The Benefits of a Team-Based Approach to Tax Planning
The Benefits of a Team-Based Approach to Tax Planning

The Benefits of a Team-Based Approach to Tax Planning



Frederick W. Lundin
Frederick W. Lundin

Wealth Management Senior Account Executive
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The Benefits of a Team-Based Approach to Tax Planning

The changing tax landscape demands a change in tax strategy.

The Tax Cuts and Jobs Act enacted at the end of 2017 changed the tax landscape substantially. The traditional tax landscape and year-end tax planning strategies still apply, but it is now more important to develop strategies around multiple tax-years rather than only planning for the current.

Specifically, it is essential that all your financial professionals work as a team to develop a strategy that is specific to your financial goals and objectives. This is especially important when considering any year-end tax planning and the impact it has on your total tax liability and investment portfolio.

Increased Standard Deduction and Timing of Deductions

The increase of the standard deduction to $24,000 for married couples filing joint tax returns may cause many taxpayers to elect the standard deduction rather than itemizing their deductions as they might have done in the past. Traditionally, tax practitioners accelerate all available deductions into the current tax year. However, with the new tax reform, the general rule is to time deductions to ensure maximum value.

If your total itemized deductions are near the standard deduction of $24,000, it is important to consider aggregating expenses for multiple years into one year to maximize the amount of deductions applied to income. Key itemized deductions to take into consideration are charitable contributions, medical expenses, property tax payments, and casualty and theft losses.

For many taxpayers, annual contributions to qualified charities is one key itemized deduction. Due to the increased standard deduction, it may be advantageous to make the charitable contributions for two tax years in a year when the standard deduction is not being elected. For example, if you are a married couple and annually give $15,000 to a charity, it may be advantageous to make a total charitable contribution of $30,000 this year and elect to take the standard deduction next year. This will allow you to maximize your itemized deductions one year, while taking the higher standard deduction the subsequent year.

If you do not want to make all of your charitable gifts directly to the charity in the current tax year, you may opt to fund a donor advised fund or charitable foundation. This allows you to make the charitable contribution in years when there is a higher tax benefit but defer the payments to the charity at your discretion.

Although the new tax law limits the deduction of state and local taxes to $10,000 per year, if applicable, you can prepay taxes. This ensures you are maximizing the total $10,000 in a year in which deductions are itemized while removing property tax payments from years in which you elect the standard deduction.

Bracket Management and Strategic Income Sources

Due to the nature of our tax system, it is important to ensure that you are taking advantage of lower tax brackets in years during retirement or lower income years. It is crucial to fill the 0% and 15% tax brackets when available with ordinary income – or realize capital gains on investments. This can be done by strategically aligning income sources with your financial and tax plan—a move that again will demand your team of financial experts work together.

For example, if you are retired and are receiving income primarily from a non-retirement or Roth IRA account, you may not be fully filling the 0% and 15% tax brackets. By adding additional withdrawals from retirement accounts, you may be able to shift assets from retirement accounts into taxable accounts at lower tax rates. This can be beneficial, especially to heirs of the assets, who might be in a much higher tax bracket upon inheritance. This strategy also magnifies the importance of taking a multi-year approach to tax planning.

Part of bracket management is determining the income sources and timing of income available to you, ensuring that the income is being drawn from the proper sources for optimal taxation. A key to this is structuring retirement income in a way that blends the income stream from IRAs, Roth IRAs, and taxable investment accounts, while taking other income sources such as social security and pension income into consideration.

If you are in lower tax brackets for the current year, it may be beneficial to convert current IRA assets into Roth IRA funds. This allows you to absorb the income distributed from an IRA and shift the assets into an investment vehicle where any gains will be tax-free.

When you reach the age of 70.5, you are required to begin distributions from retirement accounts based on the IRS mortality tables. This can create a substantial amount of income, catapulting you into higher tax brackets and increasing tax liabilities.

One way to mitigate the effect of RMDs on income is to donate the annual RMD directly to a qualified charity. The tax code allows you to directly donate up to $100,000 of your annual required minimum distribution to a charity without having to include the distribution in your reported income. This can be a key strategy to fulfill a taxpayer’s annual philanthropic wishes, while lowering the income tax effect of RMDs.

Traditionally, the general rule has been to harvest any unrealized losses within taxable portfolios to minimize the amount of capital gains in one year. This continues to be important; however, you must also consider shifting capital gain income into the current year (depending on overall taxable income). It is important to understand the overall impact realizing gains and losses have on your final return and investment portfolio. Additionally, it is important to remember that you can offset up to $3,000 of ordinary income with realized capital losses.

The Thresholds for Taxation of Social Security and Medicare Costs

Understanding the thresholds for taxation of Social Security and determining the annual cost of Medicare are other important topics for retired taxpayers to consider. The current Social Security thresholds for a married couple filing jointly are a Modified Adjusted Gross Income (MAGI) of $32,000 (50%) and $44,000 (85%). These thresholds can create a significant amount of tax savings if income is strategically managed and you are able to keep MAGI under the income thresholds.

Social Security Taxation - MAGI Thresholds
Individuals Married Filing Joint % Taxed
$25,000 or less $25,001 - $34,000 $34,001 + $32,000 or less $32,000 - $44,000
$44,001 +
0% 50%

Medicare costs are another area that taxpayers must consider when evaluating annual income sources. For example, a married couple filing a joint return with income of $170,000 or less has a monthly Medicare premium of $134, while a married couple filing a joint return with income of $171,001 has a monthly premium of $187.50 ($642 greater annually). The monthly premium has a total of five income thresholds that can significantly increase Medicare expenses. See the table below for the breakdown of Social Security and Medicare income thresholds.

Medicare Premium Threshold – Annual Income
Individuals Married Filing Joint Medicare Premium
Monthly Annual
$85,000 or less $85,001 - $107,000 $107,001 - $133,500 $133,501 - $160,000 $160,000 + $170,000 or less
$170,001 - $214,000 $214,001 - $267,000 $267,001 - $320,000 $320,001 +

Strategic Collaboration and Communication

With the changes and complexity of the tax code, your financial well-being depends upon the collaboration of your financial team—financial planner, investment professional and tax preparer. When advisors collaborate and communicate, you will be in a far better position financially than if each advisor worked alone. It is important that your entire financial landscape is taken into consideration when making any year-end planning decisions, as every individual’s circumstances is different. Collaboration reduces the chances for missed opportunities and ensures that you achieve maximum value.


Tags:  Financial Planning, Maximize Deductions, Tax Code, Tax Cuts and Jobs Act, Tax Deductions, Tax Landscape, Tax Planning, Tax Strategy, Taxpayers, Team-Based Approach to Tax Planning, Timing Deductions

Note:  The content of this article is for guidance and information purposes only and is not intended to be construed as advice. Information provided is not intended to provide investment, tax, or legal advice.