Mid-Year Tax Moves: Retirement and Charitable Giving

Mid-Year Tax Moves: Retirement and Charitable Giving
Illustration/charts by John Harman/MOAA. Getty Images photos.

(This article originally appeared in the July 2022 issue of Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine here; learn more about joining MOAA here. Click here for Part II of the article.)


With the year more than half over, it’s a good time to start thinking about what you may owe Uncle Sam — and consider ways you can trim your tax tab. As you determine your short-term moves, you may want to consider some long-term tax-saving strategies, too.


Your 2021 federal tax return is a good place to start when assessing your 2022 tax liability as it can help inform the moves you might make.


It’s also wise to think about your potential 2023 financial situation to ensure a tax move makes sense this year versus next year.


A key question: Do you expect to take the standard deduction this year, or are your potential itemized deductions on track to exceed that threshold? It’s a tough hurdle: The standard deduction for single filers is $12,950 in 2022, while it is $25,900 for married taxpayers filing jointly.


[RELATED: 2022 Tax Brackets (IRS.gov)]


Those who are age 65 and older or blind get an extra standard deduction of $1,400 for married filers and $1,750 for single filers. Whether you expect to itemize or take the standard deduction “might dictate other moves you make this year,” said Tim Steffen, CPA/PFS, CFP®, director of tax planning for Baird, a wealth management firm.


You also need to assess the taxation of your income streams. How much of your pay may be tax-exempt? Will you turn on a stream of taxable military pension income this year, or will you receive tax-free VA disability payments? Will you sell long-term investments that qualify for favorable capital gains tax rates? Paint the picture of where your money will be coming from and what kind of tax bill may be attached to each income stream. (Factor in the tax bite your state may take, too.)


With all that in mind, here are some tax moves, for the short term and long term, to mull over as you enjoy the long summer days. The first installment will involve moves related to retirement and charitable giving; a second installment offers tips for medical costs, portfolio management, and other financial topics.


[RELATED: MOAA’s Military State Report Card and Tax Guide]



Boost contributions. One of the first tax moves to consider if you have earned income is to make IRA contributions or increase 401(k) or Thrift Savings Plan (TSP) contributions, said Jo Willetts, director of tax resources at Jackson Hewitt. Besides saving for retirement, you lower your taxable income now by making pretax contributions to employer plans and deductible contributions to a traditional IRA if you’re eligible. Families with one breadwinner have a workaround.


“The working partner can contribute to an IRA for a nonworking spouse,” said Willetts. The working spouse can contribute up to $6,000 to their own IRA and another $6,000 to a spousal IRA if the worker’s earnings cover the total contribution. A catch-up contribution of $1,000 can be added for each spouse who is 50 or older — for a total of $14,000 in contributions if both spouses are 50-plus in 2022.


Participants in retirement plans, such as the TSP, can contribute up to $20,500 (plus an extra $6,500 for those 50 and older) for 2022.


“TSP is terrific because it’s so low cost,” said Col. Dr. Steven Podnos, USAFR, CFP®, principal of financial firm Wealth Care. “Seek to max out the deferral.”


Servicemembers with tax-exempt combat pay can boost their tax-advantaged retirement savings even more because they can put that money into a traditional TSP up to the $61,000 annual addition limit for 2022. Visit the TSP website to learn more.


If you’re now self-employed, there are several options to set up your own tax-advantaged retirement plan, such as a SEP IRA, Simple IRA, or solo 401(k). For those bringing in a hefty sum, perhaps from consulting for a large aerospace or engineering firm, a personal defined benefit plan may allow a self-employed business owner to make a large tax-deductible contribution, said former Maj. David Chepauskas, USA, CFP®, senior wealth planner at Summit Financial.



Trouble viewing the chart? Click for a larger version.


Consider a Roth conversion. While converting money from a traditional IRA to a Roth IRA will add to your taxable income this year, the move reduces your taxes in the long run. Money in a Roth account grows tax-free and qualifies for tax-free withdrawals.


“A market downturn provides a good opportunity to consider Roth conversions,” said Chepauskas. After the conversion, any earnings growth from a market bounce back will be tax-free in a Roth IRA.


