Ep. 215 – Mid-Year Tax Planning – Why So Important in Retirement?

In this Episode of the Secure Your Retirement Podcast, Radon, Nick, and Taylor discuss the importance of mid-year tax planning. It’s important to look at the previous year’s tax situation because some things, like Roth conversions and qualified charitable distributions, need to be done before the end of the year in order to be reported on your tax returns.

Listen in to learn the importance of coming up with a good tax withholding strategy to avoid tax liabilities and bills during tax season. You will also learn about the tax benefits of donor-advised funds and qualified charitable distributions.

In this episode, find out:

  • How we look at your last year’s tax situation to better plan your taxes before the end of the year.
  • The importance of coming up with a good tax withholding strategy to avoid tax liabilities and bills.
  • How we review your basic information and sources of income on a tax planning software program.
  • Things you can do to achieve the benefits of itemizing and saving on your taxes.
  • Nick explains how we set up a donor-advised fund through Charles Schwab.
  • Understanding who qualifies for qualified charitable distributions (QCDs), plus their tax benefits options.
  • Understanding all the requirements needed for a mid-year tax planning meeting.

Tweetable Quotes:

  • “Looking at the previous year’s tax return and having conversations throughout the year really helps us guide the withdrawals and the tax strategy.”– Nick Hymanson
  • “There’s a benefit of working with a financial planner to make qualified charitable distributions transactions because the custodian does not report them.”– Taylor Wolverton


