Tax Bracket Management: $9,500 Avoided by Preventing Tax Bracket Creep

Tax Bracket Management: $9,500 Avoided by Preventing Tax Bracket Creep

Executive Summary

A high-income earner was on the verge of crossing into a higher tax bracket, threatening to significantly increase their overall tax burden. Golden Door Asset helped this client strategically manage their taxable income through increased retirement contributions and accelerated deductions. By proactively preventing tax bracket creep, we successfully kept the client within their existing tax bracket, resulting in a tax savings of approximately $9,500 for the year. This proactive approach underscores the value of AI-powered tax planning tools in optimizing client outcomes.

The Challenge

Our client, a successful software engineer earning $210,000 annually, was facing a significant tax challenge. Based on preliminary tax projections using standard deductions, their taxable income was estimated to be approximately $190,000. With the 2023 tax brackets for single filers, this placed them precariously close to the 24% tax bracket, which begins at $182,101.

The potential impact of crossing into this higher bracket was concerning. While only income exceeding $182,100 would be taxed at 24%, the psychological and financial impact of seeing a larger portion of their income taxed at a higher rate was unsettling for the client. Moreover, even a small amount of income creeping into the 24% bracket would result in a noticeable increase in their overall tax liability. We estimated that without intervention, roughly $7,900 of their income would be taxed at 24%, resulting in an additional tax burden of $1,896, on top of the taxes owed on the rest of their income.

Beyond the immediate financial impact, the client expressed a desire to optimize their tax situation proactively, rather than simply reacting to tax obligations at the end of the year. They were particularly interested in exploring strategies to maximize retirement savings and minimize their overall tax burden in a sustainable and compliant manner. This highlighted the need for a comprehensive and forward-looking tax planning solution. Furthermore, the client anticipated potential bonus income later in the year, which could easily push them well into the 24% bracket if no action was taken.

The Approach

Our approach focused on strategically managing the client's taxable income to keep it within the lower 22% tax bracket. We began by utilizing Golden Door Asset's proprietary AI-powered tax forecasting software to create a detailed projection of the client's income and potential deductions for the year. This software automatically imports data from connected accounts, giving us a complete and up-to-date view of the client's financial picture.

Next, we analyzed various strategies to reduce taxable income, prioritizing those that aligned with the client's long-term financial goals. We identified two key levers:

1. Increasing Retirement Contributions: We recommended maximizing contributions to the client's 401(k) plan. By increasing their contributions from the current 8% of salary to the maximum allowable amount of $22,500 for 2023 (or $30,000 if over 50), we could significantly reduce their taxable income. This strategy not only provided immediate tax benefits but also contributed to their long-term retirement savings.

2. Accelerating Deductions: We explored opportunities to accelerate deductions into the current tax year. This included reviewing potential itemized deductions, such as charitable contributions, medical expenses, and state and local taxes (SALT). We advised the client on strategies to bunch deductible expenses into the current year to exceed the standard deduction, even if it meant accelerating planned expenses.

We presented these options to the client, clearly outlining the potential tax benefits and the implications for their overall financial plan. We used Golden Door Asset's scenario planning tool to illustrate the impact of each strategy on their projected tax liability, showing them precisely how much they could save by taking action. We also emphasized the importance of consulting with a qualified tax professional to ensure compliance with all applicable tax laws and regulations.

The final plan involved maximizing their 401k contributions (increasing it by $5,700 from the existing amount) and strategically donating $7,500 to a qualified charity to accelerate their deductions.

Technical Implementation

Golden Door Asset's AI-powered platform played a crucial role in the technical implementation of this tax planning strategy. We leveraged the following key features:

1. Tax Forecasting Software: Our tax forecasting software automatically projects the client's taxable income based on their current financial data. This includes income from various sources, such as salary, investments, and business income, as well as deductions and credits. The software uses machine learning algorithms to identify patterns and predict future income and expenses, providing a more accurate and reliable tax forecast.

2. Scenario Planning Tool: The scenario planning tool allowed us to model the impact of different tax planning strategies on the client's projected tax liability. We could easily adjust variables, such as retirement contributions, charitable donations, and investment strategies, to see how they would affect their overall tax burden. This enabled us to identify the optimal combination of strategies to minimize their taxes while aligning with their financial goals.

3. Tax Bracket Optimization Algorithm: Our proprietary algorithm automatically identifies opportunities to optimize the client's tax bracket. It analyzes their income and deductions to determine the most efficient ways to keep them within a lower tax bracket. The algorithm takes into account various tax laws and regulations, as well as the client's specific financial situation, to provide personalized recommendations.

The calculation of the tax savings was performed as follows:

• Base Taxable Income (Pre-Strategy): $190,000
• Taxable Income Entering 24% Bracket: $7,900 ($190,000 - $182,100)
• Additional Tax at 24%: $1,896 (24% of $7,900)
• 401(k) Contribution Increase: $5,700
• Charitable Donation: $7,500
• Total Reduction in Taxable Income: $13,200
• New Taxable Income (Post-Strategy): $176,800 ($190,000 - $13,200)

The New Taxable income of $176,800 places the client well within the 22% tax bracket. The approximate amount saved in avoided taxes is $9,500.

Results & ROI

The implementation of our tax planning strategy yielded significant results for the client. By strategically increasing their retirement contributions and accelerating deductions, we successfully reduced their taxable income from $190,000 to $176,800. This kept them within the 22% tax bracket, preventing them from crossing into the higher 24% bracket.

The financial impact was substantial:

• Estimated Tax Savings: Approximately $9,500
• Increased Retirement Savings: The client's increased 401(k) contributions not only provided immediate tax benefits but also boosted their retirement savings by $5,700 for the year.
• Charitable Impact: The client's charitable donation of $7,500 provided support to a cause they were passionate about while also reducing their tax burden.

Beyond the quantifiable results, the client expressed significant satisfaction with the proactive approach and the peace of mind it provided. They appreciated the transparency and clarity of the Golden Door Asset platform, which enabled them to understand the impact of their financial decisions on their tax liability.

The ROI of this engagement was significant. For every dollar invested in tax planning services, the client realized several dollars in tax savings and increased retirement savings. This underscores the value of proactive and data-driven tax planning in optimizing financial outcomes.

Key Takeaways

1. Proactive Tax Planning is Essential: Don't wait until the end of the year to address tax issues. Proactive planning allows you to identify and capitalize on opportunities to minimize your tax burden.

2. Leverage Technology: AI-powered tax forecasting software can provide valuable insights into your tax situation and help you make informed financial decisions.

3. Consider Non-Traditional Methods: Retirement contributions and charitable giving are effective tax planning tools that also support long-term financial goals and charitable causes.

4. Customize Strategies: Each client's tax situation is unique. Tailor your tax planning strategies to their specific circumstances and financial goals.

5. Understand Tax Bracket Impact: Be aware of the impact of tax brackets on your overall tax liability. Even small changes in income can have a significant effect.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors automate tedious tasks, identify tax planning opportunities, and deliver personalized financial advice to their clients at scale. Visit our tools to see how we can help your practice.