Before doing a conversion, consider your tax rate now and in the future. If you think your tax rate is lower now, then doing a conversion this year could make sense. James Rabasca, senior tax specialist at Summit Financial, notes that under current law, the lower tax rates implemented by the Tax Cuts and Jobs Act are set to expire at the end of 2025.


On the legislative chopping block last year, the “backdoor Roth” is still available.


“As of today, people still can take advantage of the backdoor Roth if they don’t qualify for Roth contributions,” said Eric Bronnenkant, CPA, CFP®, head of tax at financial firm Betterment.


The strategy works like this: A taxpayer whose modified adjusted gross income exceeds the Roth contribution thresholds can make nondeductible contributions to a traditional IRA and then convert that money to a Roth IRA. To make this work smoothly, you need to hold only nondeductible contributions in your IRA.


[RELATED: How the Annual Gift Tax Exclusion Can be a Powerful Estate Planning Tool]


Check on required minimum distributions. RMDs for tax-deferred retirement accounts kick in when you turn 72 years old. For your first RMD, you can delay withdrawing the money until April 1 of the year after your 72nd birthday. If you delay your first RMD, you will have to take the second one by the end of that year, too.


“Two distributions in one year could push you into a higher tax bracket,” said Bronnenkant.


If you missed your RMD, take it sooner rather than later, and ask Uncle Sam for forgiveness by filing Form 5329. The penalty for missing an RMD is hefty — 50% of the shortfall. Tax experts say first-time offenders are often granted penalty relief, so it’s worth requesting the waiver if you find yourself in this situation.


All subsequent RMDs must be taken by the end of the year. You can take money out monthly, quarterly, or whatever schedule you like as long as the total is withdrawn by Dec. 31.


The big change for RMDs this year: The IRS has implemented new tables that account for today’s longer life expectancies, noted Steffen. Your RMD will be smaller than it would’ve been under the previous life expectancy table, which means more money can continue to grow tax-deferred in your retirement account.


[RELATED: MOAA's RMD Calculator]


Charitable Giving

Do a qualified charitable distribution (QCD). Starting at age 70½, you can donate money directly from your IRA to charity. When you hit RMDs at age 72, a QCD can also satisfy your RMD. But to have your distribution do double duty, do the QCD before you take your full RMD.


“The first dollars out have to be the RMD,” said Steffen. “So the first dollars have to go to a QCD if you want to also satisfy the RMD.”


You can always give more money, up to $100,000 per year, as a QCD, or you can split up your RMD so that only part of it is a QCD and the remainder is distributed to you.


[DONATE NOW: MOAA Charities]


The QCD is a particularly smart move for taxpayers who take the standard deduction. The QCD money is not taxed, even if it is also satisfying your RMD.


“Rather than receiving an itemized charitable deduction, the qualified charitable distribution is excluded from your taxable income,” said Rabasca.


Keep track of donations. As you make charitable donations during the year, collect receipts and acknowledgments and put them in a dedicated file. Track donations throughout the year in a spreadsheet or written list. When you volunteer, write down the mileage you drive in service of charity (which is deductible at 14 cents per mile) and the expenses you incur for charitable work. That way, you’ll have all the information you need at your fingertips to write off your charitable donations when tax-filing season arrives. You can also easily check to see how your gifts are stacking up so far this year.


Weigh bunching deductions. Deciding to bunch your deductions may allow you to itemize — and may affect how you give money. Let’s say you plan to give $10,000 a year for the next five years. You instead could make a $50,000 deductible gift to a donor-advised fund this tax year. Bunching up your gifts into one year may allow you to itemize and get a write-off on the donation, whereas a smaller gift each year might not be tax-deductible if you don’t have enough itemized deductions to exceed the standard deduction.


What’s Your State’s Report Card?  

MOAA has assessed each state's taxability of military retired pay and survivor benefits, as well as whether states have enacted legislation addressing servicemember and military family issues. For a limited time, all MOAA members can access MOAA’s Military State Report Card and Tax Guide.

Check Your State

About the Author

Rachel L. Sheedy, CFP®
Rachel L. Sheedy, CFP®

As a senior editor at MOAA, Rachel L. Sheedy, CFP®, develops, writes, and edits content for Military Officer magazine, with a focus on personal finance coverage.