Bunching & Proper Withdrawal Planning

This week, we dive into two strategies to potentially lower your tax bill: Bunching and Proper Withdrawal Planning.

Save Thousands with Bunching 

Bunching your annual deductions could save you thousands, especially if your itemized deductions are close to that standard deduction but fall just short. 

Let’s look at one example of how this could work for a married couple filing jointly who typically have $20k in itemized deductions. Currently, the standard tax deduction is $12,400 for a single and $24,800 for married filing jointly, but we’ll use an example of $25k for simplicity. 

Without Bunching vs. With Bunching 

Without using the bunching strategy, taking the standard deduction of $25k makes the most sense because you’re close to the limit but just not quite there. Over three years, this would give you a total deduction of $75k. 

However, look at an example of utilizing the bunching strategy with that same donation amount. Giving $20k in January and again in December of one single year creates $40k in itemized deductions. You’ve covered two years’ worth of donations/deductions in a single tax year. In year two, you won’t be itemizing, but you will be able to take the standard $25k deduction. In year three, you can bunch giving again, making itemized donations in January and December for another $40k. Over those three years, you now have a total of $105k in deductions, a difference of $30k without bunching. For a couple in the 22% tax bracket, that creates actual savings of $6,600. Continue to repeat this strategy over the years and watch the savings add up. 

A Tax-Free Withdrawal Strategy? 

Next, let’s talk about withdrawal strategy by using an example of a married couple over the age of 65, filing jointly, who are able to create a 0% Federal tax bill. How? By remaining below the threshold at which Social Security can be taxed. 

Take a look at their income sources: 

· Social Security – $50k 

· Selling stocks with a $10k gain – $30k 

· Roth IRA – $20k 

· Traditional IRA – $10k 

· Savings – $15k 

With great planning, they created several income buckets from which they can pull to create a total of $125k; however, only $10k in capital gains from their stock sales and $10k from the Traditional IRA is taxable. The rest is non-taxable, so their taxable income remains below the required threshold to tax 

their Social Security income. This might be an extreme example, but with proper planning you can get more of your retirement income tax-free. 

With the right strategies and an Integrated Financial Plan, you can absolutely lower your tax bill.

If you have any questions, please don’t hesitate to call us at 844-CARLSON (844-227-5766).

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