Is this conversation (or a variation of it) familiar?

questions for tax accountant

Jimmy walks into his accountant’s office and says, “I have to pay for my daughter’s college but I really don’t want to sell my stocks and pay tax on the large gains. How can I get around paying the capital gains tax?” 

Sally, his accountant, ponders his question for a bit, and responds with, “Well, there are a few options for avoiding tax on your stock winners—gifting, planning, and dying.” 

Jimmy leans in and says, “Tell me more.”

Sally describes the tax benefits of gifting appreciated stocks to charity. She then proceeds to explain how planning ahead can help folks like Jimmy pay taxes in the years that are most advantageous to him.

Not one to give up easily, Jimmy asks, “And the dying option?” 

Without pause, Sally quips, “When you die your heirs get an automatic step up in their cost basis—meaning the stock’s cost basis resets to the current market price so there isn’t a gain from a tax perspective…it’s the classic tax-avoidance maneuver!”

Now that puts an interesting twist on Ben Franklin’s famous saying,

in this world nothing can be said to be certain, except death and taxes”…
Ben Franklin

…and it’s also probably not the answer Jimmy sought! 

But it brings forth a very common problem for many investors: How can you minimize the tax hit on your investment portfolio? And taking it a step further for retirees or those nearing retirement, how can you reduce taxes in retirement from all sources of income? 

Alas, we’re here to help. Our financial planning team confronts these quandaries every day to help retirees structure their wealth in a tax-efficient manner. Because if you don’t plan for the erosion from taxes, you can lose nearly 40% of your money in some cases, especially after considering the impact of state-level taxes. 


In this report, we answer three popular questions for you: 

  1. What taxes do I have to pay, and at what rate?
  2. Which type of account maximizes after-tax income and growth?
  3. What strategies should I consider now—and later—to reduce taxes for myself and my heirs?

Before we begin, we want to note that while we can offer insights on tax efficiency and discuss tax considerations in a general way, Motley Fool Wealth Management does not (and is not permitted to) provide tax or legal advice. Remember, the discussion of tax strategies in this report is intended for educational purposes only and should not be relied upon as personalized tax or financial planning advice.

If you need such advice, please consult with your own tax and legal professionals before making any decisions.

With all that said, let’s dig in!

Taxes, Taxes, Taxes

The hardest thing in the world to understand is the income tax.
Albert Einstein

Let’s start with answers to two straightforward questions:1

What is a tax?

A tax is a mandatory payment or charge collected by your local, state, and federal government from individuals—like you—and businesses.

Why do we pay a tax?

To help cover the costs of general government services, goods, and activities.


Most people pay both federal and state and local taxes. On the federal level, taxpayers primarily are concerned with two types of tax—ordinary income tax and capital gains tax. There are different rate breakdowns for these based on income level, but in general, long-term capital gains tax is at a lower rate than ordinary income tax (which is also the same rate for short-term capital gains). At the state level, income tax can also be a major expense.

Comparison of Long- and Short-term Capital Gains Tax

Long-Term Capital Gains
Tax Status Single Married Filing Jointly
0% Tax Rate Up to $44,625 Up to $89,25
15% $44,626 - $492,300 $89,251 - $552,850
20% More than $492,300 More than $553,850


Short-Term Capital Gains
Tax Status Single Married Filing Jointly
10% $0 - $11,000 $0 - $22,000
12% $11,001 - $44,725 $22,001 - $89,450
22% $44,726 - $93,375 $89,451 - $190,750
24% $95,376 - $182,100 $190,751 - $364,200
32% $182,101 - $231,250 $364,201 - $462,500
35% $231,251 - $578,125 $462,501 - $693,750
37% $578,126 or more $693,751 or more

Source: Nerdwallet. Rates are for federal taxes for the 2023 tax year. Accessed March 6, 2023

As we mentioned, the applicable rate for these taxes depends on your level of income. But as a retiree, you might think your income is nearly nonexistent, because you’re no longer working and don’t receive a paycheck. However, from a tax perspective, that’s probably not true. The federal government imposes tax on “income from whatever source derived,” which not only includes your wages earned, but also income from rental properties and other income-generating assets.2 In addition, it taxes Social Security benefits and distributions from pensions and other retirement accounts as income. 

Yup, you heard that right—the government taxes much of the money you rely on in retirement. We can debate the fairness of this or your disdain for taxes, but suffice it to say, it SEEMS like there’s almost no way around paying a hefty retirement tax bill. Or is there?


