investment trust (REIT) distributions and master limited

partnership (MLP) distributions do not qualify for the dis-

counted taxed rate. Contact the investor relations depart-

ment of the specific company if you have questions about

the tax treatment.

Consider the Impact of Taxes on Mutual Fund

Investments

Selecting tax-aware managers of mutual funds may be

important to maximizing your aftertax rate of return in

your taxable investment portfolio.

You may choose when to sell specific shares of the fund

and may, therefore, create long-term versus short-term

capital gains, as long as you notify the fund family or your

broker in writing with specific instructions. But you don’t

control the investments within the fund.

Should an equity manager fail to extend the holding

period on a stock, it could cost you as much as 17.0% of

your gain (37.0% ordinary rate for short-term capital gains

versus the 20% long-term capital gains rate) between now

and 2025.

Some mutual fund distributions can be treated as qual-

ified dividends and therefore eligible for the reduced tax

rate, while others will not qualify. Dividends paid by stocks

held by the fund and passed through to the shareholder

are eligible for the qualified dividend tax treatment. How-

ever, capital distributions and interest from bonds are not.

Where’s My Money? Tracking Your Refund 24/7

If you are expecting a refund on your 2021 income tax, you

can check on its status if it has been at least four weeks since

the date you filed your return by mail, or 24 hours if you filed

electronically. You will need to supply the following informa-

tion: your Social Security number or IRS Individual Taxpayer

Identification number, your filing status and the exact whole-

dollar refund amount as it is shown on your return.

You can check the status of your refund in three ways:

» On the internet, go to www.irs.gov and click “Get Your

Refund Status.”

» On a mobile device, download the IRS2Go app.

» By telephone (for automated information), call 800-

829-4477.

If you are unable to get information on

your refund through any of these auto-

mated services, you can call the IRS for

assistance at 800-829-1040.

The IRS website also allows you to start

a trace for lost or missing refund checks,

or to notify the IRS of an address change

when refund checks go undelivered. Taxpayers can avoid unde-

livered refund checks by having refunds deposited directly into

a personal checking or savings account. This option is available

for both paper and electronically filed returns.

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Protect Social Security Benets

If you are receiving Social Security benefits, you may

have to pay taxes on them if your combined income (pri-

marily your adjusted gross income plus any tax-exempt

interest income plus half of your Social Security benefits)

exceeds certain levels.

To protect your benefits, watch the amount of inter-

est you receive from municipal bonds, since this amount

is included in your modified adjusted gross income when

determining the Social Security benefit taxability. In addi-

tion, you may want to delay discretionary taxable distribu-

tions from a retirement plan or IRA.

Conclusion

It is important to remember that taxes should not be the

primary driver of your investing decisions. Taxes do, how-

ever, play a role in wealth management. As the tax code con-

tinues to evolve, everyone should consider how the changes

directly affect their overall tax and investment strategies.

Review Tax Implications of Taxable Versus Tax-

Deferred Accounts

The spread between capital gains and ordinary income

rates has important implications with respect to your asset

allocation between taxable and tax-deferred (retirement)

accounts.

For example, from a tax perspective, holding individ-

ual stocks in tax-deferred accounts and bonds in taxable

accounts could be expensive because the long-term gains

resulting from stocks held in tax-deferred plans such as

IRAs or 401(k) plans will be taxed at ordinary rates when

taken as a distribution. By reversing that structure, taxable

bonds and other tax-inefficient assets will be shielded from

taxation in the deferred accounts, while equities will enjoy

the reduced rates for capital gains in personal accounts.

Tax-free municipal bonds should remain outside of

retirement accounts. Individuals should also consider the

cost of commissions and taxes, current cash flow needs

and the 0.9% additional Medicare tax and 3.8% NII surtax

before making any investment moves between taxable and

tax-deferred accounts.

Protecting Yourself Against Tax Scams

The Internal Revenue Service continues to warn about con

artists posing as IRS agents. Often initiating contact through

a telephone call, the fraudsters claim back taxes and/or pen-

alties are owed. Payment is usually immediately demanded

either in the form of prepaid cards or a money wire. Hesitancy

to cooperate leads to threats of lawsuits, a call to the police

or the involvement of federal law enforcement. Despite what

your caller ID may show and how convincing the fraudster

sounds, these calls are scams.

Another scam involves identify theft. Criminals obtain Social

Security numbers and then file false returns under the victims’

identities in order to receive refunds. When the victim later tries

to file a legitimate return, it can be rejected by the IRS.

Other current tax scams include filing false unemploy-

ment claims using another person’s Social Security number,

pretending to be a charity—often for a natural disaster area

or for the coronavirus pandemic—and asking for personal

information, fake emails designed to appear as if they came

from the IRS and schemes pitched as opportunities to realize

a larger refund or get a larger stimulus check. The latter can

involve being urged to falsify income, falsely claim fuel tax

credits, use tax shelters that sound too good to be true and

hide income offshore. Some criminals will also pose as tax

preparers for the sole purpose of engaging in identify theft.

