Tax Rates and Brackets for 2021

Not to be confused with tax form preparation, income tax planning is the analysis of a financial situation to determine how after-tax wealth can be maximized.

An essential first step is determining the applicable tax bracket, also known as the marginal tax rate. The table below shows the newly revised tax rates for 2021.

Rate Individuals Married Filing Jointly
10% Up to $9,950 Up to $19,900
12% $9,951 to $40,525 $19,901 to $81,050
22% $40,526 to $86,375 $81,051 to $172,750
24% $86,376 to $164,925 $172,751 to $329,850
32% $164,926 to $209,425 $329,851 to $418,850
35% $209,426 to $523,600 $418,851 to $628,300
37% Over $523,600 Over $628,300

The standard deduction is now $12,550 for individuals and $25,100 for married couples.

Capital Gains Rates for 2021

Here are the rates for long-term capital gains (assets held for more than a year). Please note that the Affordable Care Act 3.8% investment income tax remains in place, and state taxes are also a consideration when selling assets. It is also important to note that capital gains stack on top of ordinary income. For example, a single taxpayer with $100,000 of ordinary taxable income will pay 15% on long-term capital gains.

Rate Individuals Married Filing Jointly
0% Up to $40,400 Up to $80,800
15% $40,401 to $445,850 $80,801 to $501,600
20% Over $445,850 Over $501,600

 

How We Increase Your Tax Efficiency

Here are some of the methods used by Clarity to increase the tax-efficiency of our clients’ portfolios.

  • Advising on account types to maximize current tax deductions or future tax-free income.
  • For clients in high marginal tax brackets, municipal bond funds may be used in taxable accounts.
  • For clients in high tax states like California, state-specific municipal bond funds may be used.
  • Tax management of equities is implemented by using only low turnover funds. Furthermore, foreign equities may be limited to holdings that pay qualified dividends.
  • While some advisors use asset location as a justification to have retirement accounts hold only bonds and real estate investment trusts, we do not take this approach because we consider a small gain in tax efficiency to be not worth the cost of having drastically different returns across different accounts.

At Clarity, we will work with your tax professionals to ensure that they have all the information they need from us to properly complete your taxes. Likewise, we will obtain from them the information we need to efficiently trade your accounts such as marginal tax rates and loss carryforwards.

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