Invest in Knowledge

Around the Tax Code in 45 minutes, plus bonus content

March 14, 2022 John Gigliello, CFP® Season 1 Episode 6
Invest in Knowledge
Around the Tax Code in 45 minutes, plus bonus content
Show Notes Transcript Chapter Markers

Do you struggle with the basic concepts of our country’s income tax system?  Do you cringe at the thought of filing your income taxes every year, hoping that you won’t be audited?  Ever wonder why your friends get large refunds every year while YOU have to pay?  Well, you’re not alone.  Millions of citizens are literally baffled each and every year by the progressive income tax system in the United States.  And I can’t say that I blame them. According to the non-profit group The Tax Foundation, the IRC has approx. 9,000 pages covering statutes, revenue regulations and rulings.  Now I’ve been preparing taxes for the better part of 30 years and that intimidates even me!  

Hi, I’m John Gigliello, Certified Financial Planner with the Albany Financial Group and you’re listening to Invest in Knowledge, a podcast about all things financial.  After a life-altering health issue at 39, my calling in life became clear: To share my knowledge of personal finance with PEOPLE who are looking to make smart and responsible choices with their money.  Only through education, action and accountability can YOU build the confidence and security YOU need to live a SATISFYING life.  This month’s episode is about helping you to better understand our country’s income tax code in forty-five minutes or less and the original content has been taken from the Wall Street Journal’s 2022 Tax Guide.  First, we’ll take a look at the Big Picture where I’ll discuss the basics of the tax system.  Then I’ll move into the Bonus Section where I’ll talk about such items as retiree tax issues, concerns for widows and widowers, education tax credits and a special section for first-time tax filers.  

So, strap on your seats belts and let’s take a quick ride through the tax code and remember that there will be a lot of content here, so it’s okay to pull off at your favorite rest stop and take a little break when you need to.  Let’s get started.  

Do you struggle with the basic concepts of our country’s income tax system?  Do you cringe at the thought of filing your income taxes every year, hoping that you won’t be audited?  Ever wonder why your friends get large refunds every year while YOU have to pay?  Well, you’re not alone.  Millions of citizens are literally baffled each and every year by the progressive income tax system in the United States.  And I can’t say that I blame them. According to the non-profit group The Tax Foundation, the IRC has approx. 9,000 pages covering statutes, revenue regulations and rulings.  Now I’ve been preparing taxes for the better part of 30 years and that intimidates even me!  

Hi, I’m John Gigliello, Certified Financial Planner with the Albany Financial Group and you’re listening to Invest in Knowledge, a podcast about all things financial.  After a life-altering health issue at 39, my calling in life became clear: To share my knowledge of personal finance with PEOPLE who are looking to make smart and responsible choices with their money.  Only through education, action and accountability can YOU build the confidence and security YOU need to live a SATISFYING life.  This month’s episode is about helping you to better understand our country’s income tax code in forty-five minutes or less and the original content has been taken from the Wall Street Journal’s 2022 Tax Guide.  First, we’ll take a look at the Big Picture where I’ll discuss the basics of the tax system.  Then I’ll move into the Bonus Section where I’ll talk about such items as retiree tax issues, concerns for widows and widowers, education tax credits and a special section for first-time tax filers.  

So, strap on your seats belts and let’s take a quick ride through the tax code and remember that there will be a lot of content here, so it’s okay to pull off at your favorite rest stop and take a little break when you need to.  Let’s get started.  

Congress has enacted new laws: In 2017 legislators made basic, far-reaching changes set to expire after 2025, while the 2019 Secure Act revised retirement -plan rules.  In 2020 and 2021 came a sea of changes responding to the COVID-19 pandemic.  Meanwhile, the IRS has issued guidance on hot-button issues ranging from cryptocurrency to required IRA withdrawals.  On top of that, there are inflation adjustments that shift the code slightly every year.  

This year’s filing season brings special challenges.  Tens of millions of taxpayers will grapple with reporting requirements for last year’s stimulus payments and expanded child tax credits.  In a historic move, Congress had the IRS prepay a portion of the expanded credits in monthly installments during 2021.  While this change put needed cash in the pockets of many families, it will shrink refunds many filers are anticipating as well.  

As always, taxpayers will have a flood of questions: Do I file for a 2021 stimulus payment through my return, and is it taxable?  How did the child and dependent care credit change last year?  What’s the threshold for the zero-tax rate on capital gains?  What’s the deadline for contributing to a Roth IRA? 

First let’s take a look at The Big Picture.  