There are steps you can take to protect yourself:

» File your tax return as quickly as is reasonably possible.

» Guard your identity. Be careful about who you give

your Social Security number to, do not carry your

Social Security number in your wallet and use anti-virus

and firewall software on your computer. Varying your

passwords is also a good idea; password management

programs such as Dashlane and LastPass can help.

» Never click on a link in an email to visit a financial in-

stitution such as a bank or the IRS. Go directly to the

website using a known URL.

» Get an Identity Protection Pin from the IRS; sign up at

www.irs.gov/ippin.

» Regularly check your credit reports to ensure the in-

formation is accurate. Consumer Reports recommends

using AnnualCreditReport.com.

» Realize that if a tax service or proposal sounds too

promising to be true, it probably is.

» Never trust a tax preparer who does not give you your

tax return to review. It’s best for you to personally file

your own returns.

» Understand that the IRS WILL NEVER CALL TO DE-

MAND IMMEDIATE PAYMENT or call you about taxes

being owed without previously having mailed a bill. The

agency will also give you the opportunity to question or

appeal any outstanding balance or penalty.

If you suspect you are a victim of identity theft or finan-

cial fraud, act immediately. Call your banks, brokerage firms,

credit card companies, the major credit bureaus and, in the

case of tax fraud, the IRS. If your Social Security number is

compromised, fill out IRS Form 14039 and continue to file

your taxes as you normally would.

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paid, or until the regular filing date for the final tax return,

whichever is earlier.

You can avoid underpayment tax penalties by adopt-

ing one of the safe harbor rules. The basic rule is to pay

the required amount by the end of the year through with-

holding and quarterly estimated payments. The required

amount will be one of the following, depending on your

individual situation:

» 90% of the current year’s tax liability;

» 100% of the prior year’s tax liability (increases to

110% for taxpayers who had 2022 adjusted gross

income in excess of $150,000, or $75,000 for those

married filing separately); or

» 90% of the tax liability based on a quarterly annual-

ization of current year-to-date income (see IRS Form

505 and IRS Publication 505 for worksheets).

Penalties are based on any underpayment, which is the

difference between the lowest amount required to be paid

by each quarterly payment date and the amount actually

paid by that date. The annual required amount, based on

either of the first two alternatives, is paid in equal install-

ments. In the case of the third method, which is based on

annualized income, the amount due each quarter is based

on actual income received for each installment period. The

third method is typically more beneficial if you do not earn

income evenly throughout the year (e.g., you operate a sea-

sonal business) or had an unexpected increase in income

because it allows for lower required payments in the early

quarters.

Income tax payments made through withholding from

your paycheck (or from your pension or other payments)

are given special treatment. The IRS treats income tax

that is withheld as having been paid equally throughout

the year (unless you prefer to use actual payment dates).

This lets you make up for underpaid amounts retroactively

because amounts withheld late in the year may be used to

increase the amounts paid in earlier quarters.

State and Local Rules: Many states have underpayment

rules that vary from the federal requirements.

Timing: Income & Deductions for Taxpayers Not

Subject to AMT

You have opportunities to reduce your taxes if you can

control the timing of either your income or expenses.

However, it is important to make sure you understand

whether you may be subject to the AMT before adopting

these strategies. Though the TCJA retained the alternative

minimum tax, it will not apply for 2022 incomes below

$1,079,800 for married couples filing joint returns and

$539,900 for others. (See the online version of this article

for more information.)

Tax Planning Strategies

All Taxpayers: Determine Where You Are at the

End of the Year

At the end of each year, you should take the time to

assess your tax situation. Doing so will give you the oppor-

tunity to shift certain items around, should that be benefi-

cial in terms of your tax liability. Taking a few initial steps

now and using year-end planning strategies can result in

significant tax savings.

Here are the basic steps you should take to help start

your personal tax planning:

» Estimate your income, deductions, credits and

exemptions for 2021 and 2022 using the Tax Fore-

casting Worksheet (page 18 and a downloadable

spreadsheet on AAII.com);

» Identify items that you can shift from 2021 into 2022

and beyond (or vice versa);

» Determine your marginal tax rate—the rate at which

your next dollar of income will be taxed—for 2021

and 2022;

» Determine how much tax you owe and when you

must pay it to avoid underpayment penalties;

» Determine whether you are subject to the alternative

minimum tax (AMT);

» Consult with your tax professional, and then take

the actions needed to make the best of your tax

situation.

