Tax season may be over, but that doesn’t mean we’re done with tax planning. Jennifer Kohlbacher, director of wealth strategy, joins Michael MacKelvie, wealth advisor, to share the importance of year-round tax planning and what you should be thinking about.

Transcript

Michael MacKelvie: The importance of year-round planning. There’s kind of these focal points throughout the year that we are forced to pay attention to either because they’re IRS deadlines or it’s just the end of the year and maybe we are given a little notice by that calendar deadline. But what should we be doing throughout the year? That’s what we’re here to talk about today.

I’m joined by Jennifer Kohlbacher. She is a CPA, director of wealth strategy here at Mariner. She could not be a more perfect guest for this conversation here today. Jennifer, thanks for joining us.

Jennifer Kohlbacher: Thank you for having me. I’m very excited to have this conversation.

Michael: Yeah. Yeah, and I understand, you mentioned before this, somebody I guess you just ran into, asked you this very question, “What should I be doing?” Maybe you get through that tax season. “What should I be doing throughout the year? I kind of have this whole window from April 15th to maybe December. What is it that I should be paying attention to, right?

Jennifer: Yeah, exactly. I ran into an acquaintance that I’ve known for over a decade, was chatting with her, asking about her summer travel. And she mentioned to me, “Hey, we’re having to change our summer travel plans a little bit because we had a bigger tax bill, a bit of a surprise in April that we’ve never had before. I’m now self-employed, my husband’s job has changed a little bit. We’ve never seriously taken time to actually look at, Are we taking advantage of deductions, expenses that we should be tracking throughout the year, planning we should be doing, what withholding we should be watching and making sure we’re paying throughout the year so we don’t get hit with this big surprise at the end of the year?

We were able to have a really good conversation, and it just reminded me, again, we just finished April, we don’t really want to go start doing our tax return for next year. But taking advantage of some planning throughout the year can really make a big impact and also just take the stress out of April’s coming. It just really takes that surprise out.

Michael: Yeah, lighten the load maybe a little bit, as well as obviously set yourself up. So what we want to avoid in this conversation is just telling people, “Yeah, it’s better to plan,” right?

Jennifer: Correct.

Michael: Let’s try to steer away from that generic advice as much as we can and maybe give some people a little bit more concrete to-dos or thoughts at least for this period of time. What are some of the things that I guess come to mind for you as far as like, “Hey, we have this maybe dead zone of sorts, but it shouldn’t be a dead zone. Here’s some things to pay attention to”?

Jennifer: Right. One, I call it simple, takes a few minutes, but one thing that can be really impactful throughout the year for those of us who are working and have a W-2 that we’re getting wages and we’re having withholding taken out, take the time to get a copy of that pay stub, most of us have access to it online, and check a few things. The first thing I would say is check your withholding. Those W-4s that you have to fill out with HR every year when you’re re-enrolling for your benefits aren’t the most user-friendly sometimes.

A lot of times, and I’ve noticed this, whether it’s a college student or an executive, across the board, wide variety of income ranges, a lot of times the withholding on the pay stub doesn’t quite cover the taxes that are coming. For example, if you just finished your tax return and your effective rate was around 22%, and you actually check your withholding on your pay stub and your withholding is only about 15%, it might be a perfect opportunity to make that adjustment, because I personally would rather have a little bit of withholding go out of my paycheck each pay period instead of, all of a sudden, a big cash surprise in April that I owe a big balance. Or vice versa. Maybe you are having too much withholding and you’re getting a big refund in April, so maybe it makes sense to back off a little bit. And instead …

Michael: Yeah, especially when interest rates are paying you five and a half in your money market, right?

Jennifer: Exactly. Instead of giving the government that tax-free or interest-free loan, you’re actually making money on it. That’s something … what I call simple but impactful.

The other thing while you have your pay stub out is your 401(k) contributions. Usually, the IRS adjusts that so you can contribute a little bit more to it each year. And you may have, through your company, some benefits for some flexible spending accounts, your health savings account. I always say it’s a great idea when you’re looking at your pay stub to check that and say, “Okay, am I contributing enough to my 401(k) that I can defer some taxes? Or do I want to start making some contributions pre-tax to a health savings account?” So, what I call simple things but can be impactful throughout the year.