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:Welcome everyone to Secure Your Retirement Podcast. Today is an extra special episode, I think, because we don’t have Murs on the show, because he was traveling and I decided, hey, I want to make sure that we have a good show so I brought a couple guests on. We have Nick Hymanson and Taylor Wolverton, who both are on our team and help us in our financial planning preparation and, well, as you know, all the financial plans that we go through with our clients, as well as our tax planning and tax strategy.  
 And today that’s really what we want to talk about, because as we record this show, we’re midway of the year. So we’re June of 2023 and we right now are doing a lot of work to get ready for our tax planning, tax strategy meetings that we’ll be having later this year. And I think a lot of times people think about preparing their taxes and doing that kind of stuff usually in February, March and April of a year. And yet we’re doing a lot of work right now around tax planning in June, getting ready to have tax planning strategy meetings in September, October, November timeframe.  
 So I think it’s just important for people to understand why that is necessary, and then what we do to get ready for that because it’s not just some little small meeting that we’re going to have and that there’s not a lot of work that has to go into it prior to meeting. This is probably one of our most intense meetings that we got to do a lot of prep for more than even the financial planning side of things, but it really does connect with the financial plan.  
 So I’ll just say this, let’s just have a little conversation here and I’ll throw it your way first, Taylor. When it comes to tax planning, tax strategy, why is it, what are some things that you think about if you were trying to describe to somebody why we would want to do tax planning, tax strategy before the beginning of the year, not after the beginning of the year?  
Taylor Wolverton:Yeah. For one thing, we want to look at what your situation was last year so that we can have an idea of some moves that we can make before the end of this year. A lot of things like, for example, Roth conversions or qualified charitable distributions, those need to be made before the end of the year in order to be reported on your tax return. So for 2023, in order for you to complete a Roth conversion that needs to be done before December 31st of 2023 so that it can be reported for the year.  
 So we want to look at your tax situation now in June and what it’s going to look like through the end of this year so that we can have an idea of what changes or moves that we might want to make or consider making so that can be done in time.  
Radon Stancil:Yeah. Very good. So now let’s just think a little bit about how this ties in with financial planning. A lot of our clients when they retire, maybe when they first retire, they are living on some cash in the bank, and then they decide I want to start taking some money from an IRA or I have required minimum distributions and we’re looking at that.  
 Now we meet with people in the beginning of the year, we do a financial planning meeting and that’s where we update where their incomes going to come from this year. So Nick, could you just speak a little bit maybe about why that’s such a big deal when we look at 2022 and say, well, what happened in 2022, and then now we’re looking in the fall of 2023, and how that plays in income perspective?  
Nick Hymanson:So what we want to do is basically get a good idea of your income from last year, and then anything, any changes, any unique situations that could have happened this year, we want to talk about that as well. What that does is that’ll help us with our recommendations for tax withholdings. So during the year, like Radon said, you might have RMDs that are getting taken out of your accounts, withdrawals, any one-time withdrawals from IRA accounts.  
 And so. it is important to come up with a good tax withholding strategy so that when it comes to tax time, you’re not surprised with any sort of tax liability and tax bills around that time. So looking at the previous year’s tax return, and then also having conversations throughout the year really help us kind of guide the withdrawals and the tax strategy there.  
Radon Stancil:Yeah. And I think too, it is important, for example, if a person was thinking about doing something. So for example, we’re talking now and the person was thinking about maybe selling a highly appreciated stock or they were thinking about doing something that was going to create a tax event and maybe they didn’t really need to do it right now, but they could wait till the first of the year, there could be some strong tax advantages for us to hold off on those things, but for sure to know about them.  
 Now one of the things that we do is that we have to get… You said this Taylor, we have to get people’s last year, so 2022 tax return, and we’re doing an analysis of that tax return to help us kind of do some planning for 2023. Now we use a software program that allows us to upload the 2022 tax return, and then we can do some simulations.  
 So could you kind of walk through, I know we don’t show all the mechanics or anything to a client, but could you kind of walk us through what that is doing? What are you looking for when you upload that into that software program, Taylor?  
Taylor Wolverton:Yeah. I mean even just starting with some of the most basic things like are your name spelled correctly? Are you using the correct filing status that we want you to be using? Are your social security numbers correct on your tax return? And then, looking at what the tax return is actually reporting like different sources of income. Like Nick mentioned, you might have social security or IRA distributions, especially if you’re taking required minimum distributions, you’re going to have those reported on your tax return as taxable income.  
 You might have interest and dividends or if you’re still working or phasing into retirement in some kind of part-time capacity, you’ll have wages reported on your tax return. So we’re really just reviewing all the different sources of income that you have and we can look at that with you and show you, here’s the amount of your social security that’s being taxed, or here’s the amount of capital gains that your account generated, or here’s the amount of interest.  
 And then, we’re walking down your tax return looking at different deductions. Are you taking the standard deduction or are you taking the itemized or are you itemizing for your deductions? And then, what amount of taxable income that produces, and then what amount of tax you owe based on that amount.  
 And then, also, like Nick mentioned, we can look at the withholdings that you had last year and we can have a conversation with you about, do you want to have a refund for each tax year? Would you rather make a payment and just make sure that the way that your tax return is laying out with either getting a refund or a liability at the end of the year, that’s matching your preference. And if we need to help you adjust your withholdings in order to match your preference, then that’s something that we can do, also before the end of the year so that it’s resulting in the way that we want and the way that you expect.  
