Tax Season Planning and Your Investments

Tax Season Planning and Your Investments

January 03, 2022

'Tax advice' is left to federally-authorized tax practitioners who prepare tax returns, defend clients pursuing relief, or dispute tax payment errors. Financial professionals don't provide tax advice but can provide information on the tax consequences of specific investments you have as part of financial planning. Some financial professionals are CPAs (Certified Public Accountants) or have the CFP (Certified Financial Planner) designation and can prepare tax returns for their clients.

Financial professionals without these certifications can also provide advice on numerous financial situations and the tax consequences of each. They can also offer advice on:

  • Pension and retirement savings contributions and distributions
  • Life insurance
  • Annuities
  • Other investments and tax information for each.

Income and capital gains taxes- Financial professionals look for income in your portfolio, whether from qualified dividends, ordinary dividends, or tax-free income. Your tax bracket helps determine what types of investments are best suited for your situation, both for growth and from a tax savings perspective. You may have carry-forward losses from a bad year which will off-set the increase from another investment. Reviewing past tax returns is critical to capturing income and losses for this year's filing.

Missed Deductions and Opportunities- It’s common for clients to miss out on deductions they could be taking, or maybe their tax professional wasn’t aware they could take. These deductions could be incorrect payroll deduction for W-2s, missed deductions for college savings plans, long-term care premiums (if they exceed 7.5% of your adjusted gross income), and health insurance if you’re self-employed.

Here are a few specific items for the 2021 tax filing season that may impact you:

Expanded child tax credits- The American Rescue Plan increased the child tax credit to $3,000 for families with kids ages 17 and under for 2021, with an extra $600 for children under age 6. While millions of Americans have received advanced credits, filers who earned more than expected may need to pay some of it back.

To qualify for the full credit, single filers need a modified adjusted gross income of less than $75,000, and married couples filing together must earn under $150,000.

Charitable deductions- Taxpayers that made charitable donations may take advantage of a write-off for cash gifts in 2021, even if they don’t itemize deductions on their federal tax return. For 2021, single filers may claim cash donations up to $300, and married couples may get up to $600, according to the IRS, from a relief measure from 2020.

Health insurance premium subsidies- In March 2021, Congress increased subsidies to help make health insurance more affordable for Americans. Since premium subsidies have been capped at 8.5% of household income, some filers may have to repay some of the benefits if their earnings exceed the thresholds for 2021.

Required Minimum Distributions (RMDs) - With new RMD changes initiated from The SECURE Act, if you turned age 70 1/2 in 2019, you would've been required to take your first RMD by April 1, 2020. If you turned age 70 1/2 in 2020 or later, you should have taken your first RMD by April 1 of the year after you turned age 72. This rule generally applies to the original owner's age of a traditional IRA, SIMPLE IRA, SEP-IRA, a 401(k), or 403(b). Roth IRAs do not have RMDs.

Rely on your financial and tax planning professionals

Work with your financial and tax professionals regarding your investments and deductions to help determine how they may impact your tax situation when you file your 2021 taxes. Right now is a great time to meet with them and put a plan in place for 2022 to help you next tax season too!


Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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