                The tax code currently has seven income-tax brackets for individuals that range from 10 – 37%.  The 10% rate takes effect at the first dollar of taxable income, after benefits such as the standard deduction are applied.  Each tax rate applies to income in that bracket.  So, a taxpayer whose last dollars are taxed at 24% will likely have portions of income taxed at 0, 10%, 12% and 22%.  The current rates and brackets were set by the 2017 tax overhaul, and they expire at the end of 2025.  If Congress doesn’t make changes, the top rate will return to 39.6% in 2026.  

Investment-Tax Rates and Brackets

                Investors with taxable accounts – as opposed to tax-favored retirement accounts such as individual retirement accounts or 401(k)s – are often eligible for lower tax rates and other benefits.  When an investor sells a holding in a taxable account, the result is a capital gain or loss.  That is the difference between the investment’s original cost (plus adjustments) and its selling price.  A key benefit is that capital losses can offset capital gains.  If total losses exceed total gains, the net losses can offset up to $3,000 of “ordinary” income such as wages per year. 
Another benefit is that unused capital losses can be carried forward to offset

future capital gains and ordinary income.  Long-term capital gains are profits on investments held longer than a year. They are taxed at favorable rates of 0%, 15% or 20%.

Short-term capital gains are those on investments held a year or less. They are

taxed at the higher rates that apply to ordinary income. This is a key distinction frequent traders should be aware of.  The favorable lower rates for long-term gains also apply to dividends that are “qualified,” which are most of them. Other dividends are taxed at the higher rates for ordinary income like wages.

Withholding and Estimated Taxes

The U.S. income tax is a pay-as-you-go system. The law requires most employees

and self-employed business owners to pay at least 90% of their taxes long before the April due date. This year, the due date for 2021 tax returns for most taxpayers is April 18, 2022 (April 19 for residents of Maine and Massachusetts). Filing deadlines may also be delayed for victims of federally declared disasters. Taxpayers can request a six-month extension to file their returns, but that doesn’t delay the requirement to pay what they owe.  

                With some exceptions, tax underpayments incur penalties based on current interest rates. Recently this rate was 3%. To avoid these penalties, employees and many retirees typically have taxes withheld from paychecks or Social Security and pension payments over the course of the year.  Self-employed business owners and others who don’t have withholding instead make quarterly estimated payments of their taxes based on earnings for that quarter.  Many Americans also received unemployment compensation in 2021. These payments are taxable, and unlike in 2020 there’s no partial exemption. Recipients should expect to receive a Form 1099-G for the total that is being reported to the IRS.

Pandemic Stimulus Payments 

                In March 2021, Congress authorized a third round of stimulus payments of up to $1,400 per household member—including adults, children, adult dependents like college students and elderly relatives. These payments aren’t taxable, and overpayments don’t need to be returned to the IRS in most cases.  To date, the IRS has sent more than 175 million third-round payments totaling more than $400 billion, based on a filer’s 2019 or 2020 income. Some of these were “top-up” payments for people who received an amount based on their 2019 income and then qualified for more based on 2020 returns they filed in 2021. That could be, for example, because of a job loss or the birth of a child in 2020.  Because the stimulus payments were structured as an advance payment of a tax credit for 2021, taxpayers can also qualify based on their 2021 income and family situation if they haven’t received payments or are eligible for more. These amounts are claimed as a Recovery Rebate Credit on line 30 of Form 1040; the instructions have a worksheet to determine the correct amount.  Single filers with adjusted gross income of $75,000 or less, heads of household with AGI of $112,500 or less and married joint filers with AGI of $150,000 or less qualify for the full $1,400 payment. Above that, the phaseout for receiving a partial payment is steep: Individuals with AGI of $80,000, heads of household with AGI of $120,000 and married joint filers with AGI of $160,000 get nothing.

State Taxes on Remote Work

                The pandemic has turned millions of Americans into telecommuters. As one Covid-19 variant has followed another, some companies have stopped trying to predict when they will require employees to return to the workplace and on what terms.  This shift often brings tax complexity for people working remotely in a state different from the one where their office is, because they may have to file returns and even pay taxes to more than one state.  The problem is that each state’s tax system is a unique mix of rules that consider how long a worker is there, what income is earned, and the location of the worker’s true home, or “domicile.” While some states give credits for taxes paid to different states, others don’t—or the credit they give may not fully offset the tax paid.  As a result, out-of-state remote workers can wind up owing more, or the same, or (rarely) less. Businesses often face a torrent of extra tax-filing requirements, even if the amount of income paid to remote workers is relatively small.  A number of states passed special pandemic provisions for remote workers, but these have mostly lapsed, according to Cathie Stanton, a member of the American Institute of CPAs who monitors state taxes on remote work. Some states are eyeing remote workers as a revenue source.


