Essential Tax Planning Strategies for Every Age

Hey everyone, it's Phil Clark with We're Talking Money. We're here to break down some financial strategies that could change your future. Now, today we're going to talk taxes, and more specifically how tax planning, it's often confused as a one-size-fits-all, and it's anything but. So whether you're a young professional, maybe you're raising a family, or perhaps you're already enjoying retirement, the right approach to taxes can make a huge difference. So let's dive into how you can make the most of your deductions.

So first up, let's talk about something that everyone needs to understand, and I came across this in a recent client meeting, and unfortunately this new client did not understand this part of the tax world: the standard deduction. This is the default way for many people to reduce their adjustable gross income, or AGI. Now, in 2024 this standard deduction is $14,600 for individual filers and is $229,200 for married couples filing jointly. For 202 5, this standard deduction is going to move up again. It'll go to $30,000, and of course 15,000 for that single filer.

Now, that's a lot of savings without doing a thing, but here's the catch. Some people still itemize, and they barely reach this amount, and if the total is below that standard deduction, then a lot of time has been wasted, not to mention there could be a cost of your accountant doing the math for you. So itemized deductions, in case you don't know, they include things like mortgage interest, charitable donations, medical expenses, and there's plenty of others, but those are the basics. And if you don't have enough to go over that standard deduction, you don't want to spend the time and money with your CPA for something that's futile.

One of the problems with tax planning is that accountants often forget that one size doesn't fit all. And I'm not trying to attack an accountant or call a CPA someone who's not paying attention, but sometimes they can get into a little bit of a rut. My job is to take us away from that rut and remind you that there is no one-size-fits-all. Tax planning is different depending on where you are in life, so let's break that down.

If you're early in your career, you might not have enough big deductions to itemize. Maybe you don't own a home yet, or maybe you don't have significant medical expenses. That's a good thing. So most young professionals tend to stick with the standard deduction, but want to at least keep track of all of your expenses that are potentially something that would help you itemize or get you over that threshold. Also, don't overlook things like contributing to an IRA or your 401k. Those things can help lower your taxable income. And of course your HSA, don't forget that one. Particularly for the younger folks, that is a great way for you to save some additional tax and create another bucket of money for medical expense, or down the road could be used for other things.

Depending on where you live, married filing separate could be the best for your state tax returns. Be sure to know the rules in your state, or make sure that you have a CPA that does.

As you get older, you're more likely to benefit from itemizing, especially if you own a home. Mortgage interest and property taxes and even out-of-pocket health care costs, they can really add up. Still, with that standard deduction being as large as it is, itemizing is not a sure bet. But that's okay, because we have a secret weapon called bunching. Studies tell us that about 70% of itemizers never heard of something called bunching.

So here's how that works. Instead of spreading out donations or medical expenses over several years, you can bunch them into a single year, and that could allow you to surpass that standard deduction. Say you're married, you're filing jointly, and your standard deduction, it's $29,800. Now, you normally in this example are donating, say, $99,000 a year to your favorite charity. If you have $99,500 in mortgage interest and you pay roughly $10,000 in property taxes, when you add those dollars together you still fall short of that standard deduction. So you just take the standard deduction in this case, and you'd miss out on any extra tax savings from itemizing. Over four years, you can see on the screen that your total deductions equaled $19,200.

With bunching, you could make two or more years' worth of charitable donations in one year. So instead of donating $99,000 this year and $99,000 the next year, you would donate $18,000 in the current year. Now, if you add that to your $99,500 in mortgage interest and your $10,000 in property taxes, you're at $337,500 in deductions, and guess what, now you can itemize. You're well above the standard deduction. You itemize this year, then next year, when your itemized deductions are lower, you go back to taking the standard deduction. And you can see from this chart, over two years you've saved more than if you just took the standard deduction each year. Compared to spreading the gifts evenly, you gain additional deductions of nearly $116,000, and assuming your tax rate is 35%, you just put about $6,000 in your pocket using this simple technique.

