Over the last three years, thousands of pages of tax code have been written – or, should I say, rewritten. The bulk of new tax code came from the Tax Cuts and Jobs Act (TCJA) in 2017, the Secure Act in 2019, and the Cares Act in 2020. With so many changes, it’s understandable that easy deductions and tax reduction strategies are often missed.
As a financial planner, one of my duties is to work with our tax team to ensure clients take advantage of as many available tax deductions and credits as possible for their situation. To pinpoint available opportunities within the tax code, we compiled the Lighthouse Tax Reduction Checklist. This is a list of 46 tax deductions and strategies that we use to identify potential tax savings for clients. Over the last two months, we introduced you to the first twelve items on our list. This month, we’re highlighting the next four.
13. 529 Plans for Education
You pay federal taxes on your contributions, but the money grows tax-free and distributions for qualifying educational expenses are not taxed. There are no annual contribution limits, but contributions above $15,000 per donor per beneficiary count against the lifetime estate and gift tax exemption. Each state sponsors a 529 plan with different investment options. If you contribute to your state’s plan, you may receive a state tax deduction as well. For Marylanders, it could be as much as $2,500 per year per child. Also, money in these accounts can now be used to cover private school tuition of up to $10,000 per year.
14. Flexible Spending Accounts
If you already know that you will have ongoing expenses related to childcare or out of pocket healthcare, why not receive some tax breaks for them? Healthcare flexible spending account limits increased to $2,750 in 2021. The contribution increase is also applicable to limited-purpose FSAs that are restricted to dental and vision care services and can be used along with health savings accounts (HSAs). In either case, don’t overfund it since it’s “use it or lose it”. Dependent childcare FSA for 2021 remains at $5,000 a year for individuals or married couples filing jointly, or $2,500 for a married person filing separately. To be clear, married couples have a combined $5,000 limit, even if each has access to a separate dependent care FSA through his or her employer.
15. Electric Vehicle (EV) Tax Credits
With EVs becoming the “transportation of the future”, it’s important to consider both federal and state credits that may be available when deciding on purchasing a vehicle. You could be eligible for up to a $7,500 federal tax credit the year you purchase your EV based on which model you purchase. As an example, the Nissan Leaf qualifies for the maximum $7,500 credit while the BMW x3 hybrid’s tax credit is $5,836. The Department of Energy keeps a list of qualified vehicles. Go to www.fueleconomy.gov to see the list and credits. Also, keep in mind that the tax credit is only available for a purchase and not a lease. For those of you who are Tesla fans, you are out of luck. Once a manufacturer sells 200,000 qualified vehicles, the tax credit expires – and Tesla reached that milestone in 2018. Maryland also had a $3,000 tax credit that ran out in the summer of 2020. We’re waiting to see if the credit is renewed for this year.
16. Avoid the Medicare Tax Surprise
For those tax filers who are on Medicare, there lurks a penalty that can cause the amount of Medicare Part B premium to skyrocket two years after a higher income year. Many people don’t realize that premium you pay for Medicare is based on your income from two tax years ago. Below is a chart from www.medicare.gov. You’ll notice that if you are Married Filing Jointly in 2019, and your adjusted gross income was $176,000 or less, your premium would be $148.50 for each spouse on Medicare. But earn just $1 more, your premium goes to $207.90. That is an increase of $59.40 per month for each spouse or $1425.60 for that year! You need to be aware of these levels when making decisions such as taking withdrawals from retirement accounts or capturing capital gains. It may be smart to push this income to a different year if possible, and that’s where tax planning is critical to saving you from these onerous increases.
Again, these are only a few of the items we review to minimize taxes for our clients. And less tax means you keep more of your hard-earned money. Reach out if you’d like a review of your personal tax situation. Call us at 301-865-9740 or email us at firstname.lastname@example.org.