Let's make your day with a quick tax discussion. The amount of tax you pay when completing your tax return is not nearly as simple as just looking at the tax brackets. There are several other pieces at play (tax credits, etc.) that go into determining what exactly your tax is. Some of these other benefits are subject to phaseouts. By phase out I mean if your income is in a certain range your benefit is reduced. For example, the expanded child tax credit starts phasing out at modified adjusted gross income (AGI) of $150K for married filing jointly taxpayers. You don’t just immediately lose the benefit but slowly lose it the higher your income is until you are phased out. There are several phase outs happening on your 2021 return that are relatively unique. A few of them are listed below.
Economic Impact Payment (aka stimulus checks) - Why are we still talking about stimulus checks? If you did not receive the third stimulus check yet because your income was too high on prior returns, all is not lost. If your income has dropped in 2021, you actually can still receive all or a portion of the third stimulus check. It would increase your refund or reduce your tax due when you file your tax return. The third stimulus check starts phasing out at $150K of AGI for Married Filing Joint and $75K for Single.
Expanded Child Tax Credit - This starts phasing out at $150K of modified AGI for Married Filing Joint and $75K for Single.
Dependent Care Credit - This starts phasing out at $125K in 2021.
Under current rules (subject to change), the above items will not apply (at least not in their same form) after the 2021 tax return. Let me cherry pick a scenario. You are married filing joint with two kids. Your prior income phased you out of the third stimulus check. When you start to prepare your tax return, you see your income is showing as $160K. It is entirely within the realm of possibility that you could still make deductible 2021 retirement and HSA contributions to reduce your income down to $150K. Doing so, could increase your refund or reduce your tax due easily $8,000+ between possible, federal income tax, state income tax, stimulus checks, child tax credit, dependent care credit, etc changes. Quick notes:
Every situation is unique. You may or may not qualify for the tax credits and other benefits mentioned above.
I specifically referenced Married Filing Joint and Single phaseouts in places. There are other tax filing options like Head of Household that may have different income phaseouts.
Income is somewhat variable depending on what benefit you are talking about. Some tax items just use Adjusted Gross Income, some modify that number, and some use something else entirely.
Whether you can make deductible retirement contributions or HSA contributions is dependent on your situation.
Interesting Article(s) or Video(s)
National Christian Foundation - 5 questions about money for every family
Occasionally when diving into the weeds of personal finance, we forget some of the big picture issues. A great read to realign perspective.
Thank you for reading!