5 Tax Planning Examples

By Modern Wealth Management

April 11, 2022

5 Tax Planning Examples

Key Points – 5 Tax Planning Examples

  • Accumulating Wealth Is Great, But You Need Tax Diversification
  • You Can Harvest a Capital Gain or Loss by Selling an Asset
  • How Much Social Security Income Can Be Taxable?
  • There Are More Perks to Charitable Giving than You Might Think
  • What a Difference a Multi-Year, Forward-Looking Tax Plan Can Make
  • 8 Minutes to Read

5 Tax Planning Examples

We frequently talk about tax planning at Modern Wealth Management. Why? Because we believe it can have a significant impact on your financial future. With that, we’re going to dive into some simple, yet effective, tax planning examples. We’ll use a sample couple named Sam and Samantha Sample as our stand-ins for these cases. We want to provide you with a better understanding of the impact tax planning can have on a retirement plan as Sam and Samantha encounter these example scenarios.

The tax planning examples we’ll be covering today involve:

  1. Tax Diversification
  2. Tax Gain or Tax Loss Harvesting
  3. Social Security Income Can Be Taxable – Up to 85%!
  4. Charitable Giving as a Tax Savings Opportunity
  5. Multi-Year Tax Planning

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1. Tax Diversification

One of the best examples of tax planning, especially before retirement, is tax diversification, or asset location.

As Matt Kasper, CFP® professional, puts it, “Most of the clients that we serve have done great job saving money and accumulating wealth, but it’s all in a tax-deferred status. They don’t have any tax diversification.”

For instance, Sam and Samantha Sample did a wonderful job saving for retirement, but they saved all their money in traditional 401(k) accounts. They either didn’t have a Roth option, which is odd in today’s working world, or they didn’t use it. That means their savings is all tax-deferred, leaving them with less flexibility to use their retirement savings in a tax-efficient manner.

“People want to keep it simple. When their company gives them a 401(k) plan, they logically think that is the way that they’re going to march forward into retirement.” Bud Kasper, CFP® professional, said. “But what if these companies aren’t providing the Roth option? And what if they’re not thinking through the earlier part, when it’s generally better to use a pre-tax method as opposed to after-tax?”

Conversely, if Sam and Samantha were to contribute to a Roth 401(k) and paid taxes when putting money into their account instead of deferring those taxes, they have more flexibility in retirement to distribute funds with less tax burden.

How Does that Work?

By using a Roth when you initially begin saving in your 401(k), you’re paying taxes at presumably lower rates, as tax rates are expected to rise in the future.

Opportunity for Roth Conversions, When it Makes Sense

Additionally, a Roth provides flexibility by allowing you to do a Roth conversion when it makes the most sense from a tax planning and distribution perspective.

“We frequently hear from people that they wish they would have put more into the Roth,” Matt said. “That’s not to say that the Roth is the end all be all, but that’s a common theme that we see.”

2. Tax Gain & Tax Loss Harvesting

Our next tax planning example surrounds a crucial tax reduction strategy—harvesting capital gains or losses. You can harvest a capital gain or loss by selling an asset.

Tax Loss Harvesting

“For people that are highly invested in taxable accounts, they’ve had more than 10 years of appreciation in a lot of their investments. And right now, they probably feel a little bit handcuffed because if they sell those investments, that’s going to be a pretty good tax event or tax implication.” Matt said. “Tax-loss harvesting is certainly going to be something that’s important for people to stay on top of. You need to be calculating what type of tax budgets should be set for those taxable accounts.”

For example, imagine Sam and Samantha have everything in highly appreciated assets. If they touch one of their investments, they will have to realize a significant gain. The last thing they would want to do is maintain that risky position because of the tax implications. This tax planning example is extremely pertinent today with such sustained lofty markets meaning many are dealing with these highly appreciated assets.

Tax Gain Harvesting

If you expect higher capital gains taxes in your future, you may want to harvest those gains in years with lower tax rates. So, if Sam and Samantha Sample have a 0% tax rate on long-term capital gains, it might be beneficial to realize some of those gains and reset the basis. However, there’s some opportunity cost associated between a lower tax rate and a tax deferral loss when making financial decisions.

