Tax Planning Tip - Standard Deduction
The standard deduction, as defined by the IRS, is the specific dollar amount that reduces the amount of income on which you are taxed on. For Married Filing Joint couples, this amount in 2021 is $25,100 if under age 65; single filers under age 65 this amount is $12,550. These amounts will increase to $25,900 and $12,950 respectively in 2022.
The standard deduction should be viewed as money that you are not taxed on and should be fully utilized every year. This is not carried over or back to another year so using the full amount is key every year.
An example: Joe and Jane are married and have suffered losses in their business due to the pandemic and will have a net zero for their business income this year. Their adjusted gross income for 2021 is projected to be $8,000. By looking at other sources of income, they could potentially bring in $17,100 of non-business income and pay no additional tax on that income. Solutions could be to accelerate gains from investments, rolling a Traditional IRA into a ROTH IRA, or looking at selling any assets at a gain to increase their income.
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