Tax Case Study

Making the Most out of a Difficult Time

From time to time, our relationship with a client creates unique story, and we would love nothing more than to share with you a “case study” to describe outside the box ways we add value for our clients.

Recently a client, “Sue” (not her real name) came to us after she went through a divorce. In the divorce settlement, she was to receive non-taxable cash installments over a one-year period. Sue was working full time, and did not have an immediate need for the money from the settlement. She approached us about financial planning and investing the settlement money she would be receiving.

Sue was making roughly $50,000 a year in earned income, and contributing $12,000 of that to her company’s 401k plan. Contributing to her company 401k plan reduced her tax liability to $38,000, and with the head of household deduction ($18,650 in 2020), she owed taxes on $19,350.

We advised Sue to begin maxing out her 401k plan. Being over 50 years old, she could contribute the annual maximum of $19,500 as well as the “catch-up” contribution of $6,500, making her total 2020 401k contribution $26,000. Now contributing the maximum amount into her 401k, she only owed taxes on $5,350 ($50,000 - $26,000 - $18,650 = $5,350). The key to making this plan work for Sue was that we supplemented her salary from her divorce settlement which we manage for her. Likely, she will be in this low tax bracket for at least 3 years where she pays 0% capital gains tax.

If the above made you think of someone you know, or someone who could potentially benefit from our services we would enjoy meeting them. We would love to be a sounding board for your family and friends. If any of them should need a second opinion on their financial situation, introduce them to www.striblingwhalen.com or call us at 678-989-0048.