A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.
Russell B. Long

Tax-Efficient Wealth Planning

We think individuals have some options when it comes to how much and when they pay their taxes. In other words, while we cannot always eliminate taxes completely, there are several legal ways to structure income to mitigate your tax bill. When considering tax-mitigation strategies, we look at two sides of the tax equation—income and deductions. We’re guided by two broad principles:

tax-mitigation guiding principles

While everyone’s situation is different and these are highly personalized planning decisions, we adhere to six rules of thumb to shrink your general tax burden.

Rule 1

Pay tax in stages of life when your income is relatively low, and therefore your tax rate is also low, and defer tax in stages of your life when your income is relatively high.

Rule 2

Understand the value of the standard deduction. From a tax perspective, accumulating deductions like medical expenses, mortgage interest, and charitable giving is only helpful if you are already over the standard deduction threshold..

Rule 3

Consider the timing and manner of charitable contributions to optimize your tax deduction AND your impact.

Rule 4

Gift cash as a last resort.

Rule 5

Consider a Roth conversion if you want to give to your heirs, but not to charity. (Charities are tax-exempt so you should gift pre-tax money!)

Rule 6

Be aware of how your different income streams have unique tax efficiences. For example, self-employment and real estate earnings are taxed as ordinary income, which allows you the opportunity to deduct expenses against it prior to taxation.


Applying these general tenets to the accumulation phase

We believe if you are early in your career when your income—and tax rate—is usually comparatively low, you should save in this order: 

  • First, contribute up to the match amount in an employer-sponsored retirement plan to receive the “free” money from your employer.  
  • Then, add the maximum to a Roth IRA, not a traditional IRA. Why a Roth? Because while the money put into a Roth is after-tax, at this stage, you’ll likely have a lower tax rate than later in your career. All withdrawals from a Roth are tax-free and don’t count toward income. 

This is beneficial in retirement for several reasons, which we will discuss later, but two major advantages are that withdrawals 1) don’t count as income, so it keeps your tax rate low, and 2) won’t raise your Medicare premiums.   

And if you’re in the middle or end of your career—near your peak earning potential— defer income and push taxes to the future. At this stage, max out your pre-tax contributions to your employer-sponsored retirement plan. Also, think about tax deductions. For example, if you want to give to a charity, consider bunching your gifts instead of giving in a steady stream to maximize your deductions. 

Our tax code is so long it makes War and Peace seem breezy.
Steven LaTourette

Holding on to more of your money in the spend-down phase

At the point in your life when you can take advantage of the fruits of your labor—like retirement—you’re probably in the spend-down phase. This stage can look different for everyone. For instance, you may want to create a budget so that you use every last penny before you pass away. Or you may want to touch only interest and keep the principal in your coffers for charity and your heirs into perpetuity. Most people tend to fall somewhere in the middle of this spectrum.

What are the typical sources of income in this phase? 

Not all retirement income is equal. Some you’re required to take. Others carry tax consequences. So it’s important to know how to structure the order of your retirement income. 

common sources of retirement income

How do you know which income source to take, and at what time? The answer depends on five factors:

considerations for when to take retirement income

These five factors are a starting point to determine how much flexibility you can take on. Unless you need the income right now, here are a few sample strategies to illustrate the kind of decisions you could make if you want more flexibility and tax efficiency:

  • Delay Social Security: Even though you can access it at age 62, wait to receive it. Your future monthly benefits increase 8% every year you wait from full retirement age (age 66 or 67) until 70.4
  • Avoid required minimum distributions (RMDs): Convert prior to age 73 or gift them via a qualified charitable distribution. We’ll talk more about these options later.
  • Cash out your pension: Consider a lump sum payout. Reinvest it in an IRA to control your income flow. You’ll still need to take annual RMDs eventually, but there may be a Roth conversion option if you don’t need them. 
  • Get rid of your annuities: Sell on the secondary market. Convert your annuity from a fixed-income stream to a lump sum cash option. But, beware: You won’t receive the full cash value—it’s usually discounted between 10%-20%, so consult with your annuity professional.


Where does cash fit in? 

We recommend setting aside three to five years’ worth of savings in a liquid account (money market or short-term government bonds) so that if the stock market drops, you don’t have to worry about your near-term income needs or be forced to sell stocks at fire-sale prices. 

Calculating your “cash carve-out” takes a little work, but here’s a way to arrive at a number that may be appropriate for your needs and goals. 

Start by considering your income streams. Determine what is guaranteed or reliable income, like a pension or Social Security. Follow the steps below to determine how much cash you need in excess of this reliable, stable income.

cash carve out strategy

For example, if your spending budget is $100K per year, and you receive $60K in pension income, then your cash carve-out per year should cover the remaining $40K. To keep five years’ worth in a rainy day fund, you would need $200K ($40K x 5 years).

