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What Tax Bracket for You in 2021?

August 26, 2021 by sodowskylaw

2021 Tax Brackets, based on Taxable Income

2021 Tax Brackets, based on Taxable Income It’s never too early to start thinking about your next tax return. For most Americans, that’ll be your federal tax return for the 2021 tax year — which, by the way, will be due on April 18, 2022 (April 19 for residents of Maine and Massachusetts). The tax rates themselves didn’t change from 2020 to 2021. There are seven tax rates in effect for both the 2021 and 2020 tax years: 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, as they are every year, the 2021 tax brackets were adjusted to account for inflation. That means you could wind up in a different tax bracket when you file your 2021 return than the bracket you were in for 2020 – which also means you could be subject to a different tax rate on some of your 2021 income.

The tax bracket ranges also differ based on your filing status. The chart below shows you the ranges for the various filing statuses.

2021 Tax Brackets, based on Taxable Income

Tax Rate	Single	Head of Household	Married Filing Jointly	Married Filing Separately
10%	Up to $9,950	Up to $14,200	Up to $19,900	Up to $9,950
12%	$9,951 to $40,525	$14,201 to $54,200	$19,901 to $81,050	$9,951 to $40,525
22%	$40,526 to $86,375	$54,201 to $86,350	$81,051 to $172,750	$40,526 to $86,375
24%	$86,376 to $164,925	$86,351 to $164,900	$172,751 to $329,850	$86,376 to $164,925
32%	$164,926 to $209,425	$164,901 to $209,400	$329,851 to $418,850	$164,926 to $209,425
35%	$209,426 to $523,600	$209,401 to $523,600	$418,851 to $628,300	$209,426 to $314,150
37%	Over $523,600	Over $523.600	Over $628,300	Over $314,150

How the Tax Brackets Work

Suppose you’re single and have $90,000 of taxable income in 2021. Since $90,000 is in the 24% bracket for singles, would your tax bill simply be a flat 24% of $90,000 – or $21,600? No! Your tax would actually be less than that amount. That’s because, using marginal tax rates, only a portion of your income would be taxed at the 24% rate. The rest of it would be taxed at the 10%, 12%, and 22% rates.

Here’s how it works. Again, assuming you’re single with $90,000 taxable income in 2021, the first $9,950 of your income is taxed at the 10% rate for $995 of tax. The next $30,575 of income (the amount from $9,951 to $40,525) is taxed at the 12% rate for an additional $3,669 of tax. After that, the next $45,850 of your income (from $40,526 to $86,375) is taxed at the 22% rate for $10,087 of tax. That leaves only $3,625 of your taxable income (the amount over $86,375) to be taxed at the 24% rate, which comes to an addition $870 of tax. When you add it all up, your total 2021 tax is only $15,621. (That’s $5,979 less than if a flat 24% rate was applied to the entire $90,000.)

The Marriage Penalty

The difference between bracket ranges sometimes creates a “marriage penalty.” This tax-law twist makes certain married couples filing a joint return — typically, where the spouses’ incomes are similar — pay more tax than they would if they were single. The penalty is triggered when, for any given rate, the minimum taxable income for the joint filers’ tax bracket is less than twice the minimum amount for the single filers’ bracket.

Before the 2017 tax reform law, this happened in the four highest tax brackets. But now, as you can see in the tables above, only the top tax bracket contains the marriage penalty trap. As a result, only couples with a combined taxable income over $628,300 are at risk for this “penalty” when filing their 2021 federal tax return. (Note that the tax brackets for your state’s income tax could contain a marriage penalty.)

A New Top Tax Rate in the Future?

Will the top income tax rate go up in the near future? It will if President Biden gets his way. As part of his American Families Plan, the president has proposed increasing the highest tax rate from 37% to 39.6%, which is where it was before the Tax Cuts and Jobs Act of 2017. The 39.6% rate would apply to single filers with taxable income over $452,700 and joint filers with taxable income exceeding $509,300. Only time will tell if this change comes to pass. Meanwhile, you can use this information to plan your tax strategies for the remainder of 2021.

Patriot Day – Twenty Years

August 26, 2021 by sodowskylaw

September 11, 2021, is the twentieth anniversary of the horrific terrorist attack on several targets in the United States that killed almost 3,000 people. A year after that attack, September 11 was made a national day of remembrance and mourning, known as Patriot Day, to honor the memory of those who were killed in the attack. Although this day is not an official, public holiday, the US flag is flown at half-staff on all US government buildings.

Fortunately, I had no family or close friends injured or killed in those attacks. Unfortunately, at least one family from my church lost a loved one at the Pentagon that day.

I imagine that most people who were teenagers and older remember where they were and what they were doing that day. I know that I certainly do.

September 11, 2001, started off as a normal Tuesday. I was headed to the Fairfax County Courthouse where I had a case in Circuit Court on the 5^th floor of the Courthouse. Court was scheduled to start at 10:00 AM, but I always tried to get there plenty early to make sure I could get good parking and into the courtroom well before the judge would take the bench. That meant I was driving to the courthouse between 8:30 and 9:15.

