by Kristin P. Sinclair, A Accu Tax on June 22, 2022
Let’s Look at Some tax planning.
For Mustang Sallie, 2022 is the year Mustang Sallie needs to purchase a new car. She has been doing her research. Ms Sallie plans to purchase her 2022 model in September prior to the 2023 models debut. Ms Sallie wants to benefit from a federal tax credit for New Qualified Plug-In Electric Drive Motor Vehicle Credit. Mustang Sallie has found the vehicle she wants. She has had the electrical needs met at home so she plans roll out each day with the appropriated charge that will be needed for Mustang’s busy life.
She is looking for the reliable transportation she needs in a vehicle at a premium that is realistic for her to purchase. With a warranty She feels will be great for peace of mind.
2022 some new Qualified Plug-In Electric Drive Motor Vehicle Credits were announced. And Mustang Sallie knows exactly what she wants, and she plans to benefit from the $7,500.00 tax credit that she is going to be getting and she is going to use that to pay down on car loan making an principal only extra payment.
Let’s take a look at Mustang Sallie’s options taken, and options considered. She expects her tax rate to change federally and believes that she is withholding ample amounts. Still anticipates receiving a refund both federally and from her state return. Ms. Sallie plans to take some capital gains which will be reported on her tax return. Ms. Sallie also has some capital losses which will be reported on her tax return. This way she is limiting her taxable income and keeping her capital gains taxes exactly where she wants them to be taxed.
Mustang Sallie has been saving for a new car ever since She paid off her current vehicle. As of late she has had to make many more trips to the repair shop and is going to make a change soon.
Ms. Sallie has $15.000 saved to put down on her new vehicle to lower the amount She is borrowing at a very low interest rate. The federal electric motor vehicle credit will provide some additional principal only payment opportunity when she gets her tax refund in 2023. She will pay off the vehicle faster than she initial thought she would. Mustang no longer has a house mortgage payment, and she is aware that having a current credit record is to her advantage. She plans to pay the loan off in a couple of years. Ms. Sallie is going to be thoughtful in her approach.
Mustang Sallie enjoys Her part time job. Her part time job has made it so much more enjoyable to feel free to invest in herself. With walking shoes, athletic socks, insoles and exercise apparel. Her part time job has been wonderful. And she feels that it is keeping her really in touch with how things do indeed keep on changing.
Mustang has two bank accounts. One account is the one she has her paycheck, her Pension check as well as her Social Security Check direct deposited into.
Mustang has a bank account that she has her capital gain funds deposited into as well as her federal and state refunds. She uses this bank account to pay medical bills, her Medicare Supplement premiums, and RX copays, property taxes and vehicle taxes as well as her car payment.
Mustang takes $20,000 annually from her pension plan and has in the past had 15%withheld for federal taxes. She also has 5% withheld for her state taxes. She expects a refund. Social Security income she will receive $19,000 in benefits. Ms. Sallie has also chosen to have 7% federal taxes withheld from her Social Security income equal to $1330.00 with held over the 12-month annual period, plus she pays her Medicare Part B and Medicare Part D premiums from her Social Security income. These insurance deductions total $2071.20 during 2021. The monthly amount that Mustang sees deposited into her account from Social Security is $1,274.90.
For Mustang’s Medicare Supplement she has a High Deductible Plan G HDG plan which has low premiums. She is keeping the plan she really appreciates for it’s coverage and it’s value. Some out of pocket exposure; yes, she can seek medical care from any provider who accepts Medicare beneficiaries anywhere, yes, in the United States. She remains active in life, enjoys laughter, and loves time with friends. Exercises regularly. She feels very confident about her plan choice.
While Mustang has paid her mortgage in full, each year she still needs to pay the property taxes on her home directly to her county since it is no longer being paid via an escrow account, since she does not have a mortgage payment anymore. She is fortunate to live in a state where she enjoys a Homestead Exemption, which lowers her property taxes due a little. Since, she is purchasing a new car and her car taxes are going to go up as a result. This tax increase may be substantial, so Ms. Sallie knows she needs to plan. When her taxes are due on her new vehicle, she will be ready.
In the event Sallie, needed to move funds from one checking account to the other she does so accordingly. Keeping those funds in separate accounts works well for Mustang Sallie, and her planning for her annual obligations.
Mustang Sallie likes getting a tax refund, so when her tax documents arrive, she makes withholding changes so she feels confident that she has withheld enough in taxes that will be getting a refund for the upcoming annual period. Ms Sallie wants to look at how taking funds out of a Traditional IRA might impact her next year. When she knows that she will have a car payment due for 12 months in 2023.
SC is Mustang’s home state. SC does not tax her on her Social Security income even when the federal government taxes her based upon her provisional income. Her state gives her an additional tax break since she is over 65 years of age. And her state also allows an additional tax break on 44% of her long-term capital gains from her investments in the form of capital gain income.
Mustang Sallie wants to do some additional research before the purchase of the electric vehicle. She asked Kristin, her tax preparer, to look at some numbers for her. If She takes out an additional $15,000 in taxable income in the year how could that impact her. Had the need arisen to take out an additional $15,000 in taxable income from her Traditional IRA. Well, her taxable income would have increased by over $22,000.00. Putting some of her income into the 22% tax bracket instead of a 12% tax bracket. The answer is more taxes on Mustang’s capital gains would be applicable as well. More of Her Social Security income would have become federally taxable, and that additional IRA distribution in turn would have increased Mustang’s state taxable income by enough to move Mustang into a higher tax bracket for the state as well.
So for Mustang Sallie, continuing to work at a jobs she enjoys, spending time with people she likes to be around, and getting a lot of joy and laughter into her days, this has been a good decision. She enjoys walking with her new friends when not at work. The occasional new pair of shoes and new socks and insoles is a great investment in herself.
Taking out only what she really needs to, from her pension, and saving her IRA for when she absolutely must start taking distributions has been very workable for her lifestyle. Drawing from capital gains income when needed, has also been a wise choice to pay for things needed or wanted. Including in her case a new car.
Even if the tax rates change again in 2026, she has a goal of being ready and prepared when it comes time to make a major purchase decision like her transportation, to visit important people in her life. Working part time, traveling occasionally, exercising daily. This for Mustang Sallie is a nice balance for a full life.
Kristin P Sinclair
A Accu Tax
June 22, 2022
Updated in Rock Hill