Radon Stancil:So there’s two things there that I want to just kind of think about that we have to do before December 31st. And one of those is a what’s called a QCD, a qualified charitable distribution. And then, we’re going to talk a little bit about donor advised funds and the planning behind that. So let’s just start with donor advised funds. And I’m just going to set this up a little bit and then we’ll ask about the mechanics and Nick can help us look how this would go about.  
 So sometimes what we’ll find is, and this would come from the tax return, is that we might see that some, or in conversation somebody is charitably inclined and maybe somebody says, “I normally give X amount.” So let’s just use $10,000 a year that they give to a charity, a church, some other organization, whatever it might be. And then, we’ve got this idea of, well, then can I itemize?  
 And most people don’t itemize. And the reason why is because the standard deduction is so high today. So Taylor, hoping I’m not throwing you on under the bus here as far as trying to give you something on the spot, but what is the standard deduction right now? Do you know that? You don’t have that right in front of you? Okay. Look for that.  
Taylor Wolverton:   
Radon Stancil:And we’ll come back to that. I know it’s somewhere for a couple, it’s around the 25,000, but we’ll get that in a second. So the idea is a standard deduction. If I do a donor advised fund, I can stack, we did a whole episode on this, I can stack my contribution. So let’s say I normally give $10,000 a year. I can set up a donor advised fund, put $30,000 or $40,000 into that, get all of that deduction this year, use it as a deduction this year, and then I just distribute the $10,000 a year for the next three or four years. But the reason why I did that is so that I could itemize today and I get the benefit of itemizing, which means I’m going to get a bigger deduction.  
 And again, this may not save us thousands and thousands, but anytime I can save a thousand or $2000 in connection to the IRS, that’s a good thing. So Nick, can you just tell us how we would set up a donor advised fund, how we can do it? We normally would do this to Charles Schwab. So just walk us through the mechanics of that.  
Nick Hymanson:Right. So this donor advised fund, it would basically be held at Charles Schwab. It would look very similar to other accounts held at Charles Schwab with a few differences. So in this situation, a check would be written from a checking account, savings account, or really another place to straight to a Schwab charitable account.  
 So when you do that, the account actually is in the name of a Charles Schwab charitable account. And so, the funds are held there and during this entire process, we’re kind of working with you to make sure that the specific charities that you’d like to contribute to. And then, basically all of the contact information, everything is set in stone so that these specific charitable amounts that you’d like to contribute are going to be approved by Charles Schwab and their back office.  
 So they have a whole department that works specifically on charitable accounts, and we have a team over there and a contact that we can get in touch with to make sure that the charity that you’d like to contribute to within this donor advised fund is going to be approved and going to be accessible for this amount of money.  
 So from there, it basically works exactly like any other Charles Schwab account. The funds will be in the account and then ready to be basically withdrawn and moved to the charities in the future. So it’s held there. Once you do put that money in, you can’t necessarily take that out. And so, it’s kind of a one time transaction putting that amount of funds in the charitable account. But that’s kind of how the process works and we work with our clients throughout that entire thing and the Charles Schwab charitable team to make sure from start to finish, from moving the cash, from checking or savings to that account, kind of everyone’s on the same page and kind of works pretty smoothly.  
Radon Stancil:Yeah. And also, by the way, on that point, let’s say that somebody goes, “I know who I want to donate to today, but I might not know in two or three years.” Can they make that decision each year?  
Nick Hymanson:They can. They can. So the answer to that is it can change in terms of who you want to contribute to in terms of which charity. So it doesn’t have to be a decision that you make upfront, but it definitely helps in terms of making sure that Charles Schwab has that charity’s information and they’re accessible for that charitable account.  
Radon Stancil:Very good. All right. Did we find the standard deduction, Taylor?  
Taylor Wolverton:Yes. I did find it. So if you are married filing jointly for 2023, your standard deduction is going to be $27,700. And then, it actually increases once you’re over the age of 65. So if one of the spouses is over the age of 65, it goes up by $1500. So then, that standard deduction would be 29,200. And if both spouses are over the age of 65, then it’s another $1500. So that would bring you to $30,700. So that’s your amount of income that you’re not having to pay taxes on right out of the gate.  
Radon Stancil:Very good. And so, if we wanted to get some, if wanted to be able to, because the way that works is, let’s say that my standard deduction is 27,700 and I donate $10,000 this year to a charity. It’s all kind of baked into that standard deduction. I don’t get to deduct it twice. So if I want to get some itemization there and get the benefit of my deduction, then I could go to 30,000 or $40,000 this year, and then next year I’m still going to get my standard deduction.  
 So it’s just a way of me stacking these standard deductions. By the way, if you’re single, not married, then that deduction’s much lower. It’s $13,850. So I don’t have to stack as much if I’m filing single. So just keep that in mind. It’s a strategy that we talk about. We always say this, not everyone should do it, everyone should consider it. And that’s the way we deal with tax planning.  
 So let’s transition here real quick over, Taylor, to QCD. I’m sorry, Yes. QCDs, qualified charitable distributions. And could you explain who that applies to and how that works?  
Taylor Wolverton:Yes. So in order to be eligible for a qualified charitable distribution, you have to be over the age of 70 and a half. So if you turn 70 and a half, let’s say today in June of 2023, you can only make those transactions after your birthday of turning, or the day that you turn 70 and a half. So you can’t make it earlier in the year, even if it’s the same year that you are turning 70 and a half. So that’s one important thing to make note of.  
