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How Can I Reduce My Taxes? How Estate Planning Can Help

Estate Planning For Life's Stages

Client meeting with their attorney to learn how to reduce her taxes owed.
Once more hesitant to plan ahead, clients in today’s environment are much more proactive and willing to take action in the near term, rather than waiting and risking having to pay higher taxes down the line.

Have you ever thought about how retirement might affect your taxes owed each year?

Upon your retirement, you might assume you will be in a lower tax bracket. However, if you retire and receive Social Security, pension income, dividends, and interest payments—and chances are you will—you may find yourself with a similar income to when you were working. While this is great for having an income, it probably won’t lower your taxes much, if at all. Are there strategies available that can help avoid the higher tax bracket?

Let’s discuss a few tried-and-testing strategies that may help you lower your taxes owed each year.

Avoiding the Higher Tax Bracket through Roth IRAs

Converting an IRA into a Roth IRA is an increasingly popular strategy to help avoid the higher tax bracket. Here’s how it works: taxes on the account must be paid, but they are paid when the funds are moved into a Roth IRA. Once in the Roth IRA account, the converted funds grow tax-free, and there are no further taxes on withdrawals after the IRA has been open for five years.

One important note is that you must be at least 59½ years old to do the conversion, and you do not have to do it all at once. However, in many cases, this makes the most sense.

Avoid Higher Tax Brackets Through Giving

Charitable giving has always been a good tax strategy. In the past, people would simply write a check to the organization they wished to support. Today, many ways exist to support nonprofits that also allow for better tax advantages.

One of the most popular ways to give today is a DAF (Donor Advised Fund). These are third-party funds created specifically to support charity. Contributing funds to a DAF will give you a tax break when you put the funds into a DAF. The DAF will hold the funds; they do not have to be contributed to charity right away. As long as the funds are in the DAF account, you will receive the tax benefit.

Another way to give to charity is through your IRA’s Required Minimum Distribution (RMD). With an RMD, the minimum amount you are required to take from your IRA every year is given to charity— otherwise, your RMD is taxable as income. If you make a charitable donation using the RMD, you get the deduction, and the nonprofit gets a donation.

Giving while living is growing in popularity, as parents and grandparents can enjoy watching loved ones benefit from the impact of a gift. A person can give up to $16,000 to any other person every year, with no taxes due on the gift. The money is then out of the estate, and the recipient receives the full amount of the gift.

Talk With an Estate Planning Attorney

Lowering the amount of taxes due every year is a key part of many individuals’ wealth management plans. These strategies related to estate planning should be reviewed with your estate planning attorney to help ensure they work seamlessly with your estate plan to achieve your goals.

Don’t have an estate planning attorney yet? Book your complimentary call with the Ozarks Legacy Law team today.