As we reach the midpoint of the year, August is an ideal time to take a closer look at your tax situation and ensure you’re on track for a smooth and successful tax season in 2024. A mid-year tax check-up allows you to assess your current financial standing, make necessary adjustments, and take advantage of opportunities to minimize your tax liability. In this detailed blog, we’ll guide you through the key areas to focus on during your mid-year tax review, including estimated tax payments, adjustments to withholding, retirement contributions, and charitable donations. By taking proactive steps now, you can avoid surprises come tax season and ensure you’re in the best possible position for the year ahead.
1. Review Your Estimated Tax Payments
If you’re self-employed, own a small business, or have significant income from sources that aren’t subject to withholding (such as rental income, investment income, or freelance work), you’re likely required to make estimated tax payments throughout the year. Estimated taxes are due quarterly, and the mid-year mark is the perfect time to assess whether you’re on track.
Why It Matters: Failing to pay enough in estimated taxes throughout the year can result in penalties and interest charges from the IRS. On the other hand, overpaying can tie up funds that could be used elsewhere in your business or personal life.
Action Steps:
Calculate Your Income: Review your income so far this year and project your earnings for the remaining months. Compare this to your estimated tax payments to date.
Adjust Payments if Necessary: If your income has increased or decreased significantly, you may need to adjust your estimated tax payments for the remaining quarters. Use IRS Form 1040-ES to calculate your revised payments.
Avoid Penalties: Ensure that your estimated tax payments, along with any withholding, cover at least 90% of your total tax liability for the year or 100% of your previous year’s tax liability to avoid underpayment penalties.
Pro Tip: If you’re unsure about your estimated tax payments, consult with a tax professional who can help you project your income and make any necessary adjustments.
2. Adjust Your Withholding
For employees, the amount of federal income tax withheld from your paycheck plays a significant role in determining whether you’ll owe taxes or receive a refund when you file your tax return. August is a great time to review your withholding and make adjustments if needed.
Why It Matters: If too little tax is withheld, you could face a tax bill when you file your return. If too much is withheld, you may receive a large refund, but this means you’ve effectively given the government an interest-free loan.
Action Steps:
Review Your Withholding: Look at your most recent pay stubs and use the IRS’s Tax Withholding Estimator tool to see if you’re on track for the correct amount of withholding based on your current income and tax situation.
Make Adjustments: If you find that your withholding is too high or too low, submit a new Form W-4 to your employer to adjust your withholding for the remainder of the year.
Consider Life Changes: If you’ve experienced major life changes this year—such as marriage, divorce, the birth of a child, or a change in income—these can affect your tax situation and may require a withholding adjustment.
Pro Tip: Adjusting your withholding mid-year can help you achieve a more accurate tax outcome, reducing the likelihood of either a large tax bill or a large refund.
3. Evaluate Retirement Contributions
Contributing to a retirement plan is not only a smart way to save for the future, but it also offers valuable tax benefits. Mid-year is an excellent time to evaluate your retirement contributions and ensure you’re maximizing the tax advantages available to you.
Why It Matters: Contributions to tax-deferred retirement accounts, such as a 401(k) or traditional IRA, reduce your taxable income for the year, potentially lowering your tax bill. Even contributions to a Roth IRA, while not tax-deductible, can provide tax-free growth and withdrawals in retirement.
Action Steps:
Review Your Contribution Limits: For 2024, the contribution limit for 401(k) plans is $22,500, with an additional catch-up contribution of $7,500 if you’re age 50 or older. The contribution limit for IRAs is $6,500, with a $1,000 catch-up contribution for those age 50 or older.
Increase Contributions if Possible: If you’re not on track to maximize your retirement contributions, consider increasing your contributions for the remainder of the year. Even small increases can make a significant difference over time.
Take Advantage of Employer Matches: If your employer offers a matching contribution for your 401(k), make sure you’re contributing enough to take full advantage of this benefit. It’s essentially free money for your retirement.
Pro Tip: If you haven’t yet opened a retirement account, it’s not too late. Consider starting with a traditional or Roth IRA, which can be opened at most financial institutions.
4. Plan for Charitable Donations
Charitable giving is a meaningful way to support causes you care about, and it can also provide valuable tax deductions. However, to maximize the tax benefits of your donations, it’s important to plan your giving strategically.
Why It Matters: Charitable contributions are generally tax-deductible, but to claim the deduction, you must itemize your deductions on your tax return. With the higher standard deduction, fewer taxpayers itemize, so planning your charitable giving is crucial.
Action Steps:
Review Your Giving Goals: Take stock of your charitable donations so far this year and consider your giving goals for the remainder of the year. Are there additional contributions you’d like to make?
Consider Bunching Donations: If your total itemized deductions are close to the standard deduction amount, consider bunching multiple years’ worth of charitable donations into one year to exceed the standard deduction and maximize your tax savings.
Keep Records: Ensure you keep detailed records of your donations, including receipts from the charitable organizations. For donations of $250 or more, you’ll need a written acknowledgment from the charity.
Pro Tip: Donating appreciated assets, such as stocks or mutual funds, can provide additional tax benefits. You can deduct the full market value of the asset while avoiding capital gains tax on the appreciation.
5. Review Your Business Expenses
For small business owners and self-employed individuals, mid-year is a perfect time to review business expenses and ensure you’re taking advantage of all available deductions. Proper documentation and categorization of expenses are essential for maximizing deductions and minimizing your tax liability.
Why It Matters: Deductible business expenses reduce your taxable income, directly lowering your tax bill. However, to claim these deductions, expenses must be properly documented and directly related to your business activities.
Action Steps:
Review Your Expenses: Go through your business expenses so far this year and ensure they are properly categorized. Common deductible expenses include office supplies, travel, meals, and equipment.
Document Everything: Keep detailed records of all business expenses, including receipts, invoices, and mileage logs. Proper documentation is crucial in case of an audit.
Consider Capital Purchases: If you’re planning to purchase equipment or other capital assets, consider making the purchase before year-end to take advantage of Section 179 or bonus depreciation deductions.
Pro Tip: Consider using accounting software designed for small businesses to track expenses and generate reports, making it easier to prepare your tax return and identify potential deductions.
6. Stay Informed About Tax Law Changes
Tax laws are constantly evolving, and staying informed about changes that may impact your tax situation is critical for effective tax planning. August is an ideal time to review any new tax laws or regulations that may affect your 2024 taxes.
Why It Matters: Changes in tax laws can create new opportunities for tax savings or impose additional compliance requirements. Staying informed allows you to adjust your tax strategy accordingly.
Action Steps:
Consult with a Tax Professional: If you’re unsure how recent tax law changes may impact your situation, consult with a tax professional who can provide guidance and help you plan accordingly.
Stay Updated: Subscribe to IRS updates, newsletters, or reputable tax blogs to stay informed about any new tax laws, credits, or deductions that may apply to you.
Pro Tip: If you’ve experienced significant life changes this year, such as getting married, having a child, or starting a new business, it’s especially important to understand how these changes affect your tax situation.
Conclusion
A mid-year tax check-up is a proactive way to ensure you’re on track for a successful tax season in 2024. By reviewing your estimated tax payments, adjusting your withholding, maximizing retirement contributions, planning charitable donations, and staying informed about tax law changes, you can minimize your tax liability and avoid surprises come tax time.
At QuickTaxes, we’re here to help you navigate the complexities of tax planning and ensure that you’re well-prepared for the year ahead. Contact us today to schedule a mid-year tax review and take the first step toward a smoother, more successful tax season in 2024.
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