Let's go to retirees now. Retirees have a different set of concerns, so you might have fewer deductions, first of all, because mostly when people reach retirement they don't have a mortgage, they've paid it all. You probably don't contribute to your retirement accounts any longer. So in this stage, tax planning, it's all about minimizing your taxable income through smart withdrawals and being strategic with charitable giving and keeping up with those medical expenses. So for example, retirees with significant savings, first, we believe they should consider tax-efficient withdrawal strategies, like pulling from taxable accounts before tax-deferred accounts, or consider converting traditional IRAs to Roth IRAs while your tax rate is lower.

Now, another great overlooked opportunity is something called a QCD, qualified charitable distributions. Did you know that an individual donor can contribute up to $15,000 per year using qualified charitable distributions, and the only requirement is being 70 and A5 years old or older? Now, for married couples, each spouse can take advantage of the QCD, and that means another $105,000, which is the potential in total of $210,000 in one year. Keep in mind this $15,000 per person limit, it applies to the sum of all QCDs taken from all of your qualified accounts or IRAs. Now, a donor can make one large contribution, or you could make several contributions over the course of the calendar year.

And remember, QCDs, they can be made from more than one of these IRA types, and I speak of course of a traditional IRA, an inherited IRA, inactive SEP IRA, and SIMPLE IRAs. And so if all of your retirement funds, if they're still in your employer 401k or perhaps your former employer 401K, don't worry. If you want to take advantage of QCDs, all you have to do is transfer enough funds from that old 401K to your IRA to satisfy the amount of your QCD.

Now, on top of this, QCDs, they keep your AGI low, and that helps you avoid the increase of Medicare premiums, as well as that 3.8 surtax on net investment income, and it makes it easier to deduct medical expenses.

So how does this thing work? So the traditional way for distributions from IRA accounts to occur is the withdrawal happens, and then you would typically make your donation to your charity. The withdrawn amount, it is recorded on your tax return, and the amount donated becomes an itemized deduction. The donation is not taxed as income, that's important, but it is added to your adjusted gross income, which affects those Medicare premiums, the surtaxes, and your state taxes. On the other hand, let's talk about the QCD. Using this method, the amount given to the charity, it never goes to your tax return and therefore never becomes income, and it's never added to your adjusted gross income, which is a huge benefit.

Why don't we take a look at a quick example so you can see exactly what I'm talking about. In the column titled example one, they have a mandatory distribution of $35,000. That's their RMD. Subsequently, they make a charitable contribution of $115,000. Now, in example two, you see the mandatory distribution is the same, but this time we use QCD to make a gift of $115,000. This removes the $115,000 from their mandatory distribution, and it is moved direct from the custodian to their charity to make the charitable contribution. The tax savings in this small example is already $2,000. If you have larger required distributions and you plan to make larger charitable gifts, these savings can be significant.

So the bottom line is, without the right education you could be leaving a lot of money on the table, or worse, paying a lot more taxes than you should. Tax planning is about knowing what deductions and strategies are available to you and which ones are best for your stage of life. A young professional might not itemize today, but with a strategy like bunching, a middle-aged professional or family, they could benefit in a huge way. And retirees, they need to think about when and how they are going to withdraw their funds. Preparing for this stage of life can be pretty challenging. I suggest if you're getting close to retirement, you need to get started, so that you know what your plans are going to be and if you have the right things built into that plan to mitigate the tax risk.

Tax planning isn't just something you do once a year. It's something you should be thinking about as your life changes. With the right approach, I am certain that you can save significant dollars over your lifetime. That translates to greater wealth. If you want to dive deeper into strategies for your specific situation, make sure to subscribe to our channel and leave your questions or comments in the section below. We'd love to hear from you. Our team is always happy to help. Thanks for watching, and I'll see you next time on We're Talking Money.