Michael: Yeah. And on that note, the number of times I have met with somebody, and they’re not taking advantage of just maybe a mega back door, for example, through the after-tax option. Even engineers who sometimes maybe think they engineer the world, and in a way, I guess they do, but they are very tuned into their financial plans. And a lot of times, these individuals maybe are unaware of this after-tax option. This ability to maybe place more money into their Roth, and they’re just maybe not taking advantage or maximizing their retirement benefits.

The frequency of catching inefficiencies intra-year, unfortunately, a lot of times that happens when I first meet somebody, right? They walk in and there’s three or four major inefficiencies, HSA, after-tax maybe, that they’re just not taking advantage of. There’s no reason why that should get caught just when you’re changing your 401(k) allocation or contribution. Maybe this is a helpful reminder, just hearing it here, and maybe it’s something you should look into further if you’re unaware of what these strategies are.

But what else is out there? There’s obviously different charitable decisions you can make. There’s different Roth conversions maybe that might make sense to stagger over the year or?

Jennifer: Yeah. Charitable planning is another strategy and planning tool that can be really impactful to do throughout the year. Under our current tax laws, our standard deduction is pretty high. So what I mean by that is, for example, a married filing jointly couple, if they choose to file a return and just take the standard deduction, which means it’s an amount the IRS just lets you deduct on your return, it’s $29,200 in 2024. The comparison is your itemized deductions. So, your itemized are like your state taxes, your property taxes, your charitable contributions, your mortgage interest. When you add all those up, you typically deduct the higher one, either the standard at 29,000 or your itemized.

Well, if you think about it for a minute, let’s say hypothetical, you have around $8,000 of mortgage interest. You have about $10,000 of state taxes and property taxes that you paid throughout the year. And let’s say you and your spouse gave around 7,000 to charity. Well, when you add those up, and that’s pretty generous contributions to charity throughout the year, you’ve made good property taxes, that only equals 25,000. So you’ve made all those charitable contributions and taking that standard deduction of $29,000 is still providing you a better benefit. You’re using the standard deduction. And I’ve seen that over and over and over again.

So, if you really have a charitable intent, one of the things you can think about doing, and this is why talking about it in the middle of the year makes sense, is, okay, what if I wanted to give 7,000 to charity this year? And Michael, what if I wanted to give 7,000 to charity next year? So what if, instead of doing those over two years, I saved my $7,000 and in January of 2025, I made 7,000. And then in December of 2025, so it was in the same calendar year, I made 7,000. So, I had $14,000 of charitable in one year. Well then, if I have my property taxes and my mortgage interest, I now have 32,000 of deduction, which is higher than that standard deduction. So, I can take advantage and take a bigger deduction and save it, as opposed to not taking advantage of my charitable intent and getting a tax benefit. So, just thinking through and actually bunching those together can really make a big impact and honestly save you some tax dollars.

The other thing that you can do is we use something called a donor-advised fund a lot of times, and that allows you to do this tax bunching, what we call easier, where you can contribute a larger amount to deduct in one year, and then over the next few years, just make your contributions out of this donor-advised fund, because you get a deduction up front and then you can have it dispersed to charities over a number of years. So again, very impactful, and just a little bit of timing difference can save you quite a bit of money.

Michael: Yeah, I think that’s a good point. And another note that I would have, just being in the state of Washington where you have a very low state estate tax, and we know that the federal estate tax is set to sunset. And all signs point to it dropping significantly here the next go-around. You kind of have this window for folks to maybe take advantage of some estate planning. And what better time to plan your own mortality than the summer of 2024. Most people are waking up just thrilled about that on a Saturday.

But it really is something that shouldn’t be shotgunned into effect. And again, just as a helpful reminder, there are some serious changes coming to the estate front. And not handling this maybe in the waves of tax planning, let’s just say February through April, but when it’s a quiet season, might be something to think about.

Some other pieces, just some questions, I guess, for you. Any changes this year that anybody should be aware of that, again, they kind of have this dead period of sorts that doesn’t have to be a dead period that they should take advantage of that are different this year?

Jennifer: Yeah. A lot of you have probably heard about the SECURE Act. Well, we had SECURE 2.0 pass towards the end of last year, but a lot of those changes take effect in 2024, 2025 and even out to 2026. One of those positive changes are if you have an IRA and you are retired, then your required minimum distributions, they used to be at age 70 and a half, and then it changed to 72. Well, now that age has gone up to age 73. By 2023, it’s going to go up to 75.

