People don’t want surprises when it comes to their tax bills.
“Most taxpayers will find themselves from year-to-year in the same tax bracket,” said Dean Mioli, director of investment planning for independent advisor solutions by SEI in Oaks, Pa. “Maintaining tax equilibrium is important: You would want to know how far you are from the next tax bracket, above and below.”
But that can be easier said than done.
“Rarely is the tax bill of a high-net-worth individual consistent, mainly due to fluctuations in compensation associated with stock options and other performance-related bonuses,” said Laura Nickolay, CPA, financial advisor and senior tax associate with White Oaks Wealth Advisors in Minneapolis.
For some taxpayers, charitable contributions have become the fulcrum on whether to itemize deductions, which in turn can help prevent a spike in their tax bill.
“The 2019 standard deduction for a married filing joint couple is $24,400,” Mioli said. “For a couple to itemize their tax deductions, they need to exceed the standard deduction. Let’s say the couple has the following deductions: $9,900 state and local tax, mortgage interest of $11,100 and charitable deductions of $2,400. That totals $23,400, short of the standard deduction.
“To correct the situation, the taxpayers could move some of their future charitable contributions ($4,000) into the current tax year. Now the taxpayers’ itemized deductions total $27,400, which exceeds their standard deduction so they’ll get some tax reduction,” he said.
Larry Pon, CPA in Redwood City, Calif., had a client who was older than 80 and he taking his required minimum distributions and other financial benefits of his age. “I noticed he also did a $55,000 Roth conversion,” Pon said, adding that he told the client that by doing Roth conversions he’s paying the taxes on his IRA up front.
“This client’s tax bill was $10,000 higher than it should have been and, of course, the Roth conversion put him in a higher tax bracket,” Pon said. It also increased his Medicare premium. Pon encouraged the client to make his charitable gifts out of his IRA as qualified charitable distributions.
“If you’re at a point where you need to start taking your RMDs and if you’re in a financial position where you don’t need the RMD to live, you can roll it into a charitable contribution,” Nickolay said. “You can put up to $100,000 of your RMD directly to charity—this will decrease your overall income. You won’t get a deduction, but you won’t have to pay any income tax on that distribution.”
Mioli recommended three points for taxpayers to keep a tax bill level: