Midyear Tax Planning

You thought tax season was over, didn’t you? Sorry about that. 

Much like everything else with respect to your finances, taxes need to be monitored throughout the year. Doing so will save you bundles come tax filing time next April.

This time of year, you probably have a good feel for how things have gone and what can be expected in the remaining months of 2017. Are you getting married? Are you have a child? Another child? Are you about to enter retirement?

There are many life events that happen throughout the year that will have an effect on your tax situation. It’s best to do some planning now.

What if you haven’t had any major changes yet this year, and don’t expect any by the end of the year? This is still a great time to see if you can reduce your taxes by saving more for retirement, gifting to family members, or donating to charity.

Taking a couple hours to review your tax situation now will yield benefits for years to come, here are a few considerations:

Did you change jobs or get a raise? 

If you are a W-2 employee (and receive a regular paycheck from your employer), you don’t necessarily need to worry about changing your withholding if you get a raise, as your tax withholding will adjust accordingly. However, if you received a large tax refund this past April, you should consider making an adjustment.

When you receive a tax refund, you have effectively given the government an interest-free loan by paying too much in taxes throughout the previous year. By withholding a smaller amount from each paycheck, you will be able to invest the money that is rightfully yours.

Consider using any newly available funds to increase your 401(k) contribution percentage, until you reach the annual contribution limit of $18,000.

Did you have a child?

If you have had a child, or are expecting to have a child before the end of the year, you will be entitled to the Child Tax Credit of $1,000 for the 2017 tax year. This does come with income restrictions, however. For a married couple filing jointly, the income limit is $110,000.

Is your household income going to be slightly over the $110,000 limit? If you maximize your 401(k) and HSA contributions, you could earn up to $152,750 and still receive the Child Tax Credit! 

How does this work? If both spouses contribute the maximum to their 401(k) ($36,000 total) plus their household HSA ($6,750 total), they can reduce their taxable income from $152,750 down to $110,000, as these contributions receive a current year tax-deduction.

This should show you the great benefits of properly utilizing your tax-advantaged accounts. Not only are you contributing to your future retirement, you are receiving an extra $1,000 today! 

Did your child go to college?

As we’ve talked about before, there are multiple ways to pay that alarmingly high college tuition bill. One of the great tax benefits to paying for college is the American Opportunity Tax Credit (AOTC), in the amount of $2,500. 

The amount of the tax credit is 100% of the first $2,000 of qualified education expenses, and 25% of the next $2,000 of expenses, per eligible student. This means if you pay $4,000 for qualified education expenses, you will receive the full credit of $2,500. 

Over a four-year period, this is $10,000 that can go towards paying the college bill.

Did you get married?

Congratulations on getting married! Now, what changes will happen with respect to your finances? Much like getting a raise, it is important to review your tax withholding and make any necessary adjustments. Also, consider what tax planning opportunities you may have with income outside your day job.

Changing from Single to Married Filing Jointly will help reduce the total taxes paid between you and your partner. Be sure to review how much you are saving to achieve your family goals, and maximize contributions to tax-advantaged accounts.  

Did you retire?

Depending on exactly what age you retire, you may have some magnificent tax planning opportunities. When entering retirement, you will probably find yourself with a minimal income tax rate (due to a lack of earned income) and a bucket of money saved up in tax-advantaged accounts (like your IRA).  

If this is the case, you can take advantage of your lower tax bracket by converting some money from your Traditional IRA to your Roth IRA. By “filling up” your lower tax brackets (paying taxes at the lower tax bracket rates) you will move money into the tax-free Roth IRA. This will help you greatly when you turn age 70 ½. At this time, you will have to take Required Minimum Distributions from your Traditional IRA, which could result in paying more taxes than you’d pay today. The more money that’s in your Roth IRA, the better.

Looking Ahead

These are just a few examples of the tax planning opportunities you have now that we are midyear. This should give you ample time to talk with your financial planner or accountant to make sure you are being as efficient as possible with your finances.


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