                Cryptocurrency owners, beware: The IRS is trying to strip away excuses for millions of people who aren’t complying with the tax rules on them, either inadvertently or on purpose.  The agency has put a pointed question on the front page of the Form 1040, just below the taxpayer name and address. It first appeared on the 2019 tax return in a less prominent position and moved to its current place on the 2020 return.  On the 2021 return, the question has been reworded slightly: At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?

                The tax filer must check the box “Yes” or “No.” Cryptocurrency owners who don’t answer the question or are untruthful risk higher penalties if the IRS audits them, as it will be hard to claim ignorance of the rules. The IRS first released guidance on the taxation of cryptocurrencies in 2014. It said that bitcoin and other cryptocurrencies are property, not currencies such as dollars or euros. Often, they are investment property similar to stock shares or real estate.

                This means that if the crypto is held in a taxable account— as opposed to a retirement account like an IRA or Roth IRA—net profits from a sale are typically taxed as long-or short-term capital gains, and losses can be used to offset gains.  This tax treatment has benefits, but also important drawbacks. If crypto is used to make a purchase—even of a sandwich—then the transaction typically generates a taxable sale of the crypto that the buyer must report to the IRS.  For example, say that Jack buys a boat with $10,000 of cryptocurrency that he purchased for $5,000. Jack’s transfer of the crypto is taxable. He has to report a taxable gain of $5,000 to the IRS—much as if he bought the boat with shares of stock that had grown from $5,000 to $10,000.  This makes cryptocurrencies a cumbersome substitute for cash.  

 Estate and Gift Tax

                The federal estate-and gift-tax exemption applies to the total of an individual’s taxable gifts made during life and assets left at death. Above the exemption, the top rate on such transfers is 40%.  In 2017, Congress doubled the exemption starting in 2018, and the amount will continue to rise with inflation through 2025. This expansion helped reduce the number of taxable estates to about 1,300 for returns filed in 2020 from about 5,200 in 2017, according to the latest IRS data.  For 2021, the lifetime exemption for both gift and estate taxes was $11.7 million per individual, or $23.4 million per married couple.  

 Capital Gains at Death

Under current law, investment assets held at death aren’t subject to capital-gains tax. This valuable benefit is known as the “step-up in basis.”  For example, say that Robert dies owning shares of stock worth $100 each that he bought for $5, and he held them in a taxable account rather than a tax-favored retirement plan such as an IRA.  Because of the step-up provision, Robert won’t owe capital-gains tax on the $95 of growth in each share of stock. Instead, the shares go into his estate at their full market value of $100 each. Heirs who receive the shares then have a cost basis of $100 each as a starting point for measuring taxable gain or loss when they sell.  

 The Annual Gift-Tax Exemption

For 2022, the annual gift-tax exemption has risen to $16,000 per donor, per recipient. In 2021, this limit was $15,000.  Using this tax break, a giver can give someone else—such as a relative, friend or stranger—assets up to the limit each year, free of federal gift taxes.  Annual gifts aren’t deductible for income-tax purposes, and they aren’t income to the recipient.  Above the annual exclusion, gifts are subtracted from the giver’s lifetime gift– and estate-tax exemption. 

 Bunching Gifts for College

Using another strategy, givers can “bunch” five years of annual $16,000 gifts to a 529 education-savings plan, typically for children or grandchildren. In this case, a gift-tax return should also be filed.

 Deductions & Exemptions

                The standard deduction is the amount taxpayers can subtract from income if they don’t break out deductions for mortgage interest, charitable contributions, state and local taxes and other items separately on Schedule A. Listing these deductions separately is called “itemizing.”  For 2021, the standard deduction is $12,550 for single filers and $25,100 for married couples filing jointly. For 2022, it is $12,950 for singles and $25,900 for married couples.  In 2017, Congress made a landmark change by nearly doubling the standard deduction, and the percentage of filers itemizing deductions dropped to about 11% in 2019 from about 31% in

2017, according to the latest IRS data. This shift has simplified returns for about 30 million filers and lightened the agency’s burden by reducing the number of deductions it needs to monitor.

However, taxpayers taking the standard deduction don’t get a specific tax break for having mortgage interest or making charitable donations. (For 2021, Congress is allowing charitable deductions of small amounts by filers who don’t itemize.)  That change will likely affect future decisions about making donations or owning a home.