Okay, now that we’ve set the stage, let’s dive into our nine savvy tax moves for retirement. We break these into two categories: 1. Getting a “tax bargain” on your income and 2. Getting a “bang for your buck” through deductions, credits, and legacy planning.

9 Savvy Tax Moves for Retirement
Tax Bargain on Income Bang for your Buck
02Income Tax on Earnings & RMDs 03Tax on Investment Income 04Deductions and Credits 05Legacy Planning
Move #1
Time, eliminate & distribute RMDs
Move #2
Avoid short-term capital gains
Move #4
Bunch cash gifts
Move #7
Choose account types
  Move #3
Match gains with losses 
Move #5
Give appreciated securities
Move #8
Shield wealth
    Move #6
Move #9


Income Tax on Earnings and RMDs

Dear IRS, I am writing to you to cancel my subscription. Please remove my name from your mailing list.
Which retirement income is taxed?

The answer is simple: Almost all of it!

Social Security

The federal government taxes up to 85% of your Social Security benefit each year. The taxable amount depends on your combined income, which you can determine by taking your adjusted gross income (AGI) plus non-taxed (tax-exempt) interest income and half of your Social Security benefits. 

The taxable amount of Social Security based on your combined income is:

  Individual Married filing jointly
0% Up to $25,000 Up to $32,000
Up to 50% $25,000 - $34,000 $32,000 - $44,000
Up to 85% more than $34,000  more than $44,000

Source: Social Security Administration, accessed Mar. 17, 2023

For example, if your AGI is $10,000, you have no non-taxed interest and receive $50,000 in Social Security, then your combined income is:

$10,000 +  $0 + $25,000 (i.e. ½ of $50,000) = $35,000 

So as an individual, you will be taxed on 85% of your Social Security, or:

85% x $50,000 = $42,500

In addition to the federal tax, some states also tax Social Security

Other Retirement Accounts

The most common types of retirement accounts are pensions, 401(k)s or 403(b)s, and traditional IRAs. Since these accounts are considered tax-deferred savings vehicles, you must pay tax when you receive distributions. 

Again, the federal government taxes income from tax-deferred accounts—but only when you withdraw the money or take a required distribution—at the same rate as income from an employer (your ordinary income tax rate). 

And similar to Social Security, states tax income from retirement accounts too. Almost every state imposes a tax on retirement account distributions. The exceptions are Washington, Nevada, Texas, Wyoming, South Dakota, Illinois, Tennessee, Mississippi, Florida, Pennsylvania, Alaska, and New Hampshire. Two other states—Hawaii and Arkansas—do not tax pension income, but do tax distributions from 401(k)s and IRAs.

states that don't tax retirement income


Taxation according to income is the most effective instrument yet devised to obtain just contribution from those best able to bear it and to avoid placing onerous burdens upon the mass of our people.
Franklin Roosevelt

Tax on Retirement Income

Strategies to minimize taxes can range from simple to complex.

  • On the simple side, for example, you can move to a lower income tax state to reduce or even eliminate state tax on your earnings or retirement income. (Recall, we said simple, not desirable!)
  • On the more complex side, you can manage your income to stay below the IRMAA thresholds for Medicare Parts B and D premiums, as we discussed above. In other words, the standard monthly amount covered per person is 25% of their Medicare benefits. But at the highest income level, individuals can pay 85% of their monthly Medicare benefits.  

Another set of strategies focuses on decreasing or eliminating your RMDs. Many retirees plan their retirement income needs around their spending level. Some may have just enough saved to live comfortably, while others have plans to leave a legacy. Regardless of which bucket you may fall into, paying taxes is likely not high on your list of ways to spend your money! 

But, the government will find a way to get its money. That’s why pension funds have a specified start date and you’re mandated to take a certain amount of distributions from your 401(k)s and traditional IRAs each year. And unfortunately, even if you don’t need the money, you must take it and get taxed on it. 

Despite being required to take them, there are ways to lower your distributions and thus reduce the amount of tax you pay.

And that brings us to our first savvy move...

Some taxpayers close their eyes, some stop their ears, some shut their mouths, but all pay through the nose.
Evan Esar
Savvy Tax Move #1

Time, eliminate, & distribute your RMDs

Time your RMDs and other income

The IRS doesn’t care when or how often you take distributions to satisfy your RMDs—as long as you withdraw the appropriate amount by Dec. 31 each year. There’s one exception: You can wait to take your first distribution until April 1 of your 74th year. This is important because if you have a large income event in your 73rd year, you may decide to wait until the next year so your income tax rate is lower. And vice versa if you have a liquidity event in your 74th year—you can take your RMD in your 73rd year instead. 

