How to Build a Timeline for Your Retirement [Video]

Before the next tax deadline, there are strategies you can use to reduce your taxes! In this video, we share a couple basic tax planning techniques and how they work to reduce your taxes.

Video Transcript

No one wants to file their tax return and realize that they owe a lot of money unexpectedly, but there are ways you can decrease the taxes that you pay.

Hi, my name is Michelle Smalenberger and I’m a financial advisor here at Financial Design Studio, where we help business leaders retire in a tax efficient way. Today’s video is all about strategies to help reduce what you owe before you file your next tax return. I’m gonna show you is an example here of very high level tax planning, as an example of what we do for clients. So let’s dive in!

Example One: No Tax Planning

All right, so when you’re looking at this screen, on the left hand column, you can see here a client who they filed their tax return last year and they’re making 300,000 of income. And you can see as we follow through here, they just took the standard deduction. And so now they actually have taxable income of 270,000. So there’s really not any tax planning, any tax strategies that are happening to minimize this income tax that they’re paying on the income they’re earning.

Now I do just want to pause and just kind of highlight, we’re going through a very high level tax planning here in this example. And this is just to show you that that is what tax planning is. At the very core of it, we’re taking the income that you earn and we’re subtracting the deductions that you can take to get you to the amount that you actually pay taxes on.

And there’s a lot of ways that you can do this. So I’m gonna show you a few different ways, but I really want you to understand the impact of the changes that you’re making. And hopefully this is motivating and encouraging to help you realize that you can pay less in taxes as you’re earning income. So with this income, someone who’s making $300,000, we’re gonna assume that last year and this year that it’s just stayed the same for this example.

Example Two: Max Out the 401(k)

Now, when we look to the right of that, we’re gonna show you the next example of something that you could do, a very simple example. We’re gonna max out the 401k contribution. That means you’re gonna put in the most that you can in 2025.

Now when you do that, you can see that that’s dropped your income from $300,000 to $276,500. Now it didn’t actually decrease your income, but it’s decreasing the amount that you pay taxes on. Because you said, of that $300,000 I want to earn or I’m earning, I’m now going to put the max that I can into my 401k, and I’m gonna just defer that into the future. So that’s all you’ve done. You’re still earning the same amount. But for tax purposes, it shows that you’re paying tax on a smaller amount because we’re going to pay taxes in the future.

Now, if we just carry this down, that’s the only change that we make. We’re going to take the maximum standard deduction that we can, which is $30,000 in 2025. And now you can see that the taxable income that we pay taxes on is $246,000. Now you’ll notice here to the left of that standard deduction, the left is 2024, on the right here is 2025.

This is how we always like to see it, last year versus this year, so we can kind of see the impact even between years. So all we’ve done is we’ve maxed out your 401k, and now we say, okay, but what else can we do?

Example Three: Deferred Compensation

We’re just gonna talk through a couple other common things that we find business leaders or executives doing. For example, deferred compensation. This is when, I make my $300,000 but I want to push some of that into the future because I don’t need it today. When I retire, that $30,000 of income that I am deferring this year, I’m going to receive that then. The great thing is, is by doing that, you’re saying I’m going to pay the taxes then instead of now. So if we do $30,000 of deferring compensation now, we can see how if we trickle down here to the bottom, we take the standard deduction because we’re not doing anything else.

In this example, we are also building on the prior examples. So we’re doing the 401k in addition to deferring $30,000 of compensation. So you can see we’re building on top of each other to see the impact over multiple options or multiple strategies that you’re doing. Now you can see that we have only $216,000 of taxable income, even though you are still earning $300,000 in income.

Example Four: Charitable Giving

Now in our final example, this is what we’re always trying to match, something that you care about, something you want to do in your finances already. So we say, okay, this is someone who wants to do charitable giving. Well, what if they’re already doing $50,000 of charitable giving? We want to show them the impact that that’s making. What’s interesting here is that doesn’t affect your income that you’re earning. You still earn the same amount. You’re just choosing to give $50,000 away. So where you’re going to see that difference on your tax return is lower down here.

You can see we’ve got these two numbers, $30,000 and $50,000. And $30,000 is that standard deduction, but we’re saying, we’re giving $50,000 away. So the government says, okay, you can itemize because that deduction is gonna be greater than just taking the standard deduction. So now we’ve got this $50,000 that we’re able to deduct. And now we can see that trickles down here to our taxable income. And you can see the impact that it makes on your taxable income.

Something to remember with all of these examples and all of these deductions that you can take is it’s not always dollar for dollar. So when we’re looking on the income side and we’re deferring income, we’re choosing not to pay tax today and pay it in the future. So those might see a dollar for dollar reduction. Something like charitable, real estate taxes, a lot of these other pieces that can show up in this itemized deduction number, which again, doesn’t show you. It’s one big number here, but that’s a separate page in your tax return.

Results of Strategies to Reduce Taxes

There’s a lot of pieces behind that that add up to get you to that number that you’re deducting. And so what you can notice is this person went from having $270,000 of taxable income to now they’re deferring $70,000 into the future and they’re also giving $50,000 away to charities. And so this decreases the taxable income that they’re gonna pay taxes on down to $196,000. That’s a big difference.

These are big numbers that you’re choosing to defer or you’re choosing to give away. This is simply an example because your family might have different priorities or might be different things that you’re wanting to do. This is why tax planning is so unique to each person or each family individually. That’s why this tax planning scenario side by side and allowing you to see the difference that it makes can be really helpful for you.

Now I know this is a very high level income tax planning example. Income minus expenses or deductions gets you to that taxable income. But there are a lot of other strategies that you can be utilizing such as Roth conversions or qualified charitable distributions if you’re older and you’re still working but you have to take RMDs. Or maybe you have inherited IRAs so you have other income besides just your employer income. These are the pieces we want to help you plan.

Next Steps for Reducing Your Taxes

If you have executive compensation and you’re around 10 years from retirement, click “Get Started” on our website to talk with us about what tax efficiency can look like for you. Thanks for watching!