Mid-Year Tax Check-Up: Adjusting Strategies for Tax Savings
Written By: Tim Baker
Tax planning isn't just a year-end scramble—it's an ongoing process that requires attention and strategic adjustments throughout the year. As we reach the midpoint of the year, now is the perfect time to evaluate your tax situation, identify potential savings opportunities, and make necessary adjustments to minimize your tax burden. A mid-year tax check-up allows you to leverage the financial data you've already accumulated while giving you enough time to implement changes that will positively impact your tax situation before December 31st.
Why Mid-Year is the Perfect Time for a Tax Check-Up
Many taxpayers wait until December to think about tax planning, but this approach leaves little room for meaningful adjustments. By conducting a mid-year review, you gain several advantages:
You have real data to work with: Six months of income, expenses, and life changes provide a solid foundation for projections and planning.
There's still time to act: Unlike year-end planning, mid-year adjustments have time to make a significant impact on your tax situation.
You can identify problems early: Discovering issues with withholding, estimated payments, or deduction strategies gives you time to correct course.
You can be strategic rather than reactive: With months remaining in the tax year, you can implement thoughtful strategies rather than last-minute scrambling.
Key Areas to Review During Your Mid-Year Tax Check-Up
Income Evaluation and Projections
Begin by reviewing your income from the first half of the year and projecting your expected income for the remainder. Consider:
Has your income changed significantly from what you anticipated when you set up your withholding?
Are you expecting any bonuses, investment gains, or other substantial income before year-end?
Have you changed jobs, started a side business, or experienced other income shifts?
Understanding your income trajectory helps determine if your current withholding or estimated tax payments are sufficient, reducing the risk of penalties or an unexpected tax bill.
Deduction and Credit Opportunities
Next, evaluate potential deductions and credits you might qualify for based on your activities through mid-year:
Have you had significant medical expenses that might exceed the threshold for deduction?
Are you on track with charitable contributions, and could bunching donations benefit you?
Have you made energy-efficient home improvements that qualify for credits?
Are there business expenses you could accelerate or defer for optimal tax impact?
A mid-year review lets you identify gaps in your deduction strategy and adjust your spending or timing accordingly.
Retirement Contributions
Retirement contributions remain one of the most powerful tax-saving tools available. At mid-year, check:
Are you on pace to maximize contributions to your 401(k), IRA, or other retirement accounts?
If self-employed, have you considered establishing a SEP IRA, Solo 401(k), or other retirement plan?
Should you consider Roth conversions based on your current tax bracket?
Adjusting retirement contributions now gives these changes time to impact your total contributions for the year.
Estimated Tax Payments
For those who make quarterly estimated tax payments, mid-year is crucial for ensuring you're on track:
Are your payments aligned with your actual income so far?
Do you need to adjust your third and fourth quarter payments based on income changes?
Have you accounted for any tax law changes that affect your liability?
Proper estimated payments help you avoid underpayment penalties while preventing overpayment that ties up your cash unnecessarily.
Strategies for Individuals
Based on your mid-year assessment, consider these potential strategies to optimize your tax position:
1. Adjusting Withholdings
If your review indicates you're significantly overpaying or underpaying taxes, file a new W-4 with your employer. This is especially important if you've experienced life changes like marriage, divorce, the birth of a child, or significant income shifts.
2. Maximizing Retirement Contributions
If you're not on track to maximize retirement contributions, consider increasing your contribution percentage for the remainder of the year. Remember, 401(k) contributions reduce your taxable income, potentially lowering your tax bracket.
3. Timing Deductions Strategically
Based on your projected income, determine whether accelerating or deferring deductible expenses would be beneficial. For instance, if you expect higher income next year, postponing charitable donations might provide greater tax benefit.
4. Healthcare and FSA/HSA Considerations
Mid-year is an excellent time to review your Flexible Spending Account (FSA) or Health Savings Account (HSA) contributions. If you have an FSA, make sure you're on track to use the funds before they expire. For HSAs, consider maximizing contributions for their triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Strategies for Business Owners
Business owners have additional mid-year planning opportunities:
Business Expense Timing
Evaluate whether accelerating purchases or deferring income would benefit your tax situation. For example, if you expect to be in a higher tax bracket this year, accelerating deductible expenses into the current year while deferring income until next year might reduce your overall tax burden.
Equipment Purchases and Section 179
Consider whether making qualifying equipment purchases before year-end could benefit from Section 179 expensing or bonus depreciation provisions, allowing you to deduct the full purchase price rather than depreciating it over time.
Retirement Plan Contributions
If you haven't established a business retirement plan, mid-year is an ideal time to explore options like SEP IRAs, SIMPLE IRAs, or Solo 401(k)s. These plans offer higher contribution limits than personal IRAs and can significantly reduce your taxable income.
Entity Structure Review
Use this time to evaluate whether your business entity structure (sole proprietorship, LLC, S-Corporation, etc.) still makes sense from a tax perspective. If a change would be beneficial, you have time to implement it before year-end.
Recent Tax Law Changes to Consider
Tax laws continually evolve, and staying current is essential for effective planning. In your mid-year review, consider:
Changes from recent legislation that might affect your tax situation
Expiring tax provisions that you should leverage before they disappear
New deductions or credits you might qualify for
State and local tax changes that impact your overall tax picture
Working with a tax professional can help ensure you're aware of all relevant changes and how they affect your specific situation.
Steps to Take Now
To conduct an effective mid-year tax check-up:
Gather relevant documents: Collect pay stubs, bank statements, investment reports, and receipts from the first half of the year.
Review year-to-date information: Assess income earned, taxes paid, deductible expenses, and retirement contributions.
Project your year-end position: Estimate where you'll stand by December 31st based on current trends and anticipated changes.
Identify adjustment opportunities: Determine which strategies from those outlined above apply to your situation.
Create an action plan: Develop a concrete plan with specific steps and deadlines for implementing tax-saving strategies.
Consider professional guidance: A tax professional can provide personalized advice based on your specific circumstances and help identify opportunities you might miss on your own.
The Value of Professional Guidance
While some taxpayers can effectively conduct their own mid-year review, many benefit from professional guidance. A tax professional brings expertise in current tax law, experience with various tax situations, and an objective perspective to your planning process. They can help identify opportunities you might overlook and provide strategic advice tailored to your specific financial situation.
Conclusion
A mid-year tax check-up requires some time and effort, but the potential benefits far outweigh the investment. By taking a proactive approach to tax planning, you position yourself to make informed decisions that can significantly reduce your tax burden. Rather than viewing taxes as a once-a-year obligation, embrace ongoing tax management as an integral part of your financial strategy.
The most successful taxpayers understand that tax planning is a year-round activity. By conducting a thorough mid-year review and implementing strategic adjustments now, you ensure that you're not leaving tax savings on the table come April 15th. Take control of your tax situation today, and you'll thank yourself when tax filing season arrives.
At Baker, Chi, and Parkey, our goal is to support your financial growth and stability with trusted guidance and personalized service. To learn more or discuss your unique needs, please reach out to us directly. Please note that the information provided in this blog is for general informational purposes only and is not intended to serve as legal advice. For specific advice regarding your situation, we encourage you to consult with one of our qualified professionals.