As we reach the midpoint of the year, it’s a great time to review your financial situation and make necessary adjustments to minimize your tax liability. Here are five mid-year tax planning strategies to consider:
1. Check Your Paystub for Withholding Accuracy
It’s crucial to ensure that your tax withholding aligns with your income. A couple of years ago, we had a client who, halfway through the year, had already made twice as much as he did the previous year. This substantial increase in income meant that his initial withholding was insufficient to cover his tax liability, potentially leading to a hefty penalty at tax time. To avoid this, review your paystub and use the IRS withholding calculator to adjust your withholding if necessary. Making timely adjustments can prevent underpayment penalties and ensure you meet your tax obligations smoothly.
2. Maximize Your 401(k) Contributions
Another essential mid-year tax planning step is to check your progress on 401(k) contributions. Contributing the maximum allowed to your 401(k) not only secures your retirement but also provides significant tax benefits. Contributions to a traditional 401(k) are made with pre-tax dollars, reducing your taxable income for the year. For 2024, the contribution limit is $22,500, with an additional $7,500 catch-up contribution allowed if you are 50 or older. Mid-year is an excellent time to adjust your contributions to ensure you’re on track to max out by year-end.
3. Utilize the Augusta Rule for Tax Savings
The “Augusta Rule” allows homeowners to rent out their primary residence for up to 14 days per year without having to report the rental income. This strategy, named after the homeowners in Augusta, Georgia, who rent out their homes during the Masters Tournament, can be a lucrative tax-saving opportunity. To take advantage of this rule, make a plan to rent out your residence for up to 14 days by the end of the year. The income you earn from this rental period is tax-free, provided you do not exceed the 14-day limit. If you own a business you can rent out your house for business purposes for company parties, leadership meetings, etc.
4. Monitor Year-to-Date Capital Gains and Interest Income
Mid-year is the perfect time to have a conversation with your advisor about your year-to-date capital gains and interest income. Understanding your current earnings from investments can help you plan for potential tax liabilities. Your advisor can provide an estimate of your year-end capital gains and interest income, allowing you to make informed decisions about selling assets, rebalancing your portfolio, or implementing tax-efficient investment strategies.
5. Plan for Tax-Loss Harvesting
Tax-loss harvesting is a strategy that involves selling investments at a loss to offset capital gains and reduce taxable income. This tactic can be particularly useful if you have realized significant capital gains earlier in the year. Ask your advisor if they plan to take any tax losses by year-end to mitigate your overall tax liability. By strategically selling underperforming investments, you can lower your taxable income while potentially setting yourself up for better investment opportunities in the future.
Conclusion
Mid-year tax planning is an effective way to stay ahead of your tax obligations and optimize your financial situation. By checking your paystub for accurate withholding, maximizing your 401(k) contributions, utilizing the Augusta Rule, monitoring capital gains and interest income, and planning for tax-loss harvesting, you can significantly reduce your tax burden and enhance your financial well-being. As always, consult with your financial advisor to tailor these strategies to your specific circumstances and ensure you make the most of the available tax-saving opportunities.
Let us know if you have any questions on these tips or if you would like help taking advantage of them.