Tax Planning Case Study

By Modern Wealth Management

September 30, 2019

In this tax planning case study, there are two married couples—Sam and Samantha and Paul and Polly.

Tax Planning Case Study

Sam and Samantha would like to spend $120,000 net of taxes this year and do not have a tax plan. Instead, every year they stress out until they meet with their CPA to find out if and how much they owe the IRS when they file their yearly tax return.

Paul and Polly also want to spend $120,000 net of taxes this year. However, Paul and Polly meet annually with a tax planner and have followed a forward-looking tax plan created by their CPA so that they know that every year, their tax bill will be the lowest number possible.

Both couples will be filing married, jointly, and are over the age of 65. Sam and Samantha have $20,000 in combined social security and $40,000 in Required Minimum Distributions. In order to have enough money to spend, they will have to take $75,000 more out of their IRA as all their savings are in tax-deferred accounts.

Paul and Polly

Paul and Polly have $40,000 in combined Social Security and $20,000 in Required Minimum Distributions. Due to their advanced tax planning, they have money in the three tax buckets – taxable, tax-deferred, and tax-free. When they met with their financial advisor and CPA to determine where to take their money, their CPA was able to properly blend their withdrawal from a combination of their taxable account and their Roth IRA. These withdrawals result in $25,000 of net long-term capital gains.

So how do the friends’ tax returns compare when April rolls around and it’s time to file with the IRS?

Sam and Samantha

When Sam and Samantha file their tax return, their federal taxes are almost $15,000. The extra $75,000 IRA distribution caused them to pay tax on 85% of their social security and moved them to the 22% tax bracket.

Paul and Polly’s federal tax liability is only about $1,700 when they file their taxes. Remember, they have a tax plan in place. Their advanced tax planning allowed them to maximize their social security benefits as well as take steps to reduce their required minimum distributions. Paul and Polly’s tax bill was $1,700 instead of the $15,000 that Sam and Samantha paid.

In case you missed it, watch our video on how tax planning and some other strategies can impact a couple with $1 million saved for retirement.

This is Only One Tax Planning Case Study

This is just one tax planning case study and one tax planning example. However, the question is simple…who doesn’t like to pay the lowest amount possible every year on their tax return? Do you want to be a Sam and Samantha or a Paul and Polly? If you’d like to save money with a forward-looking tax plan, schedule a complimentary consultation below or call us at 913-393-1000 to request an appointment. We’re happy to discuss how having a tax plan could benefit you in the future.

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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.