A word of caution—if you choose to wait until the next calendar year to take your first RMD, you’ll have to receive another before the end of the same year. That’s double the distribution amount (and thus higher taxes owed) in one year. 

Additionally, if you need more income than your RMD provides, consider drawing upon other income sources so you don’t jump to the next tax bracket. For instance, if your ordinary income rate is higher than the long-term capital gains rates, you may wish to generate income by selling appreciated long-term securities. Or consider ways to use tax losses from investments to offset gains and other income. 

Eliminate your RMDs

Individuals who don’t need their RMDs can eliminate all or part of them by converting their retirement accounts to a Roth. Roth accounts do not pay tax on distributions—whether it’s a withdrawal of your contribution or the appreciation on your money. In other words, after contributing after-tax money, Roths can potentially grow tax-free for your entire life. 

And, notably, there are no RMDs from your own Roth accounts. So that means when someone converts from a traditional to Roth IRA and pays tax on the converted amount (in the year of the switch), they’re done paying tax on those funds and any gains from those funds—FOREVER! 

Let’s walk through hypothetical illustrations with two different goals. 

Goal #1: Minimize taxes, no legacy

Devin and Sammy reviewing planDevin and Sammy, a 64-year-old married Florida couple, just retired after selling their business for $1.6 million. They are working with their Wealth Advisor on a retirement budget. In addition to the proceeds from the sale, they have a $1.75 million traditional IRA. Here are the details of their plan. They:

  • feel confident they can live on $100K per year
  • have enough money to cover this annual spend, so they don’t plan to take Social Security until age 70 
  • are not interested in leaving a legacy at this time

They asked their Advisor how they can reduce their taxes on their income from Social Security and their RMDs from their traditional IRA when they need to take them.

Their Advisor suggested a Roth conversion. Her analysis shows they should convert no more than 50% of the $1.75 million to a Roth, spreading the conversion over the next five years when their income tax rate should be lowest—a tax bracket trough—since they’ll have no other income until Social Security kicks in.

Lifetime taxes paid graph

Calculations by Motley Fool Wealth Management. Married couple filing jointly. Total taxes paid is discounted at 2.5% to today's dollars through age 85. Maximum tax rate excludes tax rate on transfer to heirs. Assumes traditional IRA is invested in a balanced portfolio that delivers a market return of 5.38% from ages 63-70, then 4.72% return through age 85. Taxable income starting at age 70 from Social Security ($75,000 per year) excludes the 15% of Social Security not taxed. Past performance is not indication of future results. For illustrative purposes only.

In both scenarios, Devin and Sammy pay taxes of $273,380 on the initial sale of the business (income of $1,600,000 less the standard deduction of $27,700 = $1,572,300). The differences start at age 65: 

  • No conversion: Over the next five years (ages 65-69), they have no income and pay no income tax. At age 70, their tax rate would only be 12% through age 73 when their RMDs kick in. From ages 73 through 82, their tax rate would be 22%, then kick up to 24% through age 85.
  • Convert 50%: Over the next five years (ages 65-69), their income tax rate will be 24% on the amount they convert. Then it would fall to 12% through age 83. After that, it would go up to 22%. 

When asked about converting more, the analysis shows that shifting more than 50% would generate higher taxes paid than not converting at all, which is contrary to their goal.

Goal #2: Minimize taxes, leave a legacy, and increase annual cash available

After careful consideration, Devin and Sammy decide they want to both lower their taxes and maximize the amount they can leave for heirs. But they’re also concerned about rising health care costs in their 80s and want to make sure they have at least $125K available each year during those years. 

In this case, their Advisor suggested a 40% conversion. Like the 50% conversion, their taxes would be lower than not converting at all. In addition, Devin and Sammy would confidently have the desired $125K available each year in their 80s from their Social Security benefits and the non-converted portion (60%) of their RMDs without dipping into their Roth savings. (If they do not convert, they would also have sufficient funds to meet their desired $125K, but if they convert 50%, they would only have between $115K-$122K each year and may need to dip into their Roth savings.)

Finally, they would be able to leave nearly $1 million more—$2.85 million vs. $1.85 million—to their heirs than if they did not convert. And even more importantly, almost all—$2.1 million out of the $2.8 million—will be in a Roth, so their heirs likely will never have to pay taxes on the inherited amount. If they don’t convert, their heirs will need to withdraw the inherited IRA over 10 years (same time frame as a Roth) AND pay taxes on the full amount. 

