Income Tax Planning is one of Whitford's core services. Our ‘Tax Planning In Action’ series can show you ways to reduce the amount of money you pay in taxes over your lifetime.
A client notified me that she will need an extra $50,000 from her IRA this year in order to buy a car. She went on to say that she didn't want to take the money from her brokerage account, because the account had grown substantially over the years and any investment sales would result in a large capital gain.
After reviewing her brokerage account, she wasn't wrong. I could see that a $50,000 sale of investments would result in a $40,000 long-term capital gain. This means that her original investment of $10,000 (or cost basis) had grown to $50,000, leaving her with a $40,000 gain.
A long-term capital gain of $40,000 (taxed at 15%, her capital gains rate) would leave her with a net Federal tax due of $2,029 (see below). She is not taxed on the original basis of $10,000.
An additional IRA withdrawal of $50,000 (taxed at 22%-24%, her ordinary income rate) would leave her with a net Federal tax due of $7,061, or $5,032 more! The extra income from an IRA distribution would actually push her from the 22% bracket into the 24% bracket! This cost saving evaluation and income tax planning is a great example of the projections we do throughout the year for our clients!
See below for a comparison of the two scenarios. The rest of her income sources are held constant in the example below and her filing status is Married Filing Jointly. The only differences are highlighted.
Note: The figures in this example were rounded for simplicity. Also, the investment returns are hypothetical and do not reflect any specific investment or investment advice.
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