The IRS adjusts tax brackets and rates each year to account for inflation and combat “bracket creep.” Bracket creep is when taxpayers are pushed into higher income tax brackets or do not receive adequate credits and deductions due to inflation. Are you aware of how an increase in the standard deduction and tax brackets will impact you?

What has changed?

1. The standard deduction will increase for the 2023 tax year. See below for a summary of the increases:

 2. Federal income tax brackets will increase to account for inflation in 2023:

What does this mean for you?

While this is welcomed news, these updates will not significantly impact your taxes, cash flow, or budget. These updates are enacted to hedge against inflation and keep things consistent for taxpayers.

In sum, the increase in standard deduction means households will have less income subject to taxes, and the income subject to taxes will be subject to better tax brackets.

We wanted to re-vamp our tax example from 2022 with the updated 2023 numbers to provide a familiar and helpful guide to your taxes. Read on to see a fictitious example of the impact of the increased standard deduction and tax brackets in 2023.

Meet Martin & Angela

Below is a breakdown of their taxable income and taxes due in 2022 compared to 2023.

As you can see, they reported $100,000 of combined income, which is reduced by their pre-tax 401(k) contributions and the standard deduction of $27,700. Because the standard deduction increased from $25,900 in 2022 to $27,700 in 2023, Martin and Angela’s taxable income decreased. This means they are on track to pay less this year in federal taxes.

PORTIONS OF YOUR INCOME GET TAXED AT DIFFERENT RATES

Tax brackets calculate the tax rate you will pay on each portion of your income. Tax brackets are part of our progressive tax system, which means the tax rate increases as someone’s income grows. There are seven federal tax brackets in 2023 (see image 2).

As shown in the image above, Martin and Angela’s taxable income will be split to take advantage of the lowest tax bracket. This means they will be taxed at 10% on the first $22,000 of their joint income, and their remaining taxable income will be taxed at 12%. In 2022, the maximum income allowed at the lowest tax bracket of 10% was $20,550. In 2023, the maximum income allowed will be $22,000.

If Martin and Angela fall into a higher tax bracket in the future, their taxable income will be broken down into each respective bracket to take advantage of the lower rates on what they can.

DRUMROLL, PLEASE…

After completing this exercise for all their taxable income, you can see that Martin and Angela’s total taxes owed in 2022 is $7,881 compared to $7,636 in 2023. This means they will pay $245 less federal taxes in 2023 than in 2022. While this is welcomed news, it is not a life-changing update.

If you have questions about your unique tax situation, please schedule a time to connect with our team. As always, we would love to hear from you!

Disclaimer: This post is for educational purposes and not predictive of your 2022 tax situation. The fictitious example is not a complete presentation of a tax filing.

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Did you Make Over $125,000 Individually or over $200,000 as a Married Couple?

There are two new local personal income taxes that became effective for the 2021 tax year. These two taxes, explained below, are specifically for single filers with Oregon taxable income above $125,000 and married jointly filers with Oregon taxable income above $200,000.

These two programs are local taxes, not state taxes. This means that the tax payments go directly to The City of Portland and require an additional filing. We expect high-income earners in the Portland-metro area to have at least three tax returns for 2021: US Individual Income Tax Return, Oregon Income Tax Return and City of Portland.

Like your federal and Oregon state tax return, these local tax returns are also due by Monday, April 18.

Local tax #1: Preschool for All (PFA) Personal Income Tax

In November 2020 Multnomah County voters passed The Preschool For All Program which will provide tuition-free preschool for children that meet the program criteria.

• This local tax is funded by a 1.5% marginal personal income tax on taxable income above $125,000 for single filers and $200,000 for those married filing jointly.

• This local tax is also funded by an additional 1.5% tax is imposed on taxable income over $250,000 for single filers and $400,000 for those married filing jointly

Local tax #2: Portland Metro Tax

In May 2020, Portland-area voters approved Measure 26-210 which will provide homelessness services like shelter, advocacy, and mental health resources.

• This local tax is funded by a 1% marginal personal income tax on taxable income above $125,000 for individuals and $200,000 for those married filing jointly.

• This local tax is also funded by a 1% business income tax on net income for businesses with gross receipts above $5 million.

• The Portland Metro area includes residents of Multnomah County, Clackamas County, and Washington County. For a full reference guide of the Metro jurisdiction use this online tool.

How can I Find my 2021 Taxable Income?