 Child Tax Credit

                Congress has expanded the child tax credit twice since 2017, and these expansions have put needed dollars in the pockets of many parents. However, prepayments of the credits during 2021 will also create confusion during the 2022 tax-filing season and could leave some recipients owing unexpected tax bills for 2021. Here’s what parents need to know.  As part of the 2017 tax overhaul, Congress doubled the existing child tax credit to $2,000 per child under age 17 at year-end. It is a dollar-for-dollar reduction in taxes that a range of filers can claim, because it begins to phase out at $400,000 of adjusted gross income for married joint filers and $200,000 for single filers.  This expanded child credit is in effect for 2021 and 2022, and it expires at the end of 2025.  Last March, Congress added a second expansion of the credit just for 2021, as part of its pandemic response. It’s up to $1,600 per child under age 6 and $1,000 per child ages six through 17 as of Dec. 31, 2021. Also, just for 2021, the first expansion of the child credit applies to dependents who were 17 at year-end.  This means that for 2021 the total maximum child tax credit is $3,600 per child under six and $3,000 per child from ages six to 17 at year-end. The full credit is refundable and available even to tax filers who have no income and owe no tax.  

                 Now there’s a lot more to this credit, but at the risk of putting many to sleep, I will stop here.  Please call us with any additional questions you may have.  

 State & Local Deductions (SALT)

                Since the 2017 tax overhaul, the deduction for state and local property and income or sales taxes has been capped at $10,000 per return. Previously these deductions were unlimited for individuals.  The $10,000 cap expires at the end of 2025.  This change has prompted many filers to switch to taking the standard deduction rather than itemizing on Schedule A.  The SALT cap affects many married couples more than singles, because the $10,000 SALT limit is per return, not per person.  Can two spouses file separately and claim two $10,000 deductions? No. Although married couples can file separate returns, each spouse would get a $5,000 deduction for state and local taxes. To qualify for two $10,000 deductions, the couple would have to divorce and file as two single taxpayers.  According to the Tax Foundation, the SALT cap has hit hardest in eight high-tax jurisdictions. New York, California, the District of Columbia, Connecticut, New Jersey, Maryland, Oregon, and Massachusetts. It has had the least impact in Alaska, South Dakota, Tennessee, North Dakota, Washington, New Mexico, Texas and West Virginia.

 Mortgage Interest Deduction

                The number of taxpayers claiming mortgage interest deductions on Schedule A has dropped sharply since the 2017 tax overhaul enacted both direct and indirect curbs on them. For 2019, about 13 million filers claimed the deduction vs. about 33 million for 2017, according to the latest IRS data.  A key reason for the change: Millions more filers are claiming the expanded standard deduction rather than itemizing write-offs separately on Schedule A. For example, a married couple won’t benefit from itemizing if their mortgage interest, state and local taxes and charitable contributions total less than their standard deduction amount of $25,100 for 2021 or $25,900 for 2022.  In addition, Congress in 2017 imposed new limits on the amount of mortgage debt that new purchasers can deduct interest on.  

 Limits On Eligible Mortgage Debt

Limits apply for taxpayers taking mortgage-interest deductions, and they are more generous for homeowners with older mortgages.  Homeowners with existing mortgages taken out on or before Dec. 15, 2017 can continue to deduct interest on a total of $1 million of debt for a first and second home. For mortgages issued after Dec. 15, 2017, homeowners can deduct interest on a total of $750,000 of debt for a first and second home. These limits aren’t indexed for inflation.  

 Home-Equity Loans And Lines Of Credit (HELOCS)

The law now prohibits interest deductions for such debt unless the funds are used for certain types of home improvements. Before 2018, homeowners could deduct the interest on up to $100,000 of home-equity debt used for any purpose.  To be deductible now, the borrowing must be used to “buy, build or substantially improve” a first or second home. The debt must also be secured by the home it applies to, so a HELOC on a first home can’t be used to buy or expand a second home.

 Charitable Donation Deduction

                During the pandemic, Congress temporarily expanded tax deductions for charitable donors. This expansion expired at the end of 2021.  For 2021, single filers who don’t itemize deductions on Schedule A can deduct up to $300, and married joint filers can deduct up to $600.  These donations must be of cash—such as by check, credit card or similar transfer—rather than property such as used clothing or furniture

Medical Expense Deduction

                In 2020, Congress enacted a permanent threshold for taking deductions for medical expenses. Filers can deduct eligible expenses only to the extent that they exceed 7.5% of their adjusted gross income.  Relatively few taxpayers benefit from this write-off because their deductible expenses don’t exceed the threshold. But it covers a wide range of unreimbursed costs when it does apply and it is valuable to filers with large medical expenses such as nursing-home costs. Other eligible costs include insurance premiums paid with after-tax dollars, acupuncture, menstrual products, prostheses, eyeglasses, and even a wig if needed after chemotherapy, among other things.  This deduction is only available to taxpayers who itemize.

