Tax Planning During Tax Preparation Season with Corey Hulstein
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Tax Planning During Tax Preparation Season with Corey Hulstein Show Notes
With tax filing season officially underway as of January 24, we want to review the advantages of doing tax planning during tax preparation season. It’s important to realize that tax compliance and tax planning aren’t one in the same, though. Our Director of Tax, Corey Hulstein, joins Dean Barber on The Guided Retirement Show to discuss some tax planning strategies to consider during tax preparation season.
In this podcast interview, you’ll learn:
- How we go about minimizing taxation for someone not just in one calendar year, but over their lifetime.
- There’s a big difference between figuring out your quarterly estimates and doing forward-looking tax planning during tax preparation season.
- Why QCDs and donor-advised funds could work for you if you’re charitably inclined.
- It’s important to have your CPA and CFP® Professional working together.
- Why it’s critical to do tax bracket planning and think about how much of your Social Security can be taxable.
Why You Should Start Tax Planning During Tax Preparation Season
At Modern Wealth Management, we talk a lot about how a financial plan can give you clarity, confidence, and control to live your one best financial life. A crucial component of that financial plan includes a forward-looking tax plan. Tax planning done right can help you control your taxes, especially in retirement. And there’s no better time to start tax planning than during tax preparation season.
“Let’s look at what the calendar looks like early in the year and figure out what your budget and finances look like and what the markets are doing. Let’s evaluate all our options early in the year and put a plan in place. Later in the year, we’ll check in on how that plan is doing.” – Corey Hulstein
Oftentimes, tax planning can be an afterthought for CPAs during tax preparation season because they’re so busy preparing tax returns. That’s not the case for our CPAs, though, because we understand how important it is to do tax planning for our clients during tax preparation season or any other time of year. We want to look at tax planning strategies for clients that can help them not only in that year, but several years down the road.
Reviewing your multi-year tax planning strategy is one of the annual items that we have listed on our 2023 Retirement Planning Calendar. It also includes several important dates to be aware of that can impact your retirement, so download your copy below.
2023 Retirement Planning Calendar
One of the things that your CPA might do is figure out what your quarterly estimates should be. But that’s not really planning. That’s just doing the bare minimum to make sure something isn’t screwed up for the next year. There’s a big difference between that and proactive tax planning that can provide immense value.
Qualified Charitable Distributions
If you’re charitably inclined and are 70½ or older, Qualified Charitable Distributions are a tax planning strategy that might be right up your alley. Through QCDs, you can make charitable contributions from an IRA directly to a charity without the distribution showing up on your tax return. It won’t cause more Social Security to become taxable or cause dividends that are tax-free to become taxable.
By doing those QCDs early in the year, you know what that Required Minimum Distribution is going to be like and how it’s going to fit into the overall tax plan for the year. Then, the QCD applies toward the RMD. If you wait until November or December to do the QCD, that RMD will have already been met and the QCD is less valuable. The only caveat to that is if someone needs the RMDs and they’re using the money to live on. But the QCD would still be effective. To learn more about QCDs and other tax planning strategies—some of which we’ll review shortly—download our Tax Reduction Strategies Guide below.
Download: Tax Reduction Strategies Guide
Donor-Advised Funds
QCDs are just one option to consider for those who are charitably inclined. We have three more tax years to take advantage of the higher standard deductions that the Tax Cuts and Jobs Act brought in. We’re going to dive deep into the bigger impact of that later as well.
When the TJCA was passed in December 2017, it benefited some people while it hurt others. It helped people write off state and local income taxes and charitable deductions. But if those charitable deductions aren’t big enough now, people don’t really get the tax deduction for it because they’re not itemizing anymore.
“For people that don’t have a mortgage, their state income and property taxes are capped at $10,000. Suddenly, you need to contribute $15,000-$20,000 to charity just to get a benefit. It almost disincentivizes giving to charity to some degree. But with things like donor-advised funds, there are ways around that. It just takes a lot of planning to get there.” – Corey Hulstein
What Is Bunching?
You do this through a technique called bunching. Let’s say that someone usually gives $5,000 a year to charity. If you only get to deduct your state and local income taxes up to $10,000 and you give $5,000 to charity, that’s only $15,000 on your itemized tax form when your standard deduction is over $25,000. So, you get zero benefit.
By giving to a donor-advised fund, you could give—for example—10 years in advance of those $5,000 gifts. So, you put $50,000 into a donor-advised fund and then disperse the money over that 10-year period as you wish. And you get the deduction of that $50,000 in that given year.
Working within the Tax Law
What we look at for a lot of people is how to set up a donor-advised fund to work within the tax law. In 2023, it’s going to be probably going to be popular for people to do three years of donations—assuming that the tax law changes in 2026. Once we get to 2026, we’re likely to be able to start writing off charitable donations again.