Do not convert vs. Convert 40%

chart on not converting vs. converting 40%

Calculations by Motley Fool Wealth Management. *Discounted at 2.5% to today's dollars through age 85. Does not include a hypothetical/assumed 30% tax on inherited amount. **Excludes tax rate on transfer to heirs. Assumes traditional IRA is invested in a balanced portfolio that delivers a market return of 5.38% from ages 63-70, then 4.72% return through age 85. Past performance is not indication of future results. For illustrative purposes only.



Distribute your RMDs

Instead of donating cash or an appreciated security, you can give your RMDs from your retirement accounts to a cause you care about. This qualified charitable distribution (QCD) could make sense if you…

  • would like to donate to charity during your life, or
  • will not need your full RMD to support your living expenses, or
  • do not have heirs, or do not prioritize leaving money to heirs.

QCDs are gifts to qualified public charities that, when done correctly, count toward your RMD each year. And more importantly, QCDs cancel out any tax you would have to pay on the RMD.

Let's take another example—Joe and Corinne, a retired couple weighing their options on making a $50K donation to their favorite charity. They planned on gifting cash, but their Wealth Advisor explained there could be a better way.

Let’s say they file their taxes jointly. They have a combined annual income of $24K from a pension, $50K in Social Security income (of which 85%, or $42,500, is taxable), and $50K of RMDs. Remember, RMDs are considered income and taxed at ordinary income rates.

Their Advisor computed two scenarios:

  • Withdrawing their RMD, making a cash donation of $50K, and taking it as an itemized deduction on their tax return
  • Making a QCD of $50K and taking a standard tax deduction

Here are the results of her analysis:

chart showing tax implications with and without QCD

Source: Motley Fool Wealth Management. This analysis is hypothetical and for illustrative purposes only. For guidance and advice on taxes, consult your tax professional.

In both scenarios, Joe and Corinne gifted $50K to their favorite charity. But by making the QCD instead of a cash donation and taking the standard deduction, Joe and Corinne lowered their taxable income by the amount of the standard deduction, $27,700, resulting in paying $3,324 less in taxesa 44% reduction.

There’s another important consideration: health care costs. (Yup, this again!) Making a QCD that reduces taxable income may mitigate exposure to Medicare Parts B and D income limits. In other words, the lower your income, the less you pay in Medicare premiums. So a potential benefit of making a QCD instead of taking an RMD is it may reduce the amount you pay for health care each year. 

Of course, these decisions involve your individual tax situation, so always consult with your tax professional.

Tax on Investment Income

If you have a taxable brokerage account, then at some point you’ll probably want to sell some of your winners. And of course, you’ll get taxed on that investment gain.

So here are two savvy moves to lessen the blow.

Savvy Tax Move #2

Avoid Short-term Capital Gains

The first of the two moves is perhaps the simplest to implement, but at times could be emotionally challenging. Why is it an emotional decision? Because often, investors make up their minds to sell and want to do it right away. But long-term capital gains are preferable to short-term ones, AND you need to hold your investments for more than one year to avoid short-term capital gains. 

Tax rates for long-term capital gains are 0%-20%, whereas short-term capital gains rates fall between 10%-37%, the same rate as ordinary income. For example, if you and your spouse have $500K in capital gains, you much prefer to be taxed 15% than 35%!

Larry and June capital gains strategyLet’s walk through a hypothetical example to put this in perspective. 

Larry and June are considering selling two stocks. They've held Stock A for 11 months and Stock B for 13 months. They’ll recognize a $100K capital gain on each of them. How does their after-tax profit differ?

Short- vs. Long-term Gain Example
  Stock A Stock B
Holding Period 11 months 13 months
Initial Investment $500,000 $500,000
Gain $100,000 $100,000
Tax Bracket 32% 15%
Tax on Gain $32,000 $15,000
After-tax profit $68,000 $85,000
Annualized pre-tax return 21.9% 18.4%
Annualized after-tax return 14.9% 15.6%

                            Difference in after-tax profit: $17,000     


Source: Motley Fool Wealth Management. For illustrative purposes. Illustration is for a married couple filing jointly with annual income of $400K. Analysis ignores the net investment income tax, which would add a 3.8% charge on investment income in both scenarios.

By waiting just two months, (assuming that the capital gain is equal for illustrative purposes), Larry and June would keep an extra $17,000 of the investment profit. Said a different way, they would put 17% more of their profit in their pockets instead of paying it to the government!

You don’t pay taxes–they take taxes.
Chris Rock
Savvy Tax Move #3

Match Gains with Losses

No one likes to sell their investments at a loss. But if you no longer believe in the company you invested in or want to hold fewer shares, then selling it at a loss can help offset gains from a tax perspective. This process is commonly known as tax-loss harvesting. 