Retirement Savings Accounts

                To encourage saving for retirement, Congress has provided Americans with an array of tax-favored accounts. Some, such as 401(k) and 403(b) accounts, are sponsored by employers. Others, including most individual retirement accounts, are owned and funded by individuals. Still others, such as Solo 401(k)s, are for self-employed workers.  These accounts typically have annual limits on contributions and often income-eligibility requirements, as well. Savers or their spouses also must have at least as much earned income—such as from wages, not investments–as the amount of the contribution to them. Other limits can apply.  In addition, tax-favored savings plans have restrictions as to when money in these accounts can be withdrawn and when it must be withdrawn, for the saver to avoid penalties. For example, withdrawals before age 59 ½ are often subject to a 10% penalty if the saver received a tax deduction on contributions to the account.  Assets within retirement accounts typically grow tax-deferred, but other features vary according to the type of account. Contributions to traditional IRAs and 401(k) plans are often tax-deductible, and withdrawals are taxed at the same rates as ordinary income like wages—not the lower rates for long-term capital gains.  With Roth IRAs and Roth 401(k)s, the opposite is the case: Contributions aren’t tax-deductible going in, but withdrawals can be tax-free. Roth accounts can be a good choice for savers who expect their tax rate to be lower when contributions are made than when they are withdrawn.  For both 2021 and 2022, the limit on contributions to traditional IRAs and Roth IRAs remains $6,000, plus $1,000 for those age 50 and above. Currently there is no age cap for individuals contributing to traditional IRAs.

 Roth IRA Conversions

Savers can convert all or part of a traditional IRA to a Roth IRA, but they will owe

income tax on the transfer. This switch can make sense for people who expect their future tax rates to be higher than their current tax rate, especially if they will pay the taxes due on the transfer of funds outside the account. Future tax-free withdrawals from the Roth accounts won’t push the saver into a higher tax bracket or trigger higher Medicare premiums.  

Also, savers can no longer undo a Roth conversion by “recharacterizing” it later.

 Inherited IRAs

Because of a law change, heirs of Roth or traditional IRAs whose original owners died after Dec. 31, 2019 must now empty the accounts within 10 years. Annual payouts aren’t required during this period.  The law has exceptions to the 10-year payout for some heirs, including surviving spouses. They can continue to stretch required payouts—and taxes on them—over many years. For minor children of the deceased IRA owner, the 10-year withdrawal period often begins when they reach the age of majority, which is 18 in most states. Students may be able to delay the 10-year period up to age 26.  

 Flexible Spending Accounts and the Dependent-Care Credit

                Flexible spending accounts (FSAs) are employer-sponsored plans that allow workers to set aside pretax dollars to pay certain unreimbursed expenses.  Funds in healthcare FSAs are for healthcare expenses such as glasses, over-the-counter medication, menstrual-care products, or a wig after chemotherapy. Funds in dependent-care accounts can reimburse parents for after-school programs or summer camp, among other things. Workers’ contributions to FSAs aren’t subject to federal payroll taxes, or in many cases, state taxes.  For healthcare FSAs, the limit per employee for 2021 was $2,750, so a couple could put up to $5,500 if plans were offered by both employers. For 2022, that limit rises to $2,850.  For dependent-care FSAs, the limit is usually $5,000 per family, with no adjustment for inflation, and other requirements may apply if one spouse has little or no earned income.  

Child- and Dependent-Care Tax Credit

The tax code has a credit for dependent-care expenses for children under age 13 when the care was provided, and it also can apply to expenses for others of any age who are incapable of caring for themselves—such as an elderly relative.  In most years—including 2022—many filers get a credit for 20% of up to $3,000 of eligible expenses for one dependent, or up to $6,000 of expenses for two or more.  For very low earners, the credit can be as high as 35% of these expenses.  

Home-Sellers Exemption

                Married couples filing jointly can exclude up to $500,000 of net profit on the sale of a primary home from taxes. For single filers, the exemption is $250,000. These amounts aren’t indexed for inflation.  For example, say that a married couple bought a home many years ago for $120,000 and later made $100,000 of improvements. This year, they sell the home for $600,000.  The gain, or profit, on the sale is $380,000. All of it would be exempt from capital gains tax due to their $500,000 exemption.  To be eligible for this benefit, the homeowner typically must have used the house as a primary residence for two of the previous five years. Surviving widows and widowers have until two years after the spouse’s date of death to sell and qualify for the $500,000 exemption rather than a $250,000 benefit, as long as the survivor hasn’t remarried. The survivor will also likely get a “step-up” in cost basis on half of the home’s value (in most states) or all of the home’s value (in community-property states). This will lower capital-gains taxes on the home sale, if any are owed.  Other limits and exceptions apply, such as for military personnel or the sale of a primary home that previously was used as a second home. Many more details on this exemption are here.

