Summer Review Tips
Want to avoid tax surprises next Spring? Taking a little time now to review your situation can help avoid just that. Did you experience any life changing events? Want to increase your retirement contributions or change your income tax withholdings? A mid year review gives you a chance to implement changes that may lower your tax bill.
Here are some of API’s favorite Summer Review tips to help you form a plan of action:
- Review for Life-Changing Events that affect your tax bill. These events include: marriage, divorce, death, a new baby, having your student “graduate” to becoming a non-dependent, changing or losing or adding a second job, retirement, etc. You will want to plan for these significant tax implications accordingly. A simple adjustment to your estimated tax or employment withholding can handle many situations. Your tax advisor can assist you with more significant changes.
- Review for Estimated Tax. If you earn income that is not subject to withholding you may need to pay estimated tax. This may include income such as self-employment, interest, dividends or rent. If you expect to owe a thousand dollars or more in tax, and meet other conditions, you may need to pay this tax. You normally pay it four times a year.
- Review the amount you are Withholding from your paycheck and retirement distributions. If you received a big tax refund, had a sizeable tax balance or experienced any of the life changes above, you should evaluate whether you’re having too much or too little withheld. For most employees, a new Form W-4 can be filed with your employer at any time. And you can usually specify the % or amount of withholding from each taxable retirement plan distribution.
- Review your Retirement Plan Contributions. A simple way to reduce your taxes is to take advantage of tax-advantaged retirement accounts. If you are in the 25% tax bracket, every $1,000 pre-tax contribution will potentially reduce your taxes by $250. The earlier you start contributing or increasing your contribution rate in your retirement plan, the more time you’ll have to maximize your tax savings, while lessening the impact on your monthly disposable income. The limits you can contribute were raised in 2015. For example you can contribute up to $18,000 to your 401(k) or $24,000 for those over age 50. Self-employed SEP-IRA plan limits are 25% of compensation, to a maximum of $53,000.
- Review your Investment Performance. If you have investment gains, you may want to start planning a tax-loss harvesting strategy (i.e. timing the sale of certain loss producing sales to cancel out some of the tax you might owe on your gains.) By reviewing your portfolio now, you will have more time to determine which investments you want to sell and more time to research which investments you will purchase to take its place to keep your portfolio in balance.