The income tax code is riddled with many tax benefits that are dependent on income. Consider retirees who, depending on income, may owe taxes on Social Security benefits or be subject to higher Medicare premiums. The OBBBA adds additional complexity by introducing new tax deductions which phase-out at higher income levels. Being mindful of, and planning for key income thresholds may lead to more tax-efficient outcomes.
As income increases, the ability to tax advantage of many tax benefits lessens.
There are many planning considerations for clients. For example, does a Roth IRA conversion make sense? What are the potential drawbacks from a planning perspective if additional taxable income is generated?
Here are some important income thresholds to plan for:
Importance of planning
Managing these income thresholds effectively may lead to better after-tax results. For example, consider a taxpayer residing in a higher-income tax state who is planning on taking advantage of the maximum SALT deduction under the new tax law ($40,000). This is a significant increase in the $10,000 deduction cap that has been in place since 2018. However, once modified adjusted gross income exceeds $505,000 (single filers or married couples) the amount of the deduction is reduced. When modified adjusted gross income exceeds $606,333, the deduction cap reverts to $10,000. For someone approaching the income phase-out threshold ($505,000) adding additional income from a Roth conversion for example, may not be an advantageous strategy. Taxpayers should consult with a qualified tax professional on how to manage these income thresholds based on their specific circumstances.
WHAT ARE THE RISKS?
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