To minimize your taxes, consider both short-term and

long-term tax planning issues and strategies. Starting

early will give you extra time to obtain additional informa-

tion about items that concern you and to investigate addi-

tional ideas for tax savings or deferral.

Avoiding Tax Underpayment Penalties

Make sure you determine your 2022 tax liability as early

as possible, as well as the due dates for paying those taxes

(including the self-employment tax and the AMT), so that

you avoid underpayment penalties.

Federal tax law requires the payment of income taxes

throughout the year as you earn your income. This obliga-

tion may be met through withholding, quarterly estimated

tax payments or both. If you do not meet this obligation,

you may be assessed an underpayment penalty.

If your total tax due minus the amount you had with-

held is less than 10% of your total tax due, you will not be

assessed an underpayment penalty. The disadvantage of

overpaying throughout the year, though, is that you are

in effect making an interest-free loan to the government.

However, the underpayment penalty can be high, and it is

calculated as interest on the underpaid balance until it is

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your estimated state tax liability in December 2021, rather

than waiting until 2022, if the taxes were assessed in 2021.

This secures that deduction on your 2021 tax return, even

though the payment might not be required by the state

until January 18, 2022, or April 18, 2022. The deductibility

of these taxes is subject to a $10,000 cap on state and local

taxes in 2020. The cap is not indexed to inflation and will

remain at $10,000 per year through 2025.

Charitable Contributions

If you are planning on making a gift to a charity in 2022,

consider making the gift in 2021 to accelerate the tax ben-

efit of the contribution if you have enough deductions to

exceed the $25,100/$12,550 standard deduction. The Con-

solidated Appropriations Act of 2021 allows you to deduct

cash contributions up to your contribution base (typically

AGI) in 2021.

In 2021, single filers taking the standard deduction can

again deduct up to $300 of qualifying cash deductions,

while married couples filing joint returns can deduct up to

$600. This deduction has not been carried over into 2022.

You should also consider the benefits of gifting appre-

ciated stock to a charity. If you donate long-term appreci-

ated stock directly to the charity, you get a deduction for

the full fair market value of the stock, whereas if you sell

the stock first and donate cash, you only get a deduction

for the aftertax cash donated. (If you have an unrealized

loss in the stock, however, it might be more beneficial from

a tax standpoint to sell the stock and then donate the cash

proceeds. Doing so would give you deductions for both the

capital loss and the charitable donation.)

When making a gift to a charity, you must have an

appropriate record of the gift in order to properly support

the deduction.

In addition, cash contributions of any amount must be

supported by a written record, either in the form of a bank

record (for example, a canceled check) or a written receipt

from the charity. The record must include the name of the

charity, the date and the amount of the contribution.

The higher standard deductions under the TCJA raised

the threshold for deducting donations. As such, you may

want to bunch donations in a particular year rather than

making them over two or more separate years.

Prepaid Interest

A cash basis taxpayer may not deduct prepaid interest

before the tax year to which the interest relates. However,

there is some flexibility to prepay year-end interest that is

due early in the following year.

For example, if a mortgage payment is due on January

10, a taxpayer can accelerate the deduction of the portion

of the interest relating to the period up to January 1 by

mailing the check in December.

Income

Your income is generally taxed in the year of receipt, so

having the ability to control when you receive it affords a

strategic tax planning opportunity. Deferring income until

a later year will, in most cases, delay the payment of tax.

You cannot defer taxation by merely delaying receipt of

the income if the funds are available to you and the time

of payment is subject to your unrestricted discretion. Any

decision to defer income must be weighed with the lost

time value of the money and other risks that could alter or

forfeit your right to the income.

The timing of bonuses, recognition of capital gains

from the sale of stocks and the exercise of nonqualified

stock options are all events that can easily be delayed to a

subsequent year.

Consider the deferral of compensation through the use

of various retirement plans and deferred-compensation

arrangements. If you operate a business or collect rental

income and report that income on the cash receipts and

disbursements method, you have an opportunity to delay

or accelerate the billing to your customers or tenants and

determine the timing of the related income.

Deductions

You can reduce taxes by controlling the payment of

deductible expenses. If paid by December 31, you may

deduct certain expenses that are due the following year on

your current year tax return. (Property taxes prepaid in the

current year can be deducted if assessed in the current cal-

endar year and if the $10,000 limit on state and local taxes

has not been reached.) This strategy helps when you have

a higher tax liability in the current year than you expect to

have in the coming year. Again, you must balance this deci-

sion with the time value of money and other inherent risks.

For example, if you pay a deductible expense in Decem-

ber 2021 instead of April 2022, you reduce your 2021 tax

instead of your 2022 tax, but you also lose the use of your

money for three-and-one-half months. Generally, this

will be to your advantage, unless you have an alternative

use for the funds that will produce a very high return in

that three-and-one-half-month period. You must decide

whether the cash used to pay the expense early should be

used for something more urgent or more valuable than the

accelerated tax benefit.