3. Social Security Income is Taxable – Up to 85%!

As Shane Barber puts it, “It is amazing to me how many people still don’t know that their Social Security is taxable as ordinary income if they have additional income when they’re retired. It’s based on income levels, Medicare premiums, and more.”

Just as Shane said, many people don’t realize that their Social Security benefits are taxable based on other sources of income in retirement. They’re taxable up to 85% of your overall benefit! That is obviously a healthy chunk of your Social Security, and it’s based on something called provisional income.

What is Provisional Income?

Provisional income is a combination of all taxable sources of income, plus 50% of your Social Security income, plus any interest from tax-exempt bonds. It also includes pension income.

“In that case, the Roth makes a lot of sense,” Bud said. “That pension income is going to be taxable no matter what for the rest of their lives.”

Tip: Bud is referring to something provisional income doesn’t include, which is any distribution from a Roth IRA. Those do not get included in provisional income.

If your provisional income eclipses $44,000, then up to 85% of your Social Security can be taxable. If your provisional income is over $32,000, then up to 50% of your benefit is taxable.

Distribution Management Matters

As we referred to earlier, managing your distributions in retirement can have a huge impact on your tax bill. As you can see with provisional income, Social Security is no different.

Dean Barber recently spoke with Ken Sokol, a member National Academy of Social Insurance, about this very matter on our podcast, The Guided Retirement Show.

“The distribution management can have a dramatic impact on your net income after taxes,” Sokol said. “These calculations aren’t for the faint of heart. They’re not something that an average individual is going to be aware of.”

You can watch or listen to that episode here to learn more.

In this case, it would be better for Sam and Samantha to work with a financial planner to determine the best way to claim Social Security in the most tax-efficient way as possible.

“It’s almost like your fingerprint. It’s unique to you,” Dean said in the podcast. “I think people want to try to say, ‘Well, let me just read a book about this and I’ll figure it out myself,’ or, ‘Isn’t there just a rule of thumb or something?’ And there’s absolutely not. It is a very complex calculation.”

Tax Reduction Strategies - Tax Planning Examples

4. Charitable Giving: QCDs and Donor-Advised Funds

Many of our clients at Modern Wealth Management are charitably inclined. Charitable giving can be very satisfying for our clients, and we are committed to making sure they realize that they can benefit from it financially as well.

Qualified Charitable Distributions (QCDs)

“One of the best conversations we have with clients is when we find out they’re tithing or giving charitably.” Matt said. “That’s where Qualified Charitable Distributions (QCDs) come in. I think clients really connect to that. Even with donor-advised funds. There are some good options if the client is charitable.”

Thanks to QCDs, you can make a tax-free distribution, of up to $100,000 annually, transferred directly from and IRA to a charity once you turn 70 ½.

Since the increase of the standard deduction with the Tax Cuts and Jobs Act, QCDs have become incredibly useful tax planning tools. Why? Because you don’t have to itemize to get the tax benefit from the distribution. Additionally, it can also be beneficial if you’re very charitable and your giving is so plentiful that it is limited by the 30% and 60% adjusted gross income limits.

Tax Planning Example Using QCDs

When Sam and Samantha Sample reach the 70 ½ years old mark, they can begin using QCDs to give directly from their IRA to a charity. If they took $12,600 out of their IRA themselves and gave it to charity, they would have to pay a tax on that $12,600. Contrary to if they have the $12,600 sent directly from their IRA to the charity of their choice, there would be no tax due. Furthermore, if Sam and Samantha are in the 22% bracket, they would save about $2,700 in federal taxes by utilizing the QCD.

When Sam and Samantha turn 72 and have to begin taking Required Minimum Distributions (RMDs), this strategy becomes even more impactful. They can send all or part of an RMD directly to a charity as a QCD. This keeps retirement income and taxes more management when RMDs kick in.