Using our donor-advised fund example, the hard part is having $50,000 in cash on hand. That’s not always attainable for some people. You can also have $50,000 worth of securities in that scenario and donate them to the donor-advised fund as well. Maybe you have a stock that you paid $5,000 for several years ago that’s now worth $50,000. You can put that $50,000 into the donor-advised funds. You wouldn’t need to sell it to come up with cash to put into the donor-advised fund, so you wouldn’t need to pay capital gains on it.
Looking Out for Potential Unwelcome Surprises
When it comes to taxes, there are always things like capital gains that can take people by surprise. Look back at the substantial capital gains that a lot of people had back in 2021 that they had to pay taxes on. The tax software that most CPAs use can assume that the same thing will happen the following year. But when you have large capital gains, it’s typically not the same every year.
Part of that is to just make sure that people don’t get penalties on their quarterly estimates. If we don’t look forward and project what those capital gains are, the easy answer is to pay enough to cover last year’s tax balance.
The Advantages of Having CPAs in the Same Office as Our CFP® Professionals
There are several reasons why Dean loves having Corey and our tax team in-house. One of them is because our CPAs can work alongside our CFP® Professionals. When our CPAs are making a quarterly estimates, they’re making them based on what they think is going to happen. But when they have the information and are talking to the client and CFP® Professional, they’re looking at the client’s capital gains situation for each quarter. If there are capital gains that could trigger the need for a quarterly estimate, they can do it. That turns out to be proactive planning rather than needlessly sending free money to the government as a free loan for 12 months.
“That’s how it should be done, but not everybody has that capacity. If you’re working with an individual CPA, they’re not going to know what’s going on with the capital gains side because they can’t check in an advisor every quarter. That’s where we get a lot of synergy because our CPAs and CFP® Professionals are right down the hall from each other.” – Corey Hulstein
Establishing the Concept of Tax Planning During Tax Preparation Season
Early on in Dean’s career before he had a good grasp on the advantages of tax planning, he remembers sitting down with a CPA to do tax preparation. He’d ask himself, “What could I do now to reduce my tax bill for the entire year?” Dean ended up figuring out that there’s almost nothing you can do unless you’re going to make an IRA contribution that’s deductible. You can’t simply unwind something that happened in the prior year.
That got Dean to thinking about the concept of tax planning during tax preparation season. It’s to reflect on what happened the previous year, think about what you’re going to do that year in terms of your spending, and determine the most tax efficient way of where you’re going to get that money from.
The nice thing about doing tax planning during tax preparation season is that you have all those numbers from last year in front of you. The big question is what changes moving forward. You can move those numbers up and down accordingly. It gives you a baseline scenario of what a normal year looks like and you can make adjustments from there.
Interest Income
Over the past year, we’ve seen a significant increase in interest rates. Maybe your interest income was $4,000-$5,000 in 2021. Well, interest income for 2022 three to four times that, and interest income for 2023 could be more than that.
“You need to look at those types of things and ask yourself, ‘If that interest income is causing unintended consequences, maybe we need to look at a tax-free alternative like municipal bonds. They look attractive in years.” – Dean Barber
This is something that’s easy to miss. When you look at interest, you usually think that number isn’t going to change. But sense rates have increased substantially, interest income is going to go up quite a bit.
Tax Bracket Planning
Tax bracket planning is also very important to understand during tax preparation season (and year round). For each person/couple, it’s critical to frame it within their unique situation. Let’s say that you had a couple that had a total income of $110,000. Is the 12% or 22% rate a good rate for them? For some people, that’s a great rate. For others, not so much.
This couple is going to be close to the top of the 12% bracket. If they’re going to be at the 22%, 25%, or 28% rates in the future, they need to make sure to utilize the full 12% bracket. Even if they miss it a little bit high and pay a little at 22%, that’s still better than not taking full advantage of the 12% bracket.
“To understand if this makes sense for them, you need to look forward several years. Let’s say someone is in their early 60s, retired early, and has more money than they’re going to spend. We need to look forward all the way to age 73 and ask what the Required Minimum Distributions from their retirement plan going to look like. And when they’re forced to take that money out of their IRAs and 401(k)s, what tax bracket is that going to through them into in the future? Can we get some money out of that IRA this year or next year at a lower rate than in the future? – Dean Barber
Looking at Future Tax Rates
To Dean’s point, tax rates are likely going up in the future as we alluded to earlier. And to be exact, tax rates are set to go up on January 1, 2026, because the Tax Cuts and Jobs Act will be sunsetting. So, while we might not know all the answers for forecasting someone’s tax situation, we do know that we’re in a lower tax environment now than we will be in 2026 unless something drastic happens in Congress.
