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What are folks thoughts about the possibility in the reduction of the standard deduction? Any proposed legislation out there on this? I didn't see any discussion in a quick google search.
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I'm on auto-notify from IRS and a couple of CPA firm news releases and I've seen nothing on a change in the Standard Deduction prior to 2026 when the provisions of the TCJA expire and revert to pre TCJA tax rules. The annual COLA increase from 25,100 for MFJ to $25,900 is scheduled for 2022. Is this what you suggest or do you have reputable info source suggesting otherwise?

BruceM
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What are folks thoughts about the possibility in the reduction of the standard deduction? Any proposed legislation out there on this? I didn't see any discussion in a quick google search.

It's not a possibility - it's a reality. Under the TCJA law, in 2026, the rules on standard deductions and exemptions will revert to the previous calculations, unless Congress makes the TCJA changes permanent. That means that the standard deduction will be cut about in half. That, along with the restoration of miscellaneous deductions, will allow a lot of taxpayers to itemize again. Even though the deduction will be lowered, exemptions will make up for much, and possibly even more than, the lower standard deduction. It's a trade-off and the impact to each taxpayer will be dependent on their personal situation. Some taxpayers will benefit, and others will not.

Of course, the law may always change.

AJ
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Thanks...that was the info I was looking for.

Trying to decide if/how much I want to donate to a Donor Advised Fund. I've got some appreciated stock and will likely retire in the next year or two, so trying to decide between the DAF vs selling at the 0% capital gains rate. I've already got some funds in a DAF, so I may decide to hold off on adding.
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Trying to decide if/how much I want to donate to a Donor Advised Fund. I've got some appreciated stock and will likely retire in the next year or two, so trying to decide between the DAF vs selling at the 0% capital gains rate. I've already got some funds in a DAF, so I may decide to hold off on adding.

Keep in mind that the capital gains tax bracket does not just count the capital gains. All of your other taxable income, plus your capital gains is the figure is used to determine what rate the capital gains are taxed at. So, in 2021, for someone who is single and takes the standard deduction, and has $50k in ordinary income and another $15k in capital gains, their income would be taxed like this:

$12,550 ordinary income - uses up the standard deduction (total counted - $12,550 ordinary income)
$ 9,950 ordinary income - taxed at 10% (total counted - $22,500 ordinary income)
$27,500 ordinary income - taxed at 12% (total counted - $50,000 ordinary income)
$ 2,950 capital gains - taxed at 0% (total counted - $50,000 ordinary income and $2,950 capital gains income)
$12,050 capital gains - taxed at 15% (total counted - $50,000 ordinary income and $15,000 capital gains income)

So even though this taxpayer's capital gains are well below the $40,400 capital gains 0% cap, they still pay a 15% on most of their capital gains because of their other income.

Also, when thinking about retirement, be aware that any of that appreciated stock is company stock in a 401(k), keep in mind that the NUA (Net Unrealized Appreciation) rules can help you get some of your 401(k) taxed at capital gains rates instead of ordinary income rates. You will pay ordinary income rates on the cost basis of the stock, and gains on stock that is sold immediately are considered long term capital gains. Or you could contribute that stock to the DAF, and not be taxed on the gains. There are lots of potential gotchas when executing a NUA, so be sure you understand the rules, or have an advisor that does.

AJ
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??

The taxable income just needs to be less than $80k.

https://www.irs.gov/taxtopics/tc409

Also
https://www.investopedia.com/articles/personal-finance/10151...

Though I can't find now the tax code that said less than $96K(?) ordinary income for MFJ had zero cap gains tax. I found it once, but maybe they changed that law.

1poorguy
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The taxable income just needs to be less than $80k.

Nope. My post said for someone who is single and takes the standard deduction. For singles, the capital gains 0% tax bracket is $40,400 For MFJ, which you are apparently thinking of, it's $80,800

Though I can't find now the tax code that said less than $96K(?) ordinary income for MFJ had zero cap gains tax. I found it once, but maybe they changed that law.

It's dependent on the capital gains tax brackets, plus the standard deduction, which are all adjusted for inflation each year.

AJ
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AJ,
Thanks for your keen insights. I find this site helpful to visualize how the tax brackets work.
https://engaging-data.com/tax-brackets/
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Thanks SkyHigh. I added the link to my tax planning spreadsheet tab, for a good check against what I calculate.

https://engaging-data.com/tax-brackets/
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Thanks for your keen insights. I find this site helpful to visualize how the tax brackets work.
https://engaging-data.com/tax-brackets/


That's a great site, thanks.

Does anyone know how to fairly easily estimate the pass-through business income deduction?
That's the piece I'm missing in my estimator spreadsheet.
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Does anyone know how to fairly easily estimate the pass-through business income deduction?
That's the piece I'm missing in my estimator spreadsheet.

----------------------
For most investors, if you have it, it comes from pass-through entities. The deduction is 20% of the qualified business income (QBI) reported to you on a K-1 from a partnership, LLC, or S-corp, or on a 1099-DIV from a REIT. For investments you had last year, figure the same amount for doing estimates.
But for QBI from your own business or rental activity, only you can know that number.

Bill
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For most investors, if you have it, it comes from pass-through entities. The deduction is 20% of the qualified business income (QBI) reported to you on a K-1 from a partnership, LLC, or S-corp, or on a 1099-DIV from a REIT. For investments you had last year, figure the same amount for doing estimates.
But for QBI from your own business or rental activity, only you can know that number.


I'm below the threshold, so QBI is easy for me to calculate
QBI = Net business income - SE Tax adjustment - 401k - Health Insurance
(I think)

The deduction is the puzzle.