 Miscellaneous Deductions

                The 2017 tax overhaul disallowed many miscellaneous deductions that taxpayers claimed on Schedule A. These changes generally expire at the end of 2025.  As a result, employees can’t deduct their home-office expenses—a benefit that would be useful to millions still working at home. (Business owners can still take deductions for home offices.)  Other miscellaneous deductions repealed until 2026 include write-offs for unreimbursed expenses for employee travel, meals and entertainment; union dues; safe-deposit box fees; tax-preparation fees; and subscriptions, among others.  Also suspended is the deduction for investment-advisory fees. This change affects investors who pay fees for advice based on a percentage of their assets, including many with tax-efficient separately managed accounts. 

Tax Breaks for Education

                Late in 2020, Congress permanently repealed the longstanding tuition and fees deduction, beginning in 2021, and expanded the Lifetime Learning Credit. It and the American Opportunity Credit are now the principal tax credits for education.  For 2021 and beyond, both credits now have the same income phaseout range: $80,000 to $90,000 of adjusted gross income for most single filers, and $160,000 to $180,000 for most married couples filing jointly. These limits aren’t adjusted for inflation.  But they apply differently. The American Opportunity Credit provides a maximum tax reduction of $2,500 per student per year, which is composed of 100% of the first $2,000 of eligible expenses and 25% of the next $2,000. In general, it is available for the first four years of postsecondary education, and it applies to tuition and course-related expenses, not room and board.  The Lifetime Learning Credit is typically less generous, but applies to a broader range of education expenses. It is a tax offset of 20% of up to $10,000 of eligible expenses, or up to $2,000 per taxpayer per year. It can be used not only for undergraduate education but also for graduate education, continuing education, and jobs-skills classes even if the skills aren’t related to current employment. A taxpayer can’t claim more than one of these credits for the same student per year.

 Deduction For Student-Loan Interest      

Taxpayers with student-loan interest can typically deduct up to $2,500 of it a year. This limit applies per tax return, so it is the same both for singles and for married couples filing jointly. For tax year 2021, the deduction phases out beginning at $70,000 of adjusted gross income for most single filers and $140,000 for most married joint filers. For 2022, the phaseout begins at $70,000 for most single filers and $145,000 for most married joint filers. 

In 2017, Congress made an important change for people with student loans who die or become disabled: Forgiveness of such debt due to death or disability is no longer taxable. In 2021 pandemic legislation, lawmakers also said forgiveness of student loans wouldn’t be taxable through 2025. These provisions expire at the end of 2025.

 529 Education-Savings Accounts

                Named after a section of the tax code enacted more than two decades ago, 529 accounts allow savers to contribute dollars after federal taxes have been paid on them. The assets then can be invested and grow free of federal and state taxes.  Withdrawals from these accounts are tax-free if they are used to pay eligible education expenses such as college tuition, books, and often room and board.  These plans are popular with middle and upper-income families.  Most 529 plans are offered by states, and nearly all states and the District of Columbia have them. More than 30 states offer a tax break for contributions. Savers dissatisfied with their own state’s investment offerings or fees can go elsewhere, although investment options are limited in most plans.

 Paying For K-12 Education

Since 2018 Congress has allowed 529 plan assets to be used to pay up to $10,000 per student, per year, for tuition for K-12 students. This change provides more flexibility to savers with 529 plans.  Private schools will likely want to know about families’ 529 savings and may take that information into account when making financial-aid decisions. Those who want to use this break should also check carefully to make sure these withdrawals are approved for their specific 529 plan, as some don’t allow them.

Using 529 Assets To Pay Student Loans

Parents and others with 529 education-savings accounts are now able to take tax-free withdrawals for repayments of some student loans for each beneficiary and beneficiary’s siblings. There is a lifetime limit of $10,000 per borrower. Not all states have adopted this rule, and a 529 payout for student debt may incur state tax.  In addition, some costs for apprenticeships are eligible for tax-free withdrawals from 529 accounts.  

 Bonus – Beyond the Basics

 Retiree Tax Issues

 IRA Withdrawals

Due to the pandemic, Congress suspended required minimum distributions from retirement accounts such as traditional IRAs for 2020, but lawmakers didn’t pass a similar measure for 2021. This change must be made by Congress, not the IRS. Under current law, Roth IRA owners don’t have required annual payouts.  For people born after June 30, 1949, required minimum payouts from these accounts begin in the year they turn 72, while savers born on or before that date had to begin withdrawing at age 70 ½.