So you not only remove a stock from your portfolio that you no longer want, but you can also help offset the tax on the sale of an appreciated security. Here’s an illustration of how it can work:

Matthew and Kelly want to reduce their exposure to Z company but are worried about the tax consequence of realizing the stock’s gain. They recently sold Stock Y for a loss. Their Advisor sent them the following analysis to show how they can sell some of their shares in Stock Z and not pay any capital gains tax.

Tax-Loss Harvesting Example
  Stock Y Stock Z
Year Action Cost Action Cost
2018 Bought 100 shares for $200/share $20,000 Bought 100 shares for $50/share $5,000
2021 Sold 100 shares for $100/share $100,000 Sold 75 shares for $200/share $15,000
Total Gain (Loss)   ($10,000)   $10,000

% Gain Offset: 100%     Total Taxes Paid $0

Source: Motley Fool Wealth Management. For illustrative purposes only. 

Since they recognized a loss of $10,000 when they sold Stock Y, they can sell 75 shares of Stock Z at the market price of $200/share for a gain of $10,000. Because the capital gain equals the realized loss, they should pay zero tax. 

Furthermore, if their realized loss was even greater than the $10,000 capital gain—let’s say they realized $13,000 in losses—Matthew and Kelly could use $10,000 of the realized loss to offset their $10,000 capital gains AND up to $3,000, or their remaining net losses, against other income. This can be a way to use realized losses more efficiently against ordinary income, such as wages, which, as we said, are typically taxed at a higher rate.

Deductions and Credits

The best things in life are tax free.
Joseph Bonkowski

Eighty-seven percent of taxpayers take the standard deduction on their tax return, primarily because their home is either paid off, or other restrictions reduce the amount of write-offs available.5 But if you are able to itemize your deductions—with things like charitable donations, for instance—you may be able to push your tax bracket lower.  For example, combined federal plus state tax rates can be upwards of 50% at the highest tax bracket. So if you can deduct your charitable gifts, every dollar you contribute to a charity could provide you a $0.50 tax benefit at that 50% tax bracket—a pretty good deal! 

Conversely, the effective tax rate at the lowest bracket is roughly 10% (depending on state taxes), which means every dollar you contribute to a charity could provide you a $0.10 tax benefit—not as great a deal. So you see, it’s important to be mindful of how much you want to donate in order to lower your AGI, but to remain in the tax bracket that earns you the greatest benefit overall. HINT: It comes down to savvy moves #4, #5, and #6.

Savvy Tax Move #4

Bunch Cash Gifts

Let’s walk through a hypothetical example.

Sam and Veronica wish to make annual donations of 10% of their gross income— $27,500—to charity each year. Their Advisor suggested that bunching their gifts may make more sense. She ran the following analysis to show the impact.

Bunching Cash Gifts Example
  Scenario 1 Scenario 2
  Year 1
Standard Deduction
Year 2
Standard Deduction
Year 1
Year 2
Standard Deduction
Total Income $275,000 $275,000 $275,000 $275,000
Charitable Contributions ($27,500) ($27,500) ($55,000) $0
Applicable Deductions ($27,700) ($27,700) ($55,000) ($27,700)
Tax Paid $46,152 $46,152 $39,600 $46,152
Taxes Paid Over Two Years $92,304 $85,752
Effective Tax Rate Over Two Years* 17% 16%

Tax Savings from Bunching: $6,552

Assumptions: Gross annual earnings for couple $275,000. Desired charitable contributions $27,500. Married filing jointly tax rate of 24%, graduated for income.

This example shows the potential benefits of lumping charitable gifts into one year rather than spreading them out over time.

  • Sam and Veronica considering bunchingIn Scenario 1, Sam and Veronica’s annual donation of $27,500 was less than the standard deduction of $27,700. As such, they took the standard deduction on their tax return each year, resulting in a two-year effective tax rate of 17%.
  • Alternatively, in Scenario 2, Sam and Veronica’s gift of $55,000 exceeded the standard deduction in year 1, so they were able to write off the full amount on their taxes. In year 2, even though they did not make a charitable contribution, they were still able to take the standard deduction. Because of this bunching strategy, their two-year effective tax rate was 16%. 

The result: While a 1% difference in tax rate seems minimal, Sam and Veronica saved $6,552 over the two years by bunching their gifts in one year. That's a 7.1% tax savings. And the charity still received the same amount, $55,000. 