So right now, you’ve got what I call a longer runway between a lot of times when most people stop working or start slowing down to when they have to actually take distributions out of their IRA. And usually, you have this, what we call the tax desert because you’ve retired, so maybe your income’s gone down a little bit. You don’t have to take these required distributions out, so you may hit a little bit smaller tax bracket.

Well, one impactful planning tool could be to maybe convert your IRA to a Roth IRA, which means we would pay some of the tax now, and then you let it sit for five years, and then it grows tax free and comes out to you tax free. So, if we’re in a lower tax bracket now, like I was working with a family recently, and we were going to be sitting in about a 15% bracket for the next couple years, have a fairly large IRA. So, what we’re looking at doing this year is taking little pieces of the IRA, until they reach age 73, and converting them to a Roth. So, we’re going to take 15% bracket and we’re going to fill it up to about 22 or 24% and pay tax at that level. So, when we convert and let it grow tax free, and as you mentioned, estate taxes are changing, but in 2026, our income tax laws are set to change as well, and those income tax rates are going up. So our top bracket is going up from 37% to almost 40%.

So, we are able to take advantage of a lower tax rate today, pay the tax now and then when tax rates increase, we can pull funds out of that Roth IRA. So that’s just a really good planning tool, and we usually like to do some modeling, model out what makes sense. So over the long run, you’re usually paying a lot less taxes.

Michael: Yeah, definitely. And that benefit just continues to compound the longer that you live. And sometimes it’s like, “Well, I don’t know if I’m going to live to 90 or 85.” And it’s like, okay, just as a brief glimpse into the risk here, dying early solves financial planning.

That’s not what we’re planning for. That completes the equation, so to speak. So the much larger risk is you living longer. And what Roth conversions continue to compound and amplify is that tax savings, that benefit over time to help mitigate that longevity risk. And you see that on the tail end as we model this for clients in those last five, 10 years, a lot of times really start to take off. Not even getting into inheritance and how it can benefit beneficiaries and all that.

But no, this is all really helpful. I guess is there anything else, as we wrap up here, anything else you want to touch on that you think would be a good concluding point as far as just maybe some things to think about here throughout the year?

Jennifer: Yeah, one of the things I would maybe think about, and Michael, you and I were chatting a little bit about this, is we work with a lot of individuals and families that are entrepreneurs, business owners. There’s a lot of what I call the business side hustle on the job, a lot of, with the internet, a lot of marketing going on out there, so there’s a lot of additional income coming in. And sometimes we don’t realize, we get so wrapped up in growing the business, making that additional income, the impact of capturing those expenses throughout the year can be when you get to April and doing your tax return.

It’s a really, really helpful tip, if you are a business owner or have some self-employment income, I would say, ask your CPA for maybe a checklist of types of expenses to track throughout the year. Cell phone, internet, there’s some home office expenses, supplies, mileage. There’s lots of apps available to download on your phone, which just capture all your business mileage, which adds up, some of your legal and professional fees toward your business are actually deductible, supplies. Maybe there’s equipment that needs to be purchased. Maybe capturing that to match it in years where there’s income and take the deduction might make a difference.

Michael, there’s also a lot of self-employed retirement plan options out there. So, if you are having this additional income, taking time to talk through, okay, what’s my income looking like? What are my expenses looking like? Maybe there’s some additional cash in there that we might want to set aside and putting it in that self-employed retirement account to provide you with a tax benefit. So, in essence, you’re kind of funding your retirement with some tax savings.

Michael: That’s awesome. Yeah. I think those are very solid points. And again, I think maybe just the general message here is write down a couple action items, even if it’s just one thing. Either get with your advisor, maybe ask them about it. Or, at the very least, write down a couple action items for yourself here, at least a few takeaways you know can get done here maybe in the next week.

Thanks again for joining us here, Jennifer, this was great. And thanks to everybody else for joining us. And if you’re listening on Apple, Spotify, wherever you might be listening, make sure to hit that ‘Subscribe’ so you don’t miss out on any industry insights here from industry professionals at Mariner. Again, my name is Michael MacKelvie. I was joined by Jennifer Kohlbacher, CPA here at Mariner. Have a good one.

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