See Q8
https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision...

I think I'm limited by taxable income. But is that taxable income after deducting the QBID, creating a circular reference (like computing your ACA credit does)?
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The proposal to raise the SALT deduction cap to $80k could result in other changes. Still pending. Was to be in effect for the 2021 tax year. But passage this year seems doubtful.

I think no one knows. Not even the Senators voting on it.

Flip a coin. Good luck.
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Maybe you could justify hiring an accountant to do it for you? I already told 1poorlady that if I die she may want to do that. I've shown her what records I keep, how to use Turbo Tax, how to use Quicken (at least what feeble skills I have). But if she feels she is overwhelmed, especially if I died recently, just get an accountant.

1poormom used one before she fell, and I've continued with him. The last two years I just dropped off a file with all the receipts I have, pay him $250, and he produces a tax return ready for her signature. Though I may have to sign it as PoA going forward (her handwriting is deteriorating, and looks like a second grader did it).

I'm considering doing that for myself if ever I think Turbo Tax isn't covering my situation properly. Once I retire I will have ESPP shares for many years, for example. I will be selling those to live on, which I have sold very few in the past. The gains are different because of the structure of the ESPP (HR provided an example many years ago, which I saved but would have to find again). Plus I'll want to be taking full advantage of the ACA. I'm pretty good at math, but prefer quantum mechanics to the intricacies of tax accounting, and keeping track of changes in the tax law.

Plus with an accountant you could plan better to maximize your ACA subsidies until you hit 65.

Just a thought.

1poorguy
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Can you imagine Congress passing the new tax laws for this year say in April? Can you imagine the mad rush to get taxes done not knowing what the law will be? Can you imagine millions of filing extensions? Or numerous amendments to returns once the law is decided.

Our do nothing Congress once again pulls off a disaster. Just from endless delays for God only knows why.
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Maybe you could justify hiring an accountant to do it for you?

We use one. I want to understand what they did. They've made mistakes before. And I want to be able to estimate it going forward.

Anyway, I figured it out.

Below the threshold ($326k MFJ):
QBI = Net business income - SE Tax adjustment - 401k - Health Insurance

Qualified Business Income Deduction (QBID) is the lesser of:

A) 20% of QBI, or

B) 20% of taxable income, before taking the QBID, and after subtracting any net capital gain AND qualified dividends (that's what I was missing).

We usually itemize deductions and keep cap gains/dividends to a minimum (thankyou, Berkshire Hathaway), so our QBID is always based on B). That's quite a bit less than 20% of QBI.

Plus with an accountant you could plan better to maximize your ACA subsidies until you hit 65.

That's not too difficult. Right now, it's managing income timing and maxing out above the line deductions. Being self-employed I get to stash a lot in a solo 401k ($64.5k in 2021) and Mrs. C can usually max an IRA.

The difficulty has been keeping the income below the subsidy cliff. Not a problem for this year or next thanks to the COVID relief changes. For 2023, if nothing changes, we'll be back to the subsidy cliff, by which time I hope to be retired anyway.
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To pauleckler, two posts above: I don't see any sort of disaster whatsoever. I see it as a good thing that we (probably) made it through 2021 without yet even more tax spanking for the upper middle and investor class. Particularly in light of the all he threatening proposals that were floated. I see it as a big win. (But I'm not naïve enough to think that these draconian redistribution proposals won't resurface).
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Though I can't find now the tax code that said less than $96K(?) ordinary income for MFJ had zero cap gains tax. I found it once, but maybe they changed that law.


I haven't read all subsequent posts, so perhaps this has been suggested. So at the expense of being repetitive, let me offer this as perhaps a simpler method of understanding the interplay of ordinary income and capital gains and qualified dividend tax rates.

Stack your income. Put ordinary income on the bottom. This will be income from....
- wages, including self employment
- pension income and traditional IRA withdrawals
- 85% (for most) of Social Security benefits to the household
- taxable bond and taxable money market interest
- interest on installment sales contract
- distributions from Business Development companies and most REIT distributions in taxable accounts
- Net short term capital gains (that are net of all other capital gains and losses)

Then stack on top of this the total of net Capital gains and all qualified dividends. You can combine this for tax calculation purposes as they are taxed exactly the same way.

From the bottom of the stack, remove your household's standard deduction. The stack will now drop down.

Draw a line horizontally at either $80,800 (married filing jointly) or half that $40,400 single or $54,100 if head of household. This will create 3 possible tax situations:

- All of the combined long term capital gain and qualified dividends are below this horizontal line. Here, the LTCG + QD will be taxed at 0% (notice I didn't say 'tax free', as they still make up part of the Adjusted gross income that is used in other tax calculations)
- Part of the combined LTCG + QD are below this line and part above. The part below is taxed at 0% and the part above taxed at 15%
- All the LTCG + QD are above this line, meaning they will be taxed at a flat 15% up until they hit $501,600 (married), $445,850 (S) or $473,750 (HOH), when anything above that line will be taxed at a flat 20%.

With higher adjusted gross income there may be a Net Investment Income Tax, but that's another topic.

One other note. If the horizontal line mentioned above goes through the LTCG + QD, adding another dollar of ordinary income, as may happen with added withdrawals (including Roth conversions) from one's traditional IRA) will increase the tax on that dollar from 12% to 27%, as long as there is LTCG + QD in the 12% bracket. The reason for this is the added dollar will be taxed (for most) at the 12% rate PLUS it will lift a dollar from the 0% rate into the 15% rate. So 12% + 15% = 27% rate on that added dollar.

Creating a chart in Excel can make this easier to conceptualize.

BruceM
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