Required withdrawal amounts are based on the account’s value as of the prior Dec. 31. Savers have until the following April 1 to make their first required withdrawal, but advisers often discourage waiting because then the saver will have two required withdrawals in the second year, possibly pushing him or her into a higher tax bracket.  For all years after the first, required withdrawals must be made by year-end.  For 2022 and later years, the IRS has updated the life expectancy tables used to calculate withdrawals. The revised tables typically assume longer lifespans, resulting in lower required payouts.  

 IRA Charitable Transfers

This popular benefit allows retirees who are 70½ or older to donate IRA assets up to $100,000 directly to one or more charities and have the donations count toward their required annual payout.  For IRA owners who give to charity, this is often a tax-efficient move. Donors can take the standard deduction and still receive a tax break for their giving.  While there is no deduction for gifts of IRA assets, the withdrawal doesn’t count as taxable income. This can help reduce Medicare premiums that rise with income and taxes on other investment income, among other things. Givers should also make sure they account for the charitable transfer on their tax return. IRA sponsors such as brokers and banks typically record the gross withdrawal on the 1099-R, not the net amount after the donation.

 For Widows & Widowers

                The death of a spouse often combines emotional upheaval with the need to make key decisions and deal with tax complexities. Here are issues to consider.  

 Filing An Estate-Tax Return

Executors don’t need to file a return if the decedent’s estate is below the total lifetime exemption for taxable gifts made during life and assets left at death. This exemption was $11.7 million per individual for 2021 and is $12.06 million for 2022.  They may want to file one, however, as the surviving spouse can often add the partner’s unused exemption to their own. This could help if Congress lowers the gift- and estate-tax exemption in the future.  Estate taxes are normally due nine months after the date of death. But the IRS allows executors to claim the unused exemption for the spouse up to two years after the date of death, in many cases.  

 Tax-Bracket Shifts

The year of death is the last one for which a couple can file jointly. After that, the survivor files either as a single person or, if there are dependent children, as a surviving widow or widower. Surviving widow(er)s retain the benefits of joint filing for up to two years after the year of the spouse’s death, and then they typically file as head of household.  Surviving spouses should be aware that even if their income drops, their top tax rate may not drop—and could even rise—as a result of shifting from joint-to single filing status. Some call this “the widow’s penalty.”  

 The Step-Up

Under current law, the estate of someone who dies with assets held outside retirement accounts—such as a home, stocks or a business—typically doesn’t owe tax on their appreciation. When heirs sell these assets, they owe tax only on growth after the original owner’s death. This valuable resetting of the cost basis, which is the starting point for measuring capital gains, is called the “step-up.”  In most states, jointly held assets such as a home or investment account receive a 50% step-up after one partner dies.  In nine states with community property laws, the step-up on jointly owned assets resets the basis to 100% of fair market value after the first spouse’s death.  Surviving spouses will want to take the step-up into account when selling assets because a lower gain typically brings a lower tax bill.

 The Home-Seller’s Exemption

Survivors who plan to sell their home should watch the calendar. Married joint filers get to skip tax on up to $500,000 of appreciation when they sell their home, and widows and widowers also get the $500,000 break if they haven’t remarried and sell within two years of the partner’s date of death.  they sell later, the exemption often drops to $250,000, the amount for single filers.

 Retirement Accounts

Surviving spouses can roll over inherited retirement accounts such as 401(k)s and IRAs into their own names, and financial advisers routinely recommend this move.  But it may not always be smart. For example, if the survivor is under age 59 ½ and will need to draw on an account, then rolling it over could bring a 10% penalty on payouts. While there is no deadline for doing a spousal rollover, often there is no reversing one once it is made.  New widows and widowers should consider their options carefully. It is possible to divide retirement accounts such as IRAs and then roll over some but not all assets into the survivor’s name. This would leave the remainder in an inherited IRA available for penalty-free payouts to a surviving spouse.

Heirs of these accounts who will face higher taxes as single filers may also want to convert assets to Roth IRAs, which can have tax-free withdrawals—especially if they can convert while eligible for joint-filing rates and brackets.


                2017, Congress made a major, permanent change to the tax status of alimony payments. As a result, payers can’t deduct alimony on their federal tax returns for divorce and separation agreements signed after 2018.  At the same time, alimony recipients no longer have to report these payments as income, making the tax treatment of them similar to that of child support.  Deductions are still allowed for alimony paid as a result of agreements signed in 2018 and before, and such payments will still be taxable to the recipients.  

First-Time Taxpayers

                If you’re filing for the first time this year, congratulations! You’ve arrived. Welcome to the strange, confusing world of U.S. income taxes.  You’re joining more than 200 million Americans each year who gather forms, face complex calculations, and file an income-tax return with the Internal Revenue Service by the April due date, which is April 18 for most taxpayers this year.  You’ll likely be filing income taxes for a long time, so here are answers to basic questions.