Taxes are complicated. Remember that your income (like your salary) is not the same as your taxable income. For example, you could earn a salary of $140,000 a year but have less than $140,000 of taxable income because of pre-tax retirement account contributions and taking the standard deduction or itemized deductions.

The easiest way to confirm your 2021 Oregon taxable income is to complete an Oregon Income Tax Return. Your taxable income is included on line 19 of your Form Oregon 1040.

If you are a single filer and your Oregon taxable income (on Line 19 on your 2021 Form OR-40) is greater than $125,000 or if you are a married jointly filer and your Oregon taxable income is greater than $200,000 then you likely need to pay your taxes by April 18, 2021.

FINDING YOUR TAXABLE INCOME IN TURBOTAX

1. Login and find the Documents tab.

2. Download your tax PDF. Scroll to the bottom of the PDF for the Oregon return.  

3. Find your 2021 Form OR-40. Line 19 includes your total taxable income.

examples of Calculating your local taxes owed

Preschool For All Tax: $0 because her income is below the $125,000 threshold for individual taxpayers.

Portland Metro Tax: $0 because her income is below the $125,000 threshold for individual taxpayers.

Preschool For All Tax: $6,000.
Tier 1: $400,000 - $200,000 = $200,000 of taxable income. $200,000 x 1.5% = $3,000
Tier 2: Then, $500,000 - $400,000 = $100,000 of additional taxable income. $100,000 x 3% = $3,000

Portland Metro Tax: $3,000.
$500,000 - $200,000 = $300,000 of taxable income. $300,000 x 1% = $3,000

Preschool for All Tax: $0 because they are not a Multnomah County resident.

Portland Metro Tax: $350.
$160,000 - $125,000 = $35,000 of taxable income above the threshold. $35,000 x 1% = $350

How Can I Pay for this Tax?

If you hire a CPA to prepare your individual tax returns, we recommend confirming that they will also file your City of Portland taxes for you. 

If you use an online tax software like turbotax, you will have to visit the Pro.Portland.gov website to submit your tax payments in a separate return. If you are a Multnomah County resident, this process will feel similar to paying your $35 Arts Tax.

What if my Taxable Income is Below the Limits for the PFA and Metro Tax?

You do not need to file anything to the city of Portland if your taxable income is below the limits for both local taxes in 2021. However, if you are a Multnomah County resident then don’t forget to pay your Multnomah County Art Tax for 2021. You can pay for it here: Portland Arts Tax Online Payment.

If you have more questions about the new local taxes, or would like to speak to a financial professional please reach out to us at hi@humaninvesting.com or 503-905-3100.

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Your bonus is not taxed more than regular income.

Have you ever noticed the discrepancy between the bonus payment that was communicated to you and the actual bonus payout? As an example, let’s say your employer announced that you will get a $5,000 bonus, but the upcoming paycheck is only $3,500. What happened?! The common and incorrect narrative is something along the lines of “Bonuses are taxed more than regular income!”

This is not true. Bonuses are taxed at the same rate as your regular income. Please keep reading if you would like to see an example.

Why do we think that bonuses are taxed more than regular income?

Probably because bonus payments are treated by the IRS as ‘supplemental income’, whereas your regular income is treated as ‘ordinary income’ by the IRS.

Supplement and ordinary income are taxed at the same rate. However, supplemental income (like bonuses, overtime pay, severance, and tips) require employers to withhold more taxes. Due to the tax withholding, it feels like bonuses are taxed more than regular pay. And yes, they do have more taxes withheld up front so it does impact your cash-flow.

Because we love round numbers, let’s look at an example of for someone that normally receives a $2,000 paycheck and a one-time $10,000 bonus.

$10,000 bonus example

January 5, 2022: Your employer informs you that you will receive a $10,000 bonus.

January 10, 2022: You receive your paycheck that includes your typical income and the bonus payment.

Your regular income of $2,000 was subject to the following tax withholdings:

15% - federal withholding selected on your W4 Form

8% - state of Oregon withholding tax

23% - total withholding (federal + Oregon)

Your take-home pay is $1,540.

Your bonus paycheck was subject to the following tax withholdings:

22% - federal requirement for ‘supplemental income’

8% - state of Oregon withholding tax

30% - total withholding (federal + Oregon)

Your take-home bonus payment is $7,000. As you can see in this example, the total tax withholding for the bonus payment is greater than the tax withholdings for typical paychecks.

Your tax withholdings are not the same thing as your tax payments.

