Real Examples of Tax Savings (Pt. 2)

While I love a great blog that has emotional appeal or personal stories, sometimes I just like talking about dollars. Dollars saved, dollars earned, dollars allocated towards goals, and dollars compounded – In the end, these are the main reasons clients choose to work with an advisor! 

So today we have Part 2 to follow up on Real Examples of Tax Savings Part I. As a reminder, neither of these blogs explain how to use these tools or evaluate for what situations they are appropriate. They are just to lay out what these solutions could mean in real dollars. 

We will cover examples of: 

1. Gains Harvesting 

2. Roth Conversions 

3. Gifting Appreciated Stock 

Gains Harvesting:

Gains Harvesting is the less famous younger sister of the infamous Loss Harvesting opportunity. I have a video on it here. 

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Here’s an example: You bought Stock A for $15,000 and over time it grew to $30,000. If you are in the 0% capital gains tax bracket (read more here), you would owe 0% in tax. 

So what amount did you actually save? 

Well, if you had waited and had to realize gains in a higher tax rate, you would have owed $2,250 in tax ($15,000 x 15%) as compared to the $0 you paid by gains harvesting in a low tax year.  

Roth Conversions:

Roth Conversions are one of the more complex planning tools and really should only be done under the guidance of your accountant and/or financial advisor.  

You have a $20,000 IRA that you convert while you are in the 12% tax bracket. 

That means… you owe $2,400 of tax that year BUT 20 years later it gets to grow tax free to $55,000. You get to take it all out and spend $0 in tax. 

If that $55,000 were still in a traditional IRA and you took it out at 12% you would owe $4,200 in tax. 

And THAT means:  You saved $1,800 in taxes ($4,200 – $2,400). Imagine extrapolating that out with bigger balances! 

Gifting Appreciated Stock:

If you are giving to charity, gifting with stock that has grown is a great option. Why would you do this? Because: 

You habitually give $10,000 a year to charity from your savings account. Your actual tax benefit is limited to whether you are below or above the standard deduction.  

So instead, you decide to donate $10,000 of stock that has a $7,000 cost basis. That means there is $3,000 of gains you do not have to pay tax on that you likely would’ve had to in the future.  

So the tax savings for people in the 15% capital gains tax bracket is ($3,000 x 15%) = $450. $450 less tax you owe with no other difference than just what account your gift came from. 

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There you go! Some tax planning strategies have bigger impacts than others and not all of them will be applicable in your situation. But, if you value a dollar like I do, these real dollar examples can be convincing!