For those who will pay 2022 estimated taxes based

on their 2021 tax liability, reducing your 2021 taxes has

another advantage: Your 2022 estimated tax payments

may be smaller.

State Taxes

If accelerating deductions makes sense for you and

you choose to claim a deduction on your state and local

income taxes, you may want to prepay the balance on

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If you are continuously subject to the AMT, avoid

investing in private-activity (municipal) bonds. Income

from these bonds is taxable for AMT purposes. [There are

exceptions, including qualified 501(c)(3) bonds and New

York Liberty bonds. Also, the interest on qualified bonds

issued in 2009 and 2010 is not subject to the AMT. Check

with the bond issuer for the bond’s tax status.] Further-

more, you should be aware that unusual combinations of

income and deductions might require AMT planning that

runs contrary to conventional tax-planning advice.

Although the exercise of an incentive stock option

(ISO) does not give rise to regular taxable income for the

employee, the difference between the exercise price and

the market price of a stock must be recognized for AMT

purposes for the year in which the option is exercised.

Accordingly, the exercise of incentive stock options with a

large bargain element often causes a tax liability under the

AMT regime.

The AMT arena is extremely complex, so generaliza-

tions are difficult to make. If you think you may be subject

to the AMT, you should consult a tax professional to deter-

mine how best to minimize your exposure to it.

As stated previously, the TCJA retains the alterna-

tive minimum tax, though with higher exemptions and

income limits through 2025.

Year-End Estate and Gift Tax Planning

Year-end planning from an estate planning perspective

typically involves ensuring that “annual exclusion” gifts

are completed by the end of a calendar year.

Under the federal gift tax system, each donor is permit-

ted to make nontaxable gifts of a certain amount each year

to any donee. These gifts are called “annual exclusion”

gifts and do not count against the donor’s lifetime gifts

exemption. The annual gift tax exclusion level is $15,000

for 2021 and $16,000 for 2022. To the extent that it is not

used, the annual exclusion evaporates at the end of each

calendar year.

Annual transfers that take advantage of this exclu-

sion can both diminish the donor’s estate tax liability and

improve the lives of the recipients. These gifts can take

many forms (such as cash, stocks, real estate, partner-

ship interests) and can be given outright through Uniform

Transfers to Minors accounts, and even through a trust—

provided it contains special provisions designed to allow

the gift to qualify for the annual exclusion.

Gifting may also make sense for those who intend to pass

IRA assets along to their heirs. This would particularly be

the case if tax levied on the benefactor’s IRA withdrawal is

less than the heir’s expected future tax. Before doing so, con-

sider the full impact of withdrawing more from your retire-

ment accounts on your taxes and Medicare premiums. ▪

The most significant interest deductions currently

available are for home mortgage interest and for invest-

ment interest expense to the extent of current-year

investment income. Interest paid in relation to invest-

ments that earn a tax-free return is not deductible.

Medical Expenses

If the timing of certain medical and dental expenditures

is flexible and your overall medical expenses are high in

the current year, you may want to accelerate the timing of

these expenses.

Because unreimbursed medical expenses are only

deductible to the extent that they exceed 7.5% of adjusted

gross income in 2021 and beyond, it is best from a tax

standpoint to incur expenses—such as replacement eye-

glasses or contact lenses, elective surgery, dental work and

routine physical examinations—in a year in which you

have already gone over (or in which the added expenses

would take you over) the threshold for that year.

Miscellaneous Itemized Deductions

The TCJA suspended the ability to deduct miscella-

neous itemized deductions exceeding 2% of adjusted gross

income. The suspension started in 2018 and will remain in

effect through 2025.

This category is large but includes:

» Tax preparation fees such as tax preparation soft-

ware, tax publications and any fee paid for electronic

filing; and

» Investment fees, custodial fees, trust administra-

tion fees and other expenses paid for managing your

investments that produce taxable income.

Uninsured Personal Casualties

Uninsured personal casualties can be deducted only

if they are attributable to a federally declared disaster

and exceed 10% of adjusted gross income. Losses to theft

are no longer deductible. The rule is in effect from 2018

through 2025.

Timing Caution for Taxpayers Subject to AMT

The alternative minimum tax (AMT) was originally

designed to ensure that everyone would pay their fair

share of income taxes. The measure has since evolved into

a separate tax regime that required a permanent fix in the

ATRA to prevent it from ensnaring millions of Americans.

The wisdom of conventional tax planning advice to

defer income and accelerate certain types of deductions

may not hold true if an individual expects to be subject to

the AMT. Accordingly, during the tax planning process, it

is critical that you determine whether you are subject to

the AMT in both the current year and the following year.