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With Tax Planning, It Pays To Think Ahead


We are always thinking taxes

Most people only review their tax situation at the end of the year and only consider the current year’s tax planning. Yet decisions you make throughout the year will impact your taxes, and to get the most benefit from tax planning, you need to consider future years as well. For example, if you anticipate your tax rate to be significantly different in the future, you need to consider this as part of your current year tax planning. By taking a proactive, multiyear approach to tax planning, you can reduce your overall taxes significantly. 

The “Sweet Spot” Planning Years 

A specific period of time that offers great tax planning opportunities is between retirement and turning age 70 ½, when you must begin taking distributions from your retirement accounts (RMDs). 

What opportunities does this present? Most people will go from a higher tax bracket while they are working to a lower tax bracket prior to beginning RMDs. Therefore, it almost always makes sense to accelerate any deductions you may have, such as charitable contributions, while you are working to get a larger tax benefit. When you retire and before you start RMDs, there is often a 5 to 7-year window where taxable income is much lower. During this window of time we look for opportunities to report as much income as possible at these lower tax rates. 

Roth IRA Conversions  

One way we report income during this low tax rate window is by converting amounts from traditional IRA accounts to Roth IRA accounts. The conversion amount is taxed as ordinary income but at a much lower rate than it would be once RMDs begin. The amount converted into the Roth IRA then grows tax-free and under current legislation is never subject to the RMDs that traditional IRAs must take.

Charitable Planning

Significant opportunities also exist in how you handle charitable contributions. The first opportunity involves donating securities that have significant appreciation instead of cash. By doing so, the gain that would otherwise be taxed on the sale of the security is permanently avoided and you get the full value as a charitable deduction on your tax return, just like you would have if you donated cash.

Qualified Charitable Contributions 

The second opportunity is only available to clients age 70 1/2 or older that have IRA accounts from which they need to take RMD’s. You are currently allowed to donate directly from the IRA account to any qualified charity up to $100,000 per person. The amount given directly to the charity, known as a qualified charitable distribution (QCD), is completely tax-free. This technique is particularly useful for clients that no longer itemize their deductions - given the larger standard deductions that were introduced with the 2017 tax law changes.

Medicare's income-related monthly adjustment amount

Note also that Medicare premiums are driven based on your income. Making qualified charitable distributions lowers your income, which can save you thousands of dollars in Medicare premiums.

Bunching and Donor Advised Funds

A multiyear planning technique related to charitable contributions is to “bunch” the contributions into certain years so that you will exceed the standard deduction for that year and thus get a benefit from the contribution. You can make these contributions into a Donor Advised Fund (DAF), a charitable account that you set up to manage your donations. You can make the several years’ worth of contributions (often times using appreciated securities) in one year to get the larger tax benefits for that year - but make grants out of the DAF to your preferred charities over time.

These are just a few examples of the proactive, multiyear tax planning we do with all of our clients. If you would like help reducing your taxes, schedule a call. We would be happy to meet with you to evaluate your tax circumstances. It's a rare occurrence that we don't find tax planning opportunities for a new client.