 And I was going to add, that’s also a benefit of working with a financial planner to make these transactions with a qualified charitable distribution, because it’s not reported by the custodian as an actual qualified charitable distribution, then that’s something that, of course, we can help you make the transaction and make sure that you’re eligible for it and that it’s done correctly, but also so that you tax preparer, whether that’s you or if you’re hiring someone to do your taxes, make sure that they know to report that correctly on your tax return so you’re not paying taxes on more income than you should be. So what was the other part of your question?  
Radon Stancil:Just the factor of the logistics of that. So 70 and a half and older, we know that. And then, if the person wants to do it, how they would do it? Let’s just talk about our process. Again, we use Charles Schwab. How would they, what’s the process to get the check to made out properly and to the right person?  
Taylor Wolverton:Yes. So a lot of times too, if you’re RMD age, and also over the age of 70 and a half, then your qualified charitable distribution will count as your RMD. So that’s something that you then don’t have to be taxed on that portion of your RMD that you otherwise would be. But maybe Nick would know more about who the check is made out to because that’s not something that I usually handle.  
Radon Stancil:No. That’s good. But I wanted to just speak on that point you just said, because that’s a really excellent point. So let’s think about what can occur. Somebody could say, because this is the way it would really go down. If a person says, I want to give whatever, $10,000 to my church or $10,000 to an organization and they do it incorrectly.  
 So they get their RMD, and then they write a check to the charity. Well, now they’re going to get taxed on that required minimum distribution and they really don’t get much benefit for what they just gave to the charity because it’s below their standard deduction and it’s just not going to benefit them.  
 So now you got taxed on distribution, you didn’t get any benefit really for giving the money. I mean, obviously, we want to give to our charities and that’s our goal, but might as well get some tax benefit in the process. So Nick, can you speak a little bit then of what that step would be, if I say I’ve got to get my requirement of distribution, I have to, I’m at the age, I’ve got to get it. How do I get it to the charity and so I don’t get taxed on the requirement of distribution?  
Nick Hymanson:Yeah. Yeah. Absolutely. So in terms of Charles Schwab, basically it’s a few different pieces of information that we need in order to write a check straight from the Charles Schwab account to the charity. So the caveat here is to make sure that the check is written straight to the charity, and it’s not written to the account owner. If it’s written to the account owner, technically it would be taxable to the account owner. And so, we want to make sure that it’s done correctly so that the check is made payable to the charity.  
 And from there, we need basically the charity’s name, the tax ID for the specific charity, and then the address of the charity. And of course, the amount of the QCD that you’d like to contribute. And one of the pieces here that is an option is to be able to send the check straight to the charity itself, or we can send the check, still made payable to the charity, but we can send the check to the owner’s address so that they can hand deliver the check to the charity.  
 So there’s a few options there and there’s a few pieces of information, but the one important piece is making sure that the check is made payable to the specific charity and having the tax ID so that it can be basically get that tax benefit.  
Radon Stancil:All right. So let’s just talk real quick here because we ourselves have to have this meeting. So we’ll just kind of conclude this episode with what do you need to gather to get ready for a tax planning strategy meeting with anybody, whether it’s us or somebody else. What kind of things do you need to gather? So I’ll just kind of, we’ll go round table here. So Taylor, could you tell us anything you remember that we have to have that we need to have above and ahead of this meeting so that we can be ready to go?  
Taylor Wolverton:Yeah. We’ll definitely start with asking for last year’s tax return so that we can review that and have a starting point of what this year’s tax situation might look like and create a projection based off of that. And then, in order to know what else needs to change from last year to this year, then of course we’ll also want to know what your income is looking like for this year. If there has been any changes, we’ll want to increase your amount of social security that you received in this year’s projection if there was a cost of living adjustment on social security, that’s something to be aware of.  
 Same with pensions and any IRA distributions that you took. So we’ll want to be looking at all of your different sources of income and any other changes that would otherwise affect your tax projection for this year.  
Radon Stancil:Very good. I think also one of the things we did not talk about today, we have a whole episode on this as well, is one of the things that we do consider when we’re look doing these tax planning strategy meetings is IRMAA. IRMAA’s a really big topic which is connected to Medicare and the way IRMAA, which is the premium you pay for Medicare, is looked at as they look at the last two years or two years ago, what your income was.  
 And so, we are wanting to plan ahead for that as well. And so, that’s something that we’re catching now a little bit better because now we know, hey, if we’re looking at your taxes this year and you’re talking about getting Medicare, you’re going to be turning 65, or even if you’re over 65, but you’re getting Medicare, your premium could go up based on what something happened two years ago So it helps us to manage some of those processes that way as well. Some of the things we’re looking at.  
 So be honest with you, what we decided to do, I kind of asked Nick and Taylor to come in and say, “Hey, look, we just had this meeting where we’re getting ready to have these meetings with our clients here in the fall.” And said, “Hey, well, let’s talk it through, because I think this is so important.” I don’t think a lot of people, most people do tax preparation that is after the fact. Tax strategy, tax planning is ahead of the fact, and I just want you to know there’s a lot of work that goes into it, but it’s all good things.  
 So many moving parts, there’s no way I could do it all. So we have a team of people taking different parts of what they are really good at. So thank you very much, Taylor and Nick for coming on. If you have any questions whatsoever, feel free to reach out to us. You can go to the website, top right-hand corner, click on schedule a call. Our calendar comes right up. You can hop on a 15-minute complimentary call and we’ll be able to glad to walk you through.  
 There’s also an article written on this topic that’s on our blog page. So just go to pomwealth.net, go to the blog page and you can see an entire article with all these, in all essence notes from what we talked about today. Thank you very much. Everybody, have a great day. We’ll talk to you again next week.