The short answer is $12,550 for 2021 and $12,950 for 2022.  That is the “standard deduction” for most single people for these years. For most married couples it doubles to $25,100 for 2021 and

$25,900 for 2022.  With taxes, a deduction is something everyone wants. Deductions are amounts subtracted from income the government taxes you on, so having them lowers your tax bill.  People can either list key deductions for items such as state taxes or charitable donations on a special form known as Schedule A or they can skip that process and choose the standard deduction. This year about 90% of filers will opt for the standard deduction because it will save them more.  Often the tax threshold is higher than the standard deduction, however. People paying student-loan interest get a special deduction of up to $2,500 for such interest per return. So a single person taking it for 2021 could earn up to $15,050 before owing tax.

                Workers who contribute to retirement accounts like a traditional IRA or 401(k) can raise their nontaxable amount by $6,000 or more. Taxpayers can also qualify for credits that reduce their actual taxes rather than just their income.  


The answer is withholding—and it has nothing to do with emotional style. The U.S. tax system is pay-as-you-earn. Employers usually must send part of each worker’s paycheck to the government so the workers don’t have to cope with a big bill at tax time. These payments are called withholding.  To be safe, your employer may have withheld more income taxes than you’ll actually owe. In that case, you get this extra bit back by filing a tax return and claiming a refund.  Meanwhile, you may be able to adjust your withholding and get higher take-home pay by filling out an IRS Form W-4 and giving it to the business. There is a useful IRS calculator for this.  But beware of withholding too little. The law requires most filers to pay 90% of the income tax they owe before year-end or soon after, or face penalties

                Also, check your pay stub. Maybe the withholding is mostly for Social Security and Medicare taxes, not income taxes.  


Scholarships that are used to pay for tuition, fees and textbooks are usually tax-free if the student is pursuing a degree or certificate. Tuition waivers for graduate student teaching and research are often tax-free as well.  


The IRS communicates with people by mail, so it needs a mailing address for each filer. If you don’t have someone you trust to accept mail, consider a post office box.  Note that refund checks can be deposited directly to financial accounts. They don’t have to be sent to the address on the tax return.  Workers who lived in more than one state during the year should check with each state to see if they need to file state returns there.  


So different! 

If you’re paid for work, but you aren’t a business’s employee, then you’re “self-employed.” Businesses that hire you likely won’t withhold taxes from your pay, even if they pay you regularly. You’ll be responsible for paying estimated taxes quarterly, but you’ll also likely be able to deduct business expenses that employees can’t.  And you will likely owe higher Social Security and Medicare taxes because gig workers owe both the employee and the employer portion of these taxes, although they get a deduction for part of it.  Advice for gig workers: Take your taxes seriously now, not later. The penalties for getting them wrong can be severe, and the IRS can be relentless. Consider asking a tax professional to outline the obligations, traps and benefits you’re facing, even if you do your own taxes. Always, always keep good records.

And there you have it, around the tax code in forty-five minutes.  I hope you have enjoyed today’s podcast, even if you are new to the world of income taxation.  If you know of anyone who is struggling with their tax situation, please feel free to tell them about this podcast episode.  Of course we always  encourage you to take part in the financial planning process to help secure your financial future and in turn, feel optimistic and proud about your accomplishments.  Knowing that I’ve provided education and a plan for my clients has allowed me to turn a PERSONAL CHALLENGE into a GRATIFYING JOURNEY.

If you’re looking to make smart and responsible choices with your money, then stay tuned for our next episode of Invest in Knowledge coming in early April.  Have a wonderful day!


I am a registered representative with and securities are offered through LPL Financial, Member FINRA/SIPC. Investment advice is offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and Albany Financial Group are separate entities from LPL Financial. 

 The anecdotes, facts and statistics referenced in this episode were compiled by the Wall Street Journal, 2022.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Individual tax and legal matters should be discussed with your tax or legal professional. 



Investment Tax Rates and Brackets
Withholding and Estimated Taxes
Pandemic Stimulus Payments
State Taxes on Remote Work
Estate and Gift Tax
Capital Gains at Death
The Annual Gift-Tax Exemption
Deductions & Exemptions
Child Tax Credit
State and Local Deductions (SALT)
Mortgage Interest Deduction
Charitable Donation and Medical Expenses
Retirement Savings Accounts
Flexible Spending Accounts & Dependent-Care Credit
Home-Sellers Exemption
Miscellaneous Deductions
Tax Breaks for Education
Bonus - Beyond the Basics