If you’re one of those people who is scrambling to finish your taxes by the end of the year, you may want to change your strategy by reviewing your finances mid-year. This is typically a great time for a check-up to make sure you are receiving optimal tax benefits and minimizing tax liabilities that may arise from changes in your life. Here are some things you should focus on for your mid-year tax checkup:
1. Consider Life Changes
Did you get the raise you’ve been waiting for? Changed jobs? Buy a home? Have another child?
Any of these big life changes can impact your taxes, from deductions to withholdings, so it is extremely important to be aware of your financial status and assess any financial changes in your life. When you’re young, your tax concerns are typically only wage income and educational costs; however, as you get older, your business and family investments increase the complexity of your taxes. If you have noticed that your financial situation has changed drastically, ask yourself questions like, “Would a contribution to my IRA help reduce my tax bill? Do I need to file a separate tax return for my children? What is the best way to plan for the sale of my business to reduce potential taxes for my family?”
2. Double Check Your Withholdings
The new tax law brought big changes to tax withholdings. Did you owe more money last year when you were expecting a refund? Was your refund much more or less than you expected? You are not alone - many people were surprised - or even stunned - when they received their final tax results. Eliminate the guesswork by having a paycheck checkup now.
3. Maximize your Deductions & Credits
Check to see if your eligibility has changed regarding major expenses, especially surrounding student loan deductions, joint filing deductions for newly married couples, or childcare.
Did you buy a new house? You can now deduct your mortgage interest and your property taxes, albeit with some new limitations courtesy of the new tax law.
Did you have another child? You will now have an additional tax exemption.
Did you get married or divorced? Now your filing status will change.
Are you feeling philanthropic? The new tax law has brought changes to charitable deductions as well. You may want to consider "bunching" two years' worth of contributions into a single year - if your particular situation warrants it.
Remember: it is important to be aware of these things now, instead of in April when you are filing your taxes!
4. Review Changes in Tax Law
It is important to be aware of the ever-changing aspects of the tax law - here are some important points to consider:
- Inflation: Each year, tax brackets are adjusted to account for inflation, which can impact how much income tax you will have to pay. The highest tax brackets are the ones that shift most frequently, so if you are in a household that is earning over $470,000, you may want to monitor your status to see whether you get bumped into a new bracket.
- Health Care: Because the Affordable Care Act is still in place, taxpayers who don’t have proof of insurance will receive a tax penalty. Remember, if you receive subsidies from the government to pay for your plan, you must supply this information when you file as well.
- Medical Expenses: Are your out-of-pocket expenses growing rapidly? If you itemize your taxes, you can deduct medical expenses that cost more than 10% of your Adjusted Gross Income.
5. Move Money to Retirement Accounts
Although many retirement accounts have yearly contribution caps, many people do not take full advantage. If you have more money than you had planned for this time of year, it is a smart idea to increase your contributions to your 401(k) or other retirement accounts such as an IRA. If you are already contributing to your retirement account, increase the amount you are saving in order to take advantage of the maximum amount! This money comes out of your paycheck on a pretax basis, meaning you can potentially receive an immediate tax break on your earnings.
If you’re self-employed, consider opening a Simplified Employee Pension Plan, which allows you to contribute as much as 25% of your net earnings.
While you’re relaxing on the beach this summer, won't be more relaxing if you know that you have properly planned, and tax time will no longer be stress-time? Don't forget that tax season is much closer than it seems! Do the proper planning and you will have a much less stressful tax season - your bank account will thank you for it!
As always feel free to contact me with any questions you may have, and enjoy the rest of your summer!