How Much of Your Social Security Can Be Taxable?
One other thing to keep in mind when tax planning during tax preparation season is how much of your Social Security can become taxable. When Social Security was originally enacted, it was intended to be a tax-free source of income.
“I always tell people that it still is a tax-free source of income unless you disqualify yourself. Most people are like, ‘How in the world can you disqualify yourself?’ Well, you can have too much provisional income. It’s a special formula that’s used to find out how much of your Social Security is taxable.” – Dean Barber
One of the things that CPAs like Corey do from a tax planning aspect is look at the sources of income that someone has available. Maybe they have Social Security and some money in a taxable account, Roth IRA, and a tax-differed account. It’s understanding how much someone needs net of taxes to do the things they want to do and knowing all their income sources. That way, you can realize what accounts to pull from from a tax perspective so that you’re paying less tax on Social Security.
Tax Diversification
This is one reason why we stress the importance of having good tax diversification. The different streams of income are all taxed differently. We want to make sure you’re taking from the right income sources at the right time to avoid more Social Security being taxed.
How Social Security is taxed factors into deciding how and when you want to claim your Social Security. What is your upcoming year going to look like and where are you going to get money from? You should be asking yourself that as you’re doing tax planning during tax preparation season.
When someone is getting ready to claim Social Security, we want to make sure that from a tax perspective that it’s the right decision. Will turning on Social Security adversely affect other things so that end up outweighing the benefit of a Social Security check?
“My goal is to minimize taxation—not only today, but over your lifetime. Are there certain steps we want to take between now and age 70, which is the latest you can turn on Social Security? Are there things you want to do during that timeframe to hold off on Social Security so you can maximize it over your lifetime?” – Corey Hulstein
The Many Variables that Impact When You Want to Claim Social Security
There’s a right answer for everyone for when to turn on Social Security, but there’s no book that will give you that answer. It’s unique to everyone’s personal situation. It’s important to have the conversations about that and much more with your CPA and CFP® Professional together by doing tax planning during tax preparation season. The difference between the best and worst Social Security claiming strategies for you could be tens of thousands of dollars.
There are so many variables to consider when deciding when to claim Social Security—growth, duration of life, etc. We at least want to give you the tools to help lead you to making the best decision for you. The best decision for you can change on a year-to-year basis depending on what changes in your life and how the markets are doing.
The Big Takeaway of Tax Planning During Tax Preparation Season
While we hope this information has helped you realize how it’s beneficial to do tax planning during tax preparation season, the big takeaway is that it’s important to have open communication with your CFP® Professional year round. Before you make a big purchase or financial decision, you should talk to your CFP® Professional and CPA together to determine the best income source to pull from. You want to access that money with being taxed as little as possible.
“Communication is key. Tell us what it is that you want to do and what’s important to you. Maybe it’s legacy planning. Prioritizing what’s important to you helps us determine the most efficient way to help you achieve your goals. It’s going to look different for everyone.” – Corey Hulstein
Questions to Think About While Tax Planning During Tax Preparation Season
Since you’ve already done the hard job of gathering all your tax documents, it’s a good idea to have those conversations early in the year so you can do some tax planning during tax planning season. What is 2023 going to look like for you? Do you have any special plans for 2024? Are you going to inherit any money in the future? Do you want to accelerate gifts to your kids or grandchildren? How do you do that in the most efficient way possible?
Those are questions that a lot of people are likely thinking about right now. And how you answer those questions is likely going to show up in some way on your tax return. That’s why we want you to do tax planning during tax preparation season.
Remember, It All Starts with a Financial Plan
As we mentioned earlier, a tax plan is a big component of a financial plan. So, if you don’t have a financial plan in place, that’s where you need to start. We’re giving you the opportunity to do exactly that with our industry-leading financial planning tool. Keep all this information in mind as you’re building your plan and remember that your plan is unique to you. You can start building your plan below by clicking the “Start Planning” button.
Tax planning decisions aren’t something that you just want to gloss over. They need to be well thought out, and we’re happy to help you with that. You can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals to gain some clarity and confidence about your financial life. We can meet with you in person, virtually, or over the phone. We hope all is well with you as the tax preparation season begins and look forward to hearing from you soon to discuss tax planning during this tax preparation season.
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Tax Planning During Tax Preparation Season | Watch Guide
Introduction: 00:00
Start Tax Planning During Tax Preparation Season: 01:32
Qualified Charitable Distributions: 03:10
CPA & CFP® Working Together: 04:34
Interest Income: 08:13
Tax Bracket Planning: 09:19
Social Security & Taxes: 11:20
Donor-Advised Funds: 14:53
Communication is Key: 18:06
Conclusion: 20:15
Resources Mentioned in this Podcast
Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.
Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.