Mid-Year Tax Planning You Can Use

Why Mid-Year Tax Planning Matters:

If you had any life-changing events, or expect one before the end of the year, there is reason to review your finances and do some mid-year tax planning now. Life events include new jobs, second jobs, loss of a job, a new home, unemployment benefits, inheritances, unusual employment bonuses, etc. Planning now can help save taxes and improve your financial situation before the end of the year.

Action Steps:

• Check withholdings: There are many situations when withholdings from your paychecks may result in under withholding. These situations include:
  • Bonus pay – bonuses can have federal withholding calculated at statutory rates that are too low for higher income individuals or dual income families.
  • Dual income households – If you and your spouse work, or you have two jobs, this frequently results in under withholdings due to how the payroll tax tables work.
• Retirement plan contributions: If you are not maximizing the tax benefits of employer retirement plans, consider doing so now to maximize benefits for the remainder of the year.
• HSA plan contributions: If you are qualified to contribute to a Health Savings Account, consider maximizing this. Many employers allow for contributions through your paychecks. This is the easiest way to save under these plans. If you make these contributions through your paycheck you not only save on federal and most state taxes, you also reduce the Fica and Medicare taxes you pay. If you want to really maximize an HSA account’s benefits, consider funding the maximum every year, and let it grow until retirement. You get a tax deduction, earnings grow tax-free and all distributions are tax-free if used for qualified medical expenses.
• College savings plan contributions: Contributions to these college savings 529 plans need to be made by December 31^st each year. While there is no federal tax deduction, many states allow for a state tax deduction. Even better, the earnings grow tax free and distributions are tax-free if used for qualified medical expenses. And with new laws, a portion of unused funds can be rolled over into a Roth IRA for the beneficiary.
• IRA and Back Door Roth Contributions: IRA contributions are good ways to save taxes, but you have to be careful about income limits that may affect the deductibility. This requires good planning. Also, Roth IRA contributions are possible, despite income limitations, if you set up your finances correctly using a “back door Roth” strategy.
• Charitable Giving: If you are charitably inclined, donating to charities can produce tax benefits. You will need to itemize your deductions to benefit, but there are ways to “bunch” deductions in one year to maximize your tax benefits. Also, taxpayers above age 70-1/2 can make gifts to charities from their IRAs and reduce income even if you don’t itemize.
• Investment Income: Investment income is taxable, but there are things that can take out the sting of taxes. Some strategies include allocating income producing assets to deferred accounts (IRAs, Roth IRAs, 401(k)s, etc), investing in tax free bonds, focusing on qualified dividends in your taxable accounts, tax-loss harvesting, etc.