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This marks the final week of our tax planning series, where we'll bring together the key concepts covered over the past few weeks. For detailed information on any of these topics, you can find links to previous articles below.
When working with financial planning clients, we focus on aligning their most deeply held values with their long-term financial goals. Values guide decisions on resource allocation, while financial goals inform the strategies and tactics we implement. Here are four key tax planning tools we use:
Tax-Efficient Charitable Giving
Tax Minimization Through Bracket Management
Tax Minimization Through Asset Location
Lifetime Tax Mitigation with Retirement Income Planning
Tax-Efficient Charitable Giving
For clients inclined toward charitable giving, the strategy varies by age.
Under 70.5 Years Old: Charitable donations should typically be made through a Donor Advised Fund (DAF). A DAF allows you to take advantage of today's higher standard deduction by "stacking" your giving into one tax year.
For example: Joe and Jane Donor give $15,000 annually to their church and other charities. With no mortgage interest and a property tax cap of $10,000, their charitable contributions won’t yield any tax benefits under the current standard deduction.
However, if Joe and Jane contribute $45,000 to a Donor Advised Fund in Year 1 (covering three years of their usual donations), they can distribute $15,000 annually to their favorite causes while gaining a much larger tax benefit in Year 1.
Giving Deduction Giving Deduction
Year 1 $15,000 $26,000 $45,000 $55,000 (DAF Gift + SALT Tax)
Year 2 $15000 $26,000 $0 $26,000 (Standard Deduction)
Year 3 $15,000 $26,000 $0 $26,000 (Standard Deduction)
Charitable Giving $45,000 $45,000
Tax Deduction $78,000 $107,000
Over 70.5 Years Old: Once clients reach 70.5, they can make Qualified Charitable Distributions (QCDs) directly from their IRAs. These contributions are not counted as taxable income, potentially lowering their Medicare premiums and the taxation of Social Security benefits.
Tax Minimization Through Bracket Management
A Donor Advised Fund can also help mitigate the tax impact of Roth conversions.
Example:Joe and Jane want to create tax-free retirement income by converting part of their Tax-Deferred IRA savings into a Roth IRA without moving into a higher tax bracket. If they have extra cash in their Taxable Money bucket, they can contribute it to a DAF. The charitable deduction can offset the additional income created by the Roth conversion, helping them manage their tax liability.
Alternatively, a simpler approach is to contribute to a Roth 401(k), if available, through your employer. This gives you control over your taxable income in any given year by choosing which type of account to contribute to.
Lifetime Tax Mitigation with Retirement Income Planning
Another optimal time to create tax-free retirement income is in the early years of retirement. By shifting assets from a Tax-Deferred bucket to a Never-To-Be-Taxed-Again bucket during this period, you can reduce the "tax drag" on your retirement income. You have more control over taxable income before claiming Social Security or being required to take Required Minimum Distributions (RMDs).
Spreading taxable income over more years and utilizing lower tax brackets during lower-income years can significantly reduce your lifetime tax liability.
Tax Minimization Through Asset Location
Strategic asset location helps mitigate taxable income by placing certain assets in appropriate accounts:
Never-To-Be-Taxed-Again or Tax-Deferred Buckets: Holding assets that generate significant taxable income in these buckets can reduce the tax burden on your overall portfolio.
Taxable Money Bucket: Avoid placing highly taxable assets here to minimize tax-drag.
By holding the right assets in the right buckets, Joe and Jane can continue to invest in whatever they choose, while maximizing the tax efficiency of their portfolio.
Conclusion
Mitigating your lifetime tax liability requires a well-rounded approach that includes careful income management, tax-efficient investments, and strategic use of tax-advantaged accounts. By applying these strategies, you can significantly reduce your taxes, preserve your wealth, and secure your financial legacy for future generations. Working with a qualified tax advisor or financial planner ensures that these strategies are tailored to your unique circumstances and goals.
This article is a general communication being provided for informational and educational purposes only and is not meant to be taken as tax advice, investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions, inflation or US tax policy. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.
LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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