It’s Not Too Late (or Early) for Tax Planning: 3 Tax Strategies for Today

By Andi McNamara, CFP®
Vice President, Director of Financial Planning
Washington Trust Wealth Management

We may already be in 2023, but the clock hasn’t run out on tax strategies for 2022. There is at least one move you can make between now and April 18 to try to reduce the amount of tax you'll owe – and a couple of important strategies to help reduce your tax burden for 2023.

For Your 2022 Taxes:

Make a prior year IRA contribution. If you haven’t already funded your retirement account for 2022, you have until the tax return filing due date to do so. Making a deductible contribution to a new or existing IRA before April 18 will help you lower your tax bill for 2022 – plus, your contributions will compound tax deferred. (Note: You can contribute to an existing 401K, but can’t create a new one for a prior year contribution.)¹

For the 2022 tax year, you can contribute up to $7,000 if you’re 50 or older and $6,000 if you’re under 50. Married couples filing jointly can each maximize their individual contributions.²

For Your 2023 Taxes:

Review your paycheck withholding. Use the tax withholding estimator on the IRS website to choose an estimated withholding amount most beneficial for you. If you’re withholding too little from your paycheck (or pension), you may face a tax bill and/or an underpayment penalty. If you’re withholding too much, you’ll end up with an excessive refund, which means that you've loaned the U.S. government your money without interest when you could be putting that money to work for you by, for example, saving for retirement, boosting an emergency fund, or paying down debt.

Reduce taxes on your required minimum distribution (RMD) with a qualified charitable distribution (QCD). If you want to avoid tax on your retirement account’s RMD, you can do so with a QCD – but only if you do it the right way.

RMDs are required (hence the name) and generally are taxable income. A QCD is a transfer of funds from your IRA directly to a qualifying tax-exempt organization. QCDs count toward your RMD (up to $100,000 a year), allowing you to fulfill your RMD obligation without increasing your taxable income³. This makes QCDs an effective and tax-advantaged giving option if you are charitably inclined and aren’t dependent on your RMDs to maintain your lifestyle.

However, there are two important caveats:

1. The QCD is excluded from your taxable income only if the funds are transferred directly from your IRA custodian to the qualified charity. If a distribution check is made payable to you, even if you use the money to make a charitable contribution later, the distribution will be taxable.
2. Because of the “first dollars out” rule, every dollar you withdraw from an IRA counts toward your RMD until the RMD is met. Therefore, even if you make a QCD later in the year, it can’t “cancel out” the taxable distributions you already took.

For a QCD to count toward your current year's RMD, the funds must come out of your IRA by your RMD deadline, which is generally December 31 each year.⁴

What are important wealth management missteps to avoid in 2023? Our next blog will tell you what you need to know.