I always listened to a talk/news radio station. So, I did hear some information on the radio about something happening in New York, but the details were sparse. I entered the courthouse and went to the courtroom on the 5^th floor as usual, waiting for the judge to come on the bench and court to start at 10:00.

Either just before or just after the judge came on the bench, a deputy came out and told us the courthouse was closing – we all were toleave immediately. So, we all vacated the courtroom and went out in the hallway. When someone pressed the deputy for more information, he simply said the Pentagon had been attacked and the courthouse was closing.

Several of us went to the end of the hall on the 5^th floor and looked out the windows in the direction of the Pentagon. I could see smoke billowing up on the horizon, which I surmised was coming from the Pentagon. Then, I went Io my car and drove home, as we had been told to do by the deputies at the courthouse.

I watched TV most of the rest of the day as coverage of the events unfolded as we all tried to make some sense of the events of the day. As we know, our country has been changed forever.

We all came together in a manner not seen since the days of World War II to fight a common enemy.

My, oh, my, how things have changed in 20 years. Does it take an attack by outside forces to bring us together? We don’t have to agree on everything, but we are “One Nation under God, indivisible, with liberty and justice for all,” are we not?

So, on this twentieth anniversary of the terrorist attack, let’s all remember those who lost their lives as both a direct and indirect result of the attack, both the initial victims and all the first responders who have suffered and died as a result of this attack. May we remember what working together for the common good is and what we can accomplish when we do work together.

— Elden Sodowsky

A Cautionary Tale: IRS Comes First – Even in Death!

July 22, 2021 by sodowskylaw

IRS tax attorney Are you named as the executor of someone’s estate? Do you expect to be a beneficiary of someone’s estate? If so, keep reading.

A woman died in December 2003, leaving her estate to her brother, who was also the executor. He transferred all the estate’s property to himself, except for $50,000 he gave to his daughter. He knew the estate owed tax to the IRS because he had been involved in the preparation of the estate tax return and the subsequent audit that resulted in additional taxes due. He tried to work out a payment plan with the IRS. He even made some significant payments on the tax debt, but never completely paid off the balance.

The brother passed away in 2008 leaving his daughter as executrix and sole beneficiary of his estate. She followed her father’s instructions and paid some of the tax due on the original estate, but she did not pay it all. She then distributed her father’s estate to herself, and ultimately used it all up.

Nearly thirteen years after the original estate tax return was filed, the IRS filed suit in federal district court to reduce the assessment to a judgment against both the brother’s estate and the original co-executor. The IRS also sought to hold the estate of the deceased executor and his daughter, the beneficiary of his estate, liable for the unpaid taxes of the original estate.

Can the IRS really do that? Yes, it can, if the facts support the claim.

Beneficiary Liability: The United States Code says that a person who receives property from a decedent’s estate (a beneficiary) is personally liable for any unpaid estate tax based on the value of the property received.

Fiduciary Liability: – The federal insolvency statute provides that when an estate has insufficient assets to pay all of its debts, priority must be given to debts due the United States. A fiduciary, e.g., an executor, may be held liable under this statute for the distribution of funds from the estate that is not, strictly speaking, the payment of a debt. The fiduciary may, for example, be held liable for “stripping” an otherwise solvent estate of all of its assets and rendering it insolvent by providing for the distribution of all of the estate assets to the heirs of the estate.

The purpose of imposing personal liability on estate representatives is to make those into whose hands control and possession of the debtor’s assets are placed, responsible for seeing that the Government’s priority is paid.

The Court found in favor of the IRS on all four of these claims. What does this mean to current and prospective executors and beneficiaries? Simply this – make sure ALL federal taxes are paid BEFORE doing or accepting a distribution from an estate.

We address IRS Tax Lien or Levy

If you are facing an IRS tax lien or levy, don’t feel that you need to handle the situation alone. Schedule a consultation today and let our experienced attorneys help you resolve your tax situation in the best way possible.

Business Owner Loses Mileage Expense Deduction – Will you lose, too?

June 15, 2021 by sodowskylaw

Vehicle mileage expenses comprise one of the major expense deductions on many businesses’ tax returns. The US Tax Code and regulations require the expenses claimed be reasonable and necessary for the production of income. In addition, the Code and regulations require the taxpayer substantiate the expenditures by adequate records. The taxpayer can meet the “adequate records” requirement by maintaining an account book, a diary, a log, a statement of expenses, trip sheets, or a similar record prepared contemporaneously with the use or expenditure, plus documentary evidence (e.g., receipts or bills). The IRS considers a mileage log that is kept weekly as contemporaneous for this purpose. But, keeping the log daily is better and quicker overall.

Mr. Johnson was the president of a manufacturing company who worked primarily from home due to limited office space in the manufacturing facility. He also operated a hay farming business. He used a vehicle in both operations and claimed a deduction for the expenses involved. Mr. Johnson lost his expense deduction because he failed the substantiation test. Are you in danger of failing the substantiation test, too?