However, if they were concerned about the “lumpiness” of their gift, they could open and contribute the $55,000 to a donor-advised fund (DAF). That way, they could benefit from a lower effective tax rate (Scenario 2) and distribute the funds from the DAF annually—a win-win.

Savvy Tax Move #5

Give Appreciated Securities

There are also excellent tax advantages for giving noncash contributions, and the impact may be greater than a cash donation. In other words, when you have a security that has appreciated considerably over a holding period of one year or more, you can donate that security to a qualified charity and receive a charitable income tax deduction for the security’s fair market value. This means you can reduce your income and incur a lower tax bill as a result. In addition, when you donate an appreciated security, you can avoid the capital gains tax you otherwise would have to pay if you sold it for the gain.

So how do you know if you should donate cash or an appreciated security? Gerald, in our next example, is facing this dilemma:

He would like to give to a charity in his mom’s name and is weighing the trade-off between gifting cash or an appreciated security. Here’s the analysis his Advisor showed him:

Tax Benefit of Cash vs. Stock Gift
Tax-Benefit-of-cash-vs-stock-gift waterfall chart

For illustrative purposes only. Gift to qualified public charity. Federal tax rate: 35%. Long-term capital gains rate: 20%. Stock basis: 30%.

If Gerald makes a $100,000 cash donation, it could result in a charitable tax benefit of $35,000, effectively lowering the cost of the gift to $65,000. But by donating a security, Gerald can take the charitable tax deduction ($35,000) plus the benefit of not having to pay tax on the stock’s appreciation ($14,000), for a total effective gift cost of ($51,000). And if Gerald still wanted to hold that security in his portfolio—because he transferred and did not sell it—he can use the $100,000 of cash he has set aside for a cash donation and repurchase the security immediately, thus resetting his cost basis.

The politicians say ‘we’ can’t afford a tax cut. Maybe we can’t afford the politicians.
Steve Forbes
Savvy Tax Move #6


Sometimes, more than one strategy may make sense, but combining several may offer the best tax advantage. For example, you could pair tax-loss harvesting with donating to charity. So, after you sell a security at a loss to offset the capital gain from another sale, you could donate the cash to potentially receive a charitable deduction up to 60% of AGI. 

Interested in offsetting the tax from a Roth conversion? At the same time you shift assets from a traditional to Roth IRA, donate an appreciated security that equals the conversion amount to charity. That way, the tax deduction from the donation should offset the amount of tax on the conversion, leaving you with a $0 tax liability. 

Of course, all the strategies we discuss in this section are subject to IRS rules and limitations, so as always, we recommend you consult your tax professional and Wealth Advisor for guidance.

The purpose of a tax cut is to leave more money where it belongs: in the hands of the working men and working women who earned it in the first place.
Bob Dole

Legacy Planning

Philosophy teaches a man that he can't take it with him; taxes teach him he can't leave it behind either.
Mignon McLaughlin

Do you plan to leave money to your kids, grandbabies, or charity?

If you want more control over when and how your wealth is disbursed and spent, you need a legacy plan. A legacy plan includes savvy moves to structure and shield wealth from tax.


Savvy Tax Move #7

Choose Account Type

Many people use trusts for legacy planning. They work like this: A grantor (trust maker) places assets—like cash, stocks, bonds, or real estate deeds—in an account to be managed by a trustee according to guidelines established by the grantor for named beneficiaries.

When a grantor dies, beneficiaries do not immediately incur taxes for assets still held in the trust, as these trusts pay their own tax on assets they hold. But they distribute trust income annually to beneficiaries (as a conduit entity), which beneficiaries must pay tax on. When assets such as stocks and real estate are held in a trust (depending on the type), the current market value at the time of death usually becomes the asset's cost basis for beneficiaries.

There are many kinds of trusts. Testamentary trusts are activated by a will, while living trusts are created while the grantor is alive. Living trusts can be either revocable or irrevocable, but after the grantor’s death, all trusts become irrevocable.

The taxation of trusts is complex, so it always makes sense to consult a tax professional. While they potentially can be effective in reducing estate tax exposure upon wealth transfer, they may not be the best structure. For instance, the Tax Cuts and Jobs Act of 2017 made trusts inefficient for capital gains.

The avoidance of taxes is the only intellectual pursuit that carries any reward."
John Maynard Keynes
Savvy Tax Move #8

Shield Wealth

The federal government and some states tax estates and gifts. For estates above the lifetime exclusion of $12.92 million, the assets that are not shielded (using trusts, for example) are taxed at 40% of their current value. That means an estate currently valued at $13.92 million could have $1 million that is taxable at 40%, resulting in a $400K tax bill. However, there are many nuances to the lifetime exclusion and the annual gift exclusion that can influence if and how you may choose to parse your estate.