As shown in the example above, $3,000 was withheld from the bonus payment. This is an upfront payment to the IRS, but it doesn’t mean that this person will actually pay $3,000 in taxes for this bonus At the time of filing their tax return, they may receive some of that money back (a tax refund) or they could end up owing more taxes if they have significant income during the year.

As illustrated above, supplemental income has a 22% tax withholding rate. However, most taxpayers have a lower effective tax rate than that which means they will receive money back from the IRS once they have filed their taxes. We have included an example below to help clarify this concept.

The taxes paid on bonuses are the same as taxes paid on ordinary income.

While tax withholdings are different for regular income and bonus payments, the actual tax rate you pay is the same. Once you file your tax return the actual taxes paid are trued up.

Here is an example of a single tax-payer making a salary of $48,000 a year and a $10,000 bonus. They would see $58,000 appear in box 1 of their W2 Form issued by their employer. The total combined income of $58,000 is then subject to income tax brackets.

The key point is their entire income of $58,000 is subject to the same income tax brackets and end up with the same tax treatment. The difference is only the amount withheld when the bonus is paid out. We know that the $10,000 bonus had 22% in federal tax withholdings, but we can also infer that this person’s effective tax rate is probably lower based on the progressive tax brackets shown in this image.

To be clear, the first $10,275 gets taxed at 10%. The next $31,500 (range is dollars above $10,276 and below $41,775) get taxed at 12%. The remaining $16,225 is taxed at 22%. I encourage you to read the blog post titled 2022 Tax Updates and A Refresh On How Tax Brackets Work if you want a detailed explanation of our progressive tax brackets.

Whether or not this person will receive a tax refund or owes more taxes at the time of filing their tax return depends on the rest of their financial landscape. We can save that information for another blog post!

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The IRS recently announced increases to both the standard deduction and tax brackets for taxpayers in 2022. Are you aware of how an increase to the standard deduction and an increase to tax brackets will impact you?

As you know, there are many headlines leading up to anticipated tax code changes, a litany of speculations throughout the process, and a cacophony of opinions once official tax code changes are announced. To be succinct, these two 2022 tax changes will have a small but favorable impact on most households. Everyone’s tax situation differs, but we wrote this blog to break down the complexities of the latest tax code changes.

What has changed?

1. The standard deduction will increase for the 2022 tax year. See below for a summary of the increases:

2. Federal income tax brackets will increase 3% for the 2022 tax year compared to 2021. Including a visual of the 2021 federal tax brackets is TMI for this post, but below are the new 2022 tax brackets:

what does this mean for me? it may not be much.

The practical answer is that these 2022 updates are not expected to have a significant impact on your taxes, cash flow, or budget. Both increases are good news for most households, but not life changing. To show how the changes are applied, we included a fictitious example and illustration below.

The academic or technical answer is that the increase in standard deduction means households will have less income subject to taxes, and the income that is subject to taxes will be subject to better tax brackets.

To provide an example of the impact of the 2022 increased standard deduction and 2022 increased tax brackets, read on.

Meet MARTIN & ANGELA

Below is a breakdown of their taxable income and taxes due in 2021 compared to 2022.

As you can see, they reported $100,000 of combined income which is reduced by their pre-tax 401(k) contributions and the standard deduction. Specifically, the standard deduction for married filed jointly is changing from $25,100 to $25,900 in 2022 so their taxable income is less than it was in 2021. Less taxable income puts Martin and Angela on track to pay less federal tax in 2022 than in 2021.

PORTIONS OF YOUR INCOME GET TAXED AT DIFFERENT RATES

Tax brackets calculate the tax rate you will pay on each portion of income. Tax brackets are part of our progressive tax system, which means the tax rate increases as someone’s income grows. As shown on the second image of this blog, there are 7 different federal tax brackets in 2022.

Looking at the image above, you can see that you can split your taxable income to take advantage of the lowest tax bracket. Isn’t it true that Martin and Angela would prefer to have a portion of their income taxed at the 10% rate before moving into the 12% tax bracket? In 2021, the maximum income allowed at the lowest tax bracket of 10% was $19,900. In 2022, the maximum income allowed will be $20,550.

DRUMROLL, PLEASE…

After this exercise is completed for all their taxable income, you can see that their total taxes owed in 2021 is $7,990 compared to $7,881 in 2022. As illustrated above, Martin and Angela will pay $109 less federal taxes in 2022 than they did in 2021. This will be welcomed news, but not a life-changing update when compared to the amount of buzz these two tax changes will generate in the media.

