Midyear tax moves to make
Take action throughout the year to minimize your tax bill.
There’s a saying that “the only guarantees in life are death and taxes.” So if taxes are guaranteed, why do most people only think about taxes in the Spring? There are several moves individuals can make during the tax year to reduce their tax liability. It’s always a great time to think about strategy. Here are five tax planning strategies to use during the calendar year.
One: Revisit your W-4 withholdings. Your W-4 determines how much tax is withheld from your paycheck. In states like Illinois, employers do not automatically adjust W-4 withholdings anymore, which shifts responsibility to individual taxpayers. Too little withholding could lead to a tax bill; too much withholding reduces your take-home pay. Make it a habit to review your W-4 each year and adjust as needed, especially if you received a large refund or owed a large amount to the IRS. The IRS’ tax withholding estimator can be a resource to you.
Two: Consider harvesting tax losses. Selling investments and other assets at a loss can offset your capital gains and up to $3,000 of ordinary income each year. If you incur a net loss of more than $3,000 in any given year, the excess is carried forward indefinitely.
If you are realizing losses on securities, be wary of the wash sale rule. If you sell a security for a loss and repurchase the same security within 30 days, your loss will not be recognized. Wait 31 days or consider purchasing a similar security within the 30 day period.
Three: Increase your pre-tax contributions. Contributing more to your 401k and HSA for example can immediately reduce your taxable income while growing your long-term savings. If you are 50 years or older, you can take advantage of catch-up contributions that are higher than limits for those 49 and below.
Four: Use a Roth conversion. Converting traditional IRA or 401k funds into a Roth IRA creates a taxable event, but you will benefit from tax-free withdrawals in retirement and no required minimum distributions. This is especially beneficial if you are in a lower tax bracket today than you expect to be in the future (e.g., career change, laid off, taking a pay cut).
Five: Think about itemizing. Recall the key itemized deductions: state and local income or sales taxes, real estate taxes, home mortgage interest, losses from a federally declared disaster, charity, and unreimbursed medical expenses. If you missed out on 3% interest rates, your property taxes significantly increased, or you incurred significant medical expenses, itemizing may save you more than the standard deduction.
We think about taxes all year round so you don’t have to. Contact us today to discuss these and other strategies to minimize your tax liability for the current and future years.
