Page 9 - Means Wealth 2020/2021 Perspectives
P. 9

Most people assume that the higher their income, the higher their marginal
        rate. If you have a tax year when you have a significant capital gain event you
        might assume that you will be in a higher marginal tax bracket, but that is not
        necessarily the case. For example, if you are a married taxpayer filing a joint
        tax return and have a $1 million long-term capital gain, ordinary income of
        $500 thousand and itemized deductions of $100 thousand, you might think
        that you would be in the top tax bracket of 37%. However, itemized deductions
        will reduce ordinary income first, resulting in a marginal tax bracket of 32% in
        this example.

        The federal tax rates for long-term capital gains and qualified
        dividends for 2020 are:

         Long-Term Capital
          Gains/ Qualified   Married Filing   Single     Married Filing
         Dividend Tax Rate  Joint                          Separate

         0%            $0-$80,000     $0-$40,000       $0-$40,000
         15%           $80,001-$496,600  $40,001-$441,450  $40,001-$248,300
         20%           over $496,600  over $441,450    over $248,300

        Marginal tax rates are particularly useful in evaluating income deferral or
        acceleration strategies, from Roth conversion strategies to deciding whether
        to harvest capital gains or capital losses. One of the most powerful tax
        planning strategies is to ensure you maximize your marginal tax bracket. It is
        anticipated that tax rates will be going up in the future and thus it could be
        advantageous to fill up your tax bracket this year by accelerating income or
        deferring deductions in the current year.

        Taxpayers in the lower income tax brackets may be able to avoid tax on long-
        term capital gains and qualified dividends by taking advantage of the zero
        percent tax rate on capital gains and qualified dividends.

        Preparing an income tax projection and knowing your expected marginal tax
        bracket is a good start for year-end planning. You should discuss the planning
        opportunities with your Tax or Financial Advisor who understands your
        individual tax situation and can help to optimize your marginal tax rate. n

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