Legacy planning can uncover various ways to reduce this tax. For instance, if you are married, a simple tactic is to make sure your spouse is set as your primary beneficiary to preserve the stretch treatment of an inherited traditional IRA. 

The reason why preserving the stretch treatment is important is because otherwise, distributions from an inherited traditional IRA would need to be taken within 10 years of your passing. And just like when you make withdrawals from your IRA, your spouse will have to pay ordinary income tax on that money. But with a stretch, a surviving spouse may roll the IRA into their own, which calculates RMD withdrawals based on your spouse's life expectancy. This may stretch out the IRA distributions and potential benefits of tax-deferred growth.

Another maneuver is to take advantage of annual gifting limits to reduce your taxable estate upon your death. This year, each taxpayer can gift $17,000 per person without triggering a gift tax. But if you exceed the annual amount, you don't have to pay gift tax unless the total amount over the course of your life exceeds the lifetime gift tax limit for that year. 

However, this planning opportunity may go away soon. The lifetime gift tax exclusion is scheduled to be cut in half in 2026—to roughly $6.8 million. But if you make large gifts before 2026, you don't lose the benefits of the higher gift tax exclusion amount after it's lowered.

Additionally, you may choose to give money to heirs while you’re still living to reduce your taxable estate. Here are some reasons for and against gifting while you’re alive.

When should you gift?
Reasons to gift while you're alive Reasons to wait to gift until you pass
It can be very rewarding to watch your heirs enjoy their inheritance. You can help your loved ones build financial security or pay for major expenses like college. If you don't think your estate will have a value in excess of the lifetime exclusion, there likely won't be any taxable benefit to giving your money away early.
Utilizing the annual gift tax exclusions strategically can lower the value of your taxable estate. If you plan to give investments to your heirs, it can be beneficial from a long-term tax planning perspective to wait. Assets such as stocks receive a step up in basis upon death and can result in significant capital gains tax savings. On the other hand, assets given during life keep the same cost basis that the original owner paid.
Giving money to your favorite charities while you're alive can reduce your estate's value even more and get you valuable income tax deductions each year in the process. When giving away your assets while you're alive, it's important to consider whether you're keeping enough of a financial cushion for yourself for unplanned expenses, such as long-term care.
The Tax Cuts and Jobs Act doubled the lifetime exclusion, so if you're worried about it reverting back to previous levels after 2025, you can give away your money now to take advantage of the higher amount. Gifting can complicate your tax filings. Even if you don't end up owing taxes on your gifts, you will still need to report the money you've given beyond the annual exclusion.


Isn’t it appropriate that the month of the tax begins with April Fool’s Day and ends with cries of ‘May Day!’?
George William Curtis

Tax Season is Year-Round

Many people only think about taxes from February through April’s tax day. But to maximize after-tax wealth, we go back to our tax equation—getting a tax bargain on income and the most “bang for your buck” through deductions, credits, and legacy planning. Putting a strategy in place to protect your wealth is not a two-month affair. Rather it’s a year-round endeavor with a multiyear lens. 

Taxes, along with their investments, are one of the biggest drivers of most clients’ financial strategy. And pulling your general tax considerations into a holistic picture is one of the key benefits of a financial planning and investment management relationship.

At Motley Fool Wealth Management, our experienced in-house Wealth Advisors work with you to understand your spending and how it may change over time, evaluate your long-term financial plans, and assess risks that could keep you from achieving your wealth goals. We help you determine the cost of your lifestyle through various stages of life, and how to fund it.

Our general tax planning for your wealth also evaluates ways to defer income and accelerate deductions, including how new legislation or changes to existing tax rules may affect you, and how to take advantage of tax bracket troughs. We seek opportunities to reduce your taxes—such as when to recognize income, who should recognize it, and where—and help retirees and soon-to-be retirees develop a spend-down strategy that accounts for timing of income streams, as well as tax-diversified withdrawals. 

Planning for your “retirement paycheck” is one of the many ways we help you prepare for the future, live the retired life you desire, and design a legacy you can feel proud of.

Want to learn more? Click here to learn more about our innovative money management and wealth planning solutions.

Motley Fool Wealth Management

Footnotes and Disclosures:

1Tax Foundation, accessed Mar. 30, 2023 Internal Revenue Code § 1.61-1(a). Accessed Apr. 10, 2023, accessed Mar. 27, 2023

4Bloomberg, Jul. 5, 2022 Statistics through 2019 FY, revised Oct. 2020, 2022 DAF Report, accessed Apr. 14, 2023

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