Keys to Reviewing Fresh Tax Returns

by | Apr 21, 2023 | Blog

By Adam K. Wright, CFA®, CFP®

As the tax season winds down, many people are eager to put away their tax returns and forget about the topic until next year. At Wright Associates, we believe that reviewing your freshly completed tax return and proactively tax planning are just as important as properly filing the return itself. There are many steps you can take between now and next year that can set you up for success come tax season. That’s why we’ve put together this guide for pre-retirees and retirees who are good with their money but want to be great. Use the tips below to be proactive with your tax strategy and maximize your wealth.

Important Tax Changes for 2023

The SECURE Act 2.0 has created several important tax changes that both pre-retirees and retirees should keep in mind in 2023:

  1. Changes to RMD Ages: With the new legislation, the RMD age has been increased to 73 for those born between 1951 and 1959. The RMD age will increase again in 2033 to age 75 for those born in 1960 or later. Implementing additional tax-planning strategies before RMDs commence may help mitigate your overall tax liability in the future. 
  2. Expanded Roth Options: SECURE 2.0 will allow participants to elect Roth contribution status for SIMPLE and SEP IRAs starting in 2023. This greatly expands the tax-planning opportunities for individuals who have access to these retirement plans, but may not be eligible to contribute to a Roth IRA directly.
  3. Changes to Qualified Charitable Distributions: Individuals age 70½ with an IRA are eligible to distribute up to $100,000 per year to qualified charities that will count in lieu of an RMD. The $100,000 limit will be indexed for inflation starting after 2023, which means this limit will increase each year. 
  4. Updates to QLACs: If you are looking for another way to delay your RMD, or purchase guaranteed retirement income, a qualified longevity annuity contract may be a good option. Thanks to SECURE 2.0, you can now use up to $200,000 of qualified retirement funds (from an IRA or 401(k)) to purchase QLACs. This limit is adjusted for inflation each year, and the RMD on the portion of income used to purchase a QLAC will be delayed until age 85.

For more detailed information about the SECURE 2.0 changes to be aware of, download our checklist here.

What to Consider When Reviewing Taxes As a Retiree

As a retiree, your income is relatively fixed. Even if you have a part-time job or a large retirement nest egg, chances are you don’t have the same flexibility with your monthly income as you did when you were working. Minimizing your tax liability becomes extremely important in order to help generate tax efficient retirement income. Here are four ways your current tax return can help you plan for next year (for the full checklist, click here).

Understand Your Tax Bracket

Understanding your tax bracket is an important consideration when reviewing tax returns because your annual income can impact your Medicare costs. Both Parts B and D are subject to an additional premium charge called the Income-Related Monthly Adjustment Amount (IRMAA) depending on how much you make. For instance, married couples with modified adjusted gross incomes between $194,000 and $246,000 will pay an additional $65.90 per month per person for Medicare Part B and $12.20 per month per person for Part D. Understanding where you fall in the tax brackets helps you better plan for healthcare expenses throughout retirement.

Properly Record QCDs on Your Return

If you choose to donate to a charity through a QCD, be sure to record the distribution properly on your tax return to avoid any tax penalties or errors. When reviewing your tax return, any QCDs should be reported on Form 1040, Line 4b to indicate they are excluded from taxable income. Keep in mind that QCDs are not like other charitable donations in that they cannot be claimed as an itemized tax deduction. Since the distribution is already tax-free, claiming it as a tax deduction will be considered double-dipping and can result in penalties.

Update Withholdings on Retirement Account Withdrawals

Another important consideration when reviewing your tax return is whether or not you owed taxes on your retirement withdrawals. Pre-tax retirement accounts like traditional IRAs and 401(k)s are subject to income tax upon withdrawal. If you didn’t withhold enough and owe additional taxes this year, consider increasing your withholding on future retirement account withdrawals to cover the additional tax liability. On the other hand, if you have overpaid on taxes for the year, consider decreasing your withholding to avoid overpaying in the future.

Deduct Large Medical Expenses

Medical expenses can include anything from doctor visits to prescription drugs, and if they are significant, they can be deducted on your tax return. To qualify for the deduction, your medical expenses must exceed 7.5% percent of your adjusted gross income (AGI). For someone with an AGI of $100,000, medical expenses must exceed $7,500 before they are deductible. Review your tax return to better understand your medical expense threshold. If you’re on track to surpass this amount, save any receipts or invoices related to medical expenses to help you properly report the deduction come tax season. 

What to Consider When Reviewing Taxes As Someone Who Is Still Working

For those who are still working, there are additional strategies that can be used to reduce your tax bill and plan for next year. For the full checklist, click here.

Bunch Charitable Contributions

For those who are charitably inclined but don’t donate enough to surpass the standard deduction, consider bunching your charitable contributions. This is a tax-planning strategy that involves grouping together multiple years’ worth of charitable contributions into a single year to increase your itemized deductions above the standard deduction.

Understand Estimated Tax Payments

If you earn self-employment income, it’s wise to understand your tax liability and whether you should be making quarterly estimated tax payments this year. Making estimated tax payments can help you avoid any potential underpayment penalties, and pay the correct amount of taxes throughout the year.

Review Capital Gains & Losses

If you reported any capital gains or losses, make sure you review your tax return and create a plan for how to reduce these in following years. Schedule D, Line 13 will report any capital gain distributions while Schedule D, Line 6 and Line 14 will report short-term and long-term loss carryovers. Loss carryovers can be used to offset future capital gains and potentially taxable income, so this information is crucial for tax planning.

Contribute to a Roth IRA

Depending on your taxable income, you may be eligible to contribute to a Roth IRA. This is an attractive savings vehicle for many reasons, including no RMDs, tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. If your income is above certain limits, you may not be able to open an account outright. If that’s the case, you can potentially use a backdoor Roth strategy to make a non-deductible contribution to a traditional IRA and then convert it to a Roth. This can be particularly beneficial for those who expect to be in a higher tax bracket in retirement.

We’re Here to Help

Navigating tax returns can be a confusing process, but the Wright Associates team is here to help. We can help proactively manage your tax strategies so you can make the right money choices now and in retirement. Schedule a complimentary phone call to get started today.

About Adam

Adam Wright is a CERTIFIED FINANCIAL PLANNER™ professional at Wright Associates, helping clients plan and prepare their investments to retire on their terms. If you’re serious about planning for your retirement and investing for your future, his annual process will help you make the right money choices today. Therefore, Adam and his team will proactively manage your accounts while communicating the progress of your financial plans. He believes the retirement advice you receive should be intentional and actionable.

Adam has a Bachelor of Science in Supply Chain and Information Systems from The Pennsylvania State University and a Master of Business Administration from University of Pittsburgh, Katz Graduate School of Business. He lives in Upper St. Clair with his wife and two children. When he’s not working, Adam enjoys the outdoors (fly fishing), reading, and taking long runs while listening to a favorite podcast. He’s also currently encouraging himself to take up golf. To learn more about Adam, connect with him on LinkedIn.


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