The taxpayer submitted to the IRS and the Tax Court mileage logs that appeared to show how many miles he traveled each week but not the individual dates of travel or the places to which he traveled. The primary evidence the taxpayer submitted to the Tax Court and the IRS in support of the claimed travel-related car and truck expense deductions was a Microsoft Outlook® calendar reflecting his travel during the periods at issue, supplemented by his testimony. He used the calendar for all appointments and events, including those related to his two different business ventures and his personal activities.

But many of the entries in the calendar noted only that he traveled to and/or from the ranch; they did not note the purpose for his visit (hay farming business, company work, property maintenance, or personal).

The court noted that without the business purpose information, it could not determine which of the trips were for business purposes as required by the US tax code.

Would your vehicle mileage records stand up under this test? If no, continue reading.

A mileage log that should get you through an IRS audit tracks all the required bits of information: date, time and place, business purpose, mileage, the fact that you make a personal stop at the grocery store, even if it happens to be on the route between two business locations. It also has the beginning and ending odometer readings. When this is supported by various repair and inspection records with mileage recorded, you should be able to quickly satisfy even the pickiest IRS auditor.

If you have questions about your mileage log or would like a sample of this log, send an email to info@sodowskylaw.com with the subject line “Mileage Log Sample.” May your audit end better than Mr. Johnson’s did.

Stock Trading Pitfall: The Wash-Sale Rule

June 15, 2021 by sodowskylaw

During the past year many people whose work hours and income were reduced may have been tempted to start trading stocks as a way to make money. With the market going up after the brief downturn at the beginning of the COVID-19 pandemic, making money in the stock market looked like easy pickin’s. How hard could it be to do some trades and make some money? Many people offer courses in “day trading,” and they tout how they turned $500 into $50,000 or more in just a few weeks.

These “experts” are willing to train you to use their techniques. They describe all the things to consider and the resources you need, besides money: what trading platforms to use; what brokers to use; stocks that are good for trading; what time of day is best for trading; popular trading strategies such as “swing or range” trading, spread trading, momentum trading, etc. They also typically discuss limiting your risk, telling you to trade only with money you can afford to lose. But, on the flip side of risk management, they also tell you how to use “margin” to leverage the money you have to as much as 4:1 to increase your profit (but which also significantly increases your risk!).

These day trading teachers may tell you that you must pay income tax on your profit. They may even tell you how the tax on the profit is calculated. However, many of them fail to mention one critical rule in the US tax code and regulations you must generally use in calculating your profit. That rule is the “Wash Sale Rule.”

Day trading income is comprised of capital gains and losses. A capital gain is the profit you make when you buy low and sell high — the aim of day trading. The opposite of a capital gain is a capital loss, which happens when you sell an asset for less than you paid for it. Investors can offset some of their capital gains with some of their capital losses to reduce their tax burden.

Under the wash-sale rule, you cannot deduct a loss if you have both a gain and a loss in the same security within a 61-day period. (That’s calendar days, not trading days, so weekends and holidays count.) However, you can add the disallowed loss to the basis of your security. The wash-sale rule was designed to keep long-term investors from playing cute with their taxes, but it has the effect of creating a ruinous tax situation for naïve day traders.

See the Rule in Action

Here’s an example to illustrate. On Tuesday, you bought 100 shares of DEFG at $34.60. DEFG announced terrible earnings, and the stock promptly dropped to $29.32, and you sold all 100 shares for a loss of $528. Later in the afternoon, you noticed that the stock had bottomed and looked like it may trend up, so you bought another 100 shares at $28.75 and resold them an hour later at $29.25, closing out your position for the day.

The second trade had a profit of $50. You had a net loss of $478 (the $528 loss plus the $50 profit). Here’s how this works out tax-wise: The IRS disallows the $528 loss and lets you show only a profit of $50. But it lets you add the $528 loss to the basis of your replacement shares, so instead of spending $2,875 (100 shares times $28.75), for tax purposes, you spent $3,403 ($2,875 plus $528), which means that the second trade caused you to lose the $478 that you added back.

On a net basis, you get to record your loss. The basis addition lets you work off your wash-sale losses eventually, assuming that you keep careful records and have more winning trades than losing ones in any one security.

The wash-sale rule applies to substantially similar securities. DEFG stock and DEFG options are considered to be substantially similar, so you can’t get around the rule by varying securities on the same underlying asset. DEFG shares and shares of its closest competitor, PQRS, would probably not be considered substantially similar, so you can trade within a given industry to help avoid wash-sale problems.

So, if you are going to do some “day trading,” be very aware of this rule and keep meticulous records. If you want to truly be classified as a “trader” instead of an investor, you must meet several criteria that are beyond the scope of this article. Just know that a trader may have other options available for managing the “wash sale” situation.

If you have questions about your trading activities and how to report properly, contact the Sodowsky Law Firm to schedule a confidential meeting with one of our attorneys.

— Elden Sodowsky