If you have questions about your unique tax situation, please schedule a time to connect with our team. As always, we would love to hear from you!

Disclaimer: this post is for educational purposes and not predictive of your 2022 tax situation. The fictitious example is not a full presentation of a tax filing.

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Health Savings Accounts (HSA) made the roster of tax-deferred accounts. For this reason, these accounts can be a favorable component in a financial plan both today and in the future (65+ years old). HSA accounts were first introduced in 2003, and since then, their utilization among employees and employers has grown meaningfully. In order to be eligible to participate in an HSA – an employee must be covered by a High-Deductible Health Plan (HDHP) and not be enrolled in Medicare or other health coverage. Like an employer-sponsored retirement plan, a Health Savings Account offers benefits for both employees and employers. As such, their increased popularity is hardly surprising.

While there are many benefits of HSA accounts, we must also recognize that switching from a PPO plan to an HSA often results in more out-of-pocket medical expenses during the year. Yes, we agree that sounds unappealing. However, there is always more to the story.  

Benefits of HSA accounts to Employees

• The account is portable. Contributions to HSA need not be used in the tax year they are made. Additionally, if an employee changes jobs, the account is still accessible.  

• Health Savings Accounts do not impose income limitations. Unlike IRAs, highly compensated individuals are still eligible to participate in these tax-deferred accounts.

• Health Savings Accounts provide a trifecta of tax savings:

  • Employee contributions are federal-tax deductible.

  • Federal tax on investment earnings is deferred until withdrawal.

  • All withdrawals (including earnings) used to pay for qualified healthcare costs are free from federal taxes regardless of when they are made.

• Dollars contributed to an HSA are both literally and psychologically compartmentalized for medical expenses.

Benefits of HSA accounts to Employers

• The time and money employees spend on healthcare is often more efficient with an HSA. This seems intuitive because unlike an FSA, employees have ‘skin in the game’.

• Employer contributions to their employees’ HSA accounts are exempt from FICA taxes. In 2020, the combined FICA rate is 7.65% which is not insignificant.

• Offering an HSA plan further diversifies the benefit offerings for their employees.

Hierarchy of Retirement Savings

For those with an employer-sponsored retirement plan and an HSA account, there is a hierarchy for where to best save one’s dollars. This hierarchy assumes the employee does not have significant debt and has also created an emergency savings fund.

• First Priority: Take full advantage of the 401k employer match. Free money!

• Second Priority: Maximize your HSA contributes and invest your dollars for the future.

• Final Priority: If you have extra earnings, contribute the maximum to a 401k plan or a Roth IRA.

Here is an example scenario of the three-step hierarchy above:

• Sophia’s employer matches 50% up to 6%. Melissa should contribute 6% to her 401k plan, and her employer will contribute 3%. Free money – check.

• Next, Sophia should maximize her annual HSA contribution. Trifecta of tax savings – check!

• Finally, Sophia can contribute additional funds to her 401k plan to maximize her annual contribution and/or contribute to a Roth IRA.

Withdrawal Rules

There are early withdrawal restrictions for Health Savings Accounts to ensure individuals are using their account for the intended purpose: paying for medical expenses. Specifically, HSA’s incur a 20% penalty and income tax on any amount withdrawn before age 65 that is not used for medical expenses. That said, an HSA account should be opened with the pure objective of saving and paying for inevitable health expenses throughout one’s life.

When you have your inevitable health care expenses, you can also pay out-of-pocket and keep the receipts for tracking your deductible. From a long-term growth and tax perspective, this may be advantageous if you have extra savings in your bank account.  

Investment Strategy

Most HSA accounts have a minimum cash balance required. Once you have saved the minimum cash balance, the additional dollars can be invested. The investment strategy within your HSA account will vary depending on your financial landscape, but often the investment strategy is aligned with your other retirement accounts – like a 401k or an IRA.

Prioritize your health

It is absolutely imperative to acknowledge that HSA dollars should be spent on health and wellbeing as needed. As exciting and opportunistic it is to imagine a future tax-deferred balance, health today must be prioritized. We do not work in the health sector, but at Human Investing we have a team of financial advisors who are committed to ensuring your medical costs are accounted for in a strategic manner.  

