Yup, it is tax season. This year as clients and friends were completing their 2021 tax returns* the cries of, “Are you kidding me?” and “This is by far the most taxes I have ever paid in my life!” were louder than ever. There were valid reasons for wealthier taxpayers paying more taxes for tax year 2021 – far more than for tax year 2020. A few reasons were somewhat UN-related to the coronavirus pandemic, and a number of reasons were directly pandemic-related.
The majority of my clients and friends simply made more money in 2021 than 2020. (Is that a bad thing? Most likely not.) The pandemic, in a delayed fashion, led to promotions and opportunities in 2021 for lots of individuals in corporate America and at companies that “dug in” amidst epic challenges in 2020. Retention and performance bonuses wound up being paid in 2021 (continuing in 2022), following a time in late 2020 when it seemed basic compensation and jobs were at serious risk. This turnaround was a huge irony and welcome relief to a number of people – and the “flip side” became higher taxes for tax year 2021.
Please note, as became clear in late 2020 and throughout 2021, many small and family businesses did not survive. My comments about corporate America and companies that “dug in” are not meant to disrespect the utter pandemic-related destruction of certain jobs and industries.
Pandemic-related factors were to blame for higher 2021 taxes in several “hidden” ways:
- For those age 72 and over, required minimum distributions (RMDs) were halted in 2020 – leading to account values ballooning and 2021 RMDs being based on these much higher balances. In addition, the basic IRS calculation leads to an increase in required amounts annually AND market performance grew account values.
- Consider the charitable giving exception for RMDs, if available, to minimize taxable income in future years.
- Inherited IRAs fell prey to similar factors of halted RMDs in 2020 and an ever-increasing calculation, although new IRS rules slightly relieved the increase in 2021 and going forward.
- Check out “The 401K Trap” link in the sidebar (co-written by yours truly) for strategies for those working TODAY to attempt to minimize future taxes related to RMDs.
- Possibly pandemic-related and possibly not, short- and long-term capital gains taxes from stock trading or sales of primary homes were factors contributing to higher taxable income in 2021.
To sum it up, death and taxes are unavoidable. Higher taxes are mostly related to higher income – a “quality problem” – or growth of assets, another quality problem. Rising tax rates may be a factor as well (not a quality problem and not controllable). Enjoy the expanded 22% and 24% tax brackets while they still exist if you can!
*IMPORTANT: The tax RETURN is the document that you or your CPA signs to file your taxes. Taxpayers file tax returns. The REFUND (not the return) is the amount of money that a taxpayer receives back from the government. Some, but not all, taxpayers receive tax REFUNDS.