Make Tax Planning Part of Your Financial Planning

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By Cristina Wiebelt-Smith, CPA, Wealth Planning Administrator

Do you get busy? I get busy.

You know who else gets busy? Tax preparers.

As a CPA who worked in public accounting for more than 20 years, I know firsthand how busy the job gets in a typical year, especially during tax time. Now add to that all the recent tax law changes, and we start to understand how even the best tax preparers could overlook something.

The past few months, I’ve been able to look over tax returns as part of our financial planning process without the stress of tax season. One trend I noticed was missing the new deduction for charitable contributions.

Last year, there was a small change allowing a deduction for charitable contributions even if you don’t itemize. Taxpayers who don’t itemize can deduct up to $300 of charitable contributions on their 2020 tax return. The deduction will also be available in 2021, with an increase for married couples filing jointly to $600.

This deduction could have a bigger impact on your taxes than you think. It’s an “above-the-line” deduction, which means it can lower your Adjusted Gross Income (AGI). Your AGI determines if you are eligible for certain other deductions and credits and the amount you pay for Medicare premiums. On top of that, most states, including Missouri, start with federal AGI to calculate state tax, so a lower AGI could potentially also lower your state tax bill.

If a married couple took the $600 tax break for charitable contributions and they are in the 22% federal tax bracket – plus Missouri’s 6% tax rate – they could save $168. Not huge dollars, but you could qualify for other tax breaks with that lower AGI.

Every tax situation is different, which is why you commonly hear CPAs say, “It depends.” That’s not an excuse; many factors depend on your individual situation. This is also why tax planning is so important in financial planning – one plan does not fit all.

Check with your tax preparer to see if this new deduction makes sense for you. If your return is extended, you still have time – and it’s never too early to start planning for 2021!

A good financial plan shouldn’t focus solely on investments – it should also include income tax planning. We have the technology and professional knowledge to help you develop a proactive income tax strategy, rather than a reactive one. We are also able to collaborate with your tax preparer.

Trying to deal with each part of your financial plan separately – often with different professions, like an investment advisor, CPA, insurance representative and estate planning attorney – can be confusing. We’ve found that focusing on your goals with your total financial picture in mind – instead of treating each part of your financial plan separately – can help improve your odds of success.

If you’d like to learn more about how we empower clients to make life’s decisions on their terms, give us a call.

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