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5 Ways to Leverage a Volatile Market for Tax Savings

When the market is volatile it can make investors feel uneasy. In a perfect world the market would never be down, but unfortunately ebbs and flows come with the territory. When the market does slow down, here are a few tax saving strategies that may be worth taking advantage of:

1. Sell the Losers – Investors who have assets in a taxable account might consider selling the assets on which they have unrealized losses. Capital losses generated can offset capital gains or up to $3,000 can be deducted against ordinary income. Additional losses can be carried forward indefinitely.

2. Contribute to a Retirement Plan – Contributions to IRAs, 401(k)s, and Roth 401(k)s are capped at specific amounts. Taxpayers can invest in their retirement accounts while values are lower and realize the benefits when the market recovers.

3. Convert to a Roth – Roth retirement accounts offer significant potential tax savings. IRA owners are allowed to convert to Roth IRAs but income tax would be due upon conversion. One strategy is to convert while the value of the assets are down in order to minimize the tax bill.

4. Exercise Employee Stock Options – Workers who received “non- qualified” options usually owe taxes on the difference between the grant price and the current value of the shares. Exercising stock options in a down market will lower the tax cost for the employee.

5. Make Gifts of Assets - If you are looking to gift stock to family or to a trust, you are limited to tax free gifts of $16,000 per year or $32,000 for married couples in 2022. A market when the cost per share has declined allows you to transfer more shares. When the value of shares rebound down the road, the IRS doesn’t assess gift tax on the increased value of the gift.

If you have questions on these strategies feel free to email or call and we would be happy to walk you through this blog post in more detail.

*Please note that Human Investing does not provide tax advice/guidance and you should contact your CPA with specific tax related questions.

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Retirement Savings Contribution Credit (Savers Credit)

For anyone who has made a contribution to a retirement account in 2015 or is considering contributing in 2016, you might be eligible for an additional tax credit. The Retirement Savings Contribution Credit, also known as the Savers Credit, is a special tax break to low and moderate income taxpayers who are saving for retirement. This credit, in addition to other tax benefits for saving for retirement, can reduce or even eliminate your tax bill if you qualify.

Interestingly enough, a recent survey showed that only 12% of American workers with annual incomes of less than $50,000 are aware of the Savers Credit. In other words, the population that should know about this Savers Credit the most is under-informed. With hopes of raising awareness and equipping savers on how they could potentially pay less in taxes, see below for a brief Q&A on the Savers Credit on how it works and what you should know.

How much could the Savers Credit cut from my tax bill?

You can claim the credit for the 50%, 20%, or 10% of the first $2,000 you contribute to a retirement account depending on your adjusted gross income and tax filing status. Note that the largest credit amount a married couple filing jointly can claim together is $2,000 and the credit is a “non-refundable” credit. This means that the credit can reduce the taxes you owe down to zero, but it can’t provide you with a tax refund.

What retirement accounts qualify?

The Savers Credit can be claimed for your contributions to a 401(k), 403(b), and 457 plan, Simple IRA, Traditional IRA, and ROTH IRA. Note that you cannot claim any employer contributions to employer sponsored retirement accounts.

Am I eligible?

In order to claim a Savers Credit you must be:

• Age 18 or older

• Not a full-time student

• Not claimed as a dependent on another person’s return

Additionally you must meet the necessary income requirements. In 2015 the maximum adjusted gross income for the Savers Credit is $61,000 for a married couple filing jointly, $45,750 for head of household, and $30,000 for all other filers. The maximum credit you can claim phases out as your income increases. See the below table that outlines how much you can claim and at what income levels:

2015 Saver's Credit Credit Rate Married Filing Jointly Head of Household All Other Filers 50% of your contribution AGI not more than $36,500 AGI not more than $27,375 AGI not more than $18,250 20% of your contribution $36,501 - $39,500 $27,376 - $29,625 $18,251 - $19,750 10% of your contribution $39,501 - $61,000 $29,626 - $45,750 $19,751 - $30,500 0% of your contribution more than $61,000 more than $45,750 more than $30,500

This information can also be seen at on the IRS website. If you are eligible use the Form 8880 to claim your credit and other best practices.

Example:

Dan and Kailey are married and file jointly. He contributed $1,000 to his 401(k) and she contributed $500 to an IRA. Their 2015 combined AGI is $35,000. Therefore, each of them is eligible to claim a 50% credit for their contributions and together their credits are worth $750.

If you have questions on if you are eligible for the Savers Credit feel free to email or call us and we would be happy to walk you through this blog post in more detail and how you can best take advantage of this credit.

*Please note that Human Investing does not provide tax advice/guidance and you should contact your CPA with specific tax related questions.

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