Donor-Advised Funds

Donor-advised funds area type of charitable investment account for individuals or families that support the charities of their choice. Once money is in a donor-advised fund, it’s only purpose is for charity. The reason they are attractive from a tax planning perspective is that they qualify for an immediate tax deduction in the year the funds are transferred into the donor-advised fund. Another reason is that taxpayers can make donations in whatever increment and in whatever timeframe they choose.

Some other benefits of donor-advised funds include:

  • Making charitable giving more accessible.
  • Money in a donor-advised fund grows tax-free.
  • There is no required timeframe for distribution.
  • Donor-advised funds allow for a successor trustee to be named to allow for multi-generational charitable giving.

“People love that they can beat the government out of some tax as well by taking care of charities,” Bud said. “That’s great for the taxpayer.”

Tax Planning Example of a Donor-Advised Fund

For this tax planning example, imagine Sam and Samantha are charitably inclined. It just so happens that Samantha will be getting sizable severance payout of $135,000 and is retiring. Sam and Samantha’s income will be much lower in the future when Samantha retires. To offset the taxes due on the large severance payout, they’d like to get a sizable charitable deduction this year.

Like our tax planning example with QCDs, let’s say Sam and Samantha typically give $12,600 per year in charitable donations. Normally, that would result in them taking the standard deduction and receiving no tax benefit for their charity.

However, this year, Sam and Samantha decide they would like to contribute $75,600 to a donor-advised fund. By doing so, they can distribute the money over the next six years in $12,600 increments. Also, they can save $14,475 on their federal taxes this year because they can itemize their deductions rather than taking the standard deduction.

Learn more about donor-advised funds here on our podcast.

5. Multi-Year Tax Planning

All the above tax planning examples are intended to show that it’s crucial to put together a multi-year, forward-looking tax plan. Implementing tax-efficient investment solutions like Roth options and capital gains harvesting are just parts of a much larger puzzle. That puzzle includes the strategies we have discussed, but also includes establishing a plan that reaches into the future.

Generational Tax Planning

One thing we know from meeting with clients over many years is that the most important thing to most isn’t money. More often than not, the most important thing to people are their loved ones and the time they spend with those loved ones. Tax planning is as much for your retirement as it is for your family’s financial future. Most estate planning is really tax planning if it’s done right.

By planning your taxes into the future, you not only set yourself up to better achieve your goals for retirement, but you also leave your family in a better position when you’re no longer here. For example, the SECURE Act enacted something called the 10-year rule surrounding IRA accounts. This rule stipulates that unless your beneficiary qualifies as an Eligible Designated Beneficiary, IRAs must be dispersed within 10 years of inheritance. For most beneficiaries, this would result in a lot of income taxes with that additional income possibly even being taxed at higher rates.

That doesn’t mean there aren’t opportunities for tax planning though. For instance, it may make sense for you to set up a life insurance policy where you’re able to pass along tax-free money to cover those taxes for your heirs or to pay the tax for a conversion. One thing is for sure is that Congress is going to continue to find ways to tax your retirement funds. It’s important to have a plan that can adjust to new legislation like potential regulation changes to the SECURE Act.

Opportunities Exist, Tax Planning Can Help Take Advantage of Them

We hope these tax planning examples have shed some light on the opportunities available to you as you approach financial independence. Tax planning isn’t just about paying as little taxes as possible. It’s about setting yourself, and your family, up for the retirement you desire.

We know that just by reading this far, you’re invested in your financial future. If you’re ready to explore even further how tax planning might help you plan the life you dream of in retirement, that’s great! You can do exactly that from the comfort of your own home with our industry-leading financial planning tool. It’s the same tool that our CFP® professionals use while working with our clients. Our financial planning tool includes a section to review your tax situation so you can begin creating your multi-year tax plan. Learn more by clicking the “Start Tax Planning” button below!


If you have any questions about these five tax planning examples or how to go about using our financial planning tool, please reach out to us. We’re happy to answer your questions during a meeting—in person or virtually—or quick call. Just click here to schedule a 20-minute ask anything session or complimentary consultation with one of our CFP® professionals. We look forward to seeing how these tax planning examples can be beneficial to you.

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.