Have You Given Yourself a Mid-Year Tax Checkup?

Before you head to the mountains for a week of hiking or drive to the beach for a week of sand and surf, you might want to do something a little less exciting before you go. 

As boring as it sounds, you might want to do a mid-year tax checkup. After all, a few law changes have gone into effect and these could affect you big-time during next tax season. 

Take a look at a few things before you paddle out for the next bit wave on the California coast or ride away on horseback in Wyoming. It'll ensure that you actually enjoy the rest of your summer.

Why Do a Mid-Year Tax Checkup?

Doing a mid-year tax checkup is like prepping for the holidays a few months early. You buy a few decorations, then start organizing your guest list early. In other words, you prepare in advance so you aren't surprised when Cousin Joey has planned to come (uninvited) as usual.  

Same with your taxes. You can fiddle with your withholdings, entity structure and take a look at deductions as you need to. Remember, how much you earn and spend during the year affects your taxes. 

Checkpoint 1: Your Withholdings

Have any life changes affected how much you need to withhold? You might have gotten married, adopted a child, accepted a different job, among other moves. It could all impact your withholdings. Check with the tax withholding estimator from the IRS so you know how much you will underpay or overpay throughout the year.

If your income has changed significantly, you might want to change your IRS W-4, Employee’s Withholding Certificate and ask your employer to hold more or less of your wages.

Checkpoint 2: 401(k) Contributions

Need to deposit more into after-tax 401(k) contributions? Since you make 401(k) contributions pre-tax, you can reduce your taxable income. It's a great way to reduce your overall taxable income and build your retirement savings even more.   

Remember: You can run up against the tax deadline for next year for IRA or health savings account contributions but not your 401(k).

Checkpoint 3: Retirement Account Withdrawals

Did you take a withdrawal from a retirement account during the pandemic? You can repay all or part of the funds within three years of the date you took the distribution, says the IRS.

Consider paying the repayment now if you're in a position to do so — it can help you save more later.

Checkpoint 4: Child Tax Credit

Next week, millions of families will begin receiving monthly payments for the enhanced child tax credit due to the American Rescue Plan. The plan says that parents will receive $2,000 to $3,000 but goes to $3,600 for children five years old and younger. Families with higher incomes will see less. Those who file their tax return as a single person will start to phase out if their adjusted gross income goes above $75,000. It goes to $112,500 for head-of-household filers and $150,000 for married couples filing a joint return. 

If you have kids but know you'll have a hefty tax bill come April 2022, you can opt-out of the payments and receive a lump sum next April, as long as you don't think you'll earn more and get less. Check out the Child Tax Credit Update Portal on the IRS website.

Checkpoint 5: Quarterly Estimated Tax Payments

Anyone self-employed or who operates a small business must make quarterly estimated tax payments. Late or insufficient payments may lead to fines, so try to accurately predict your income for the rest of the year as closely as you can. 

Use the Electronic Federal Tax Payment System courtesy of the IRS or mail-in checks. You should be able to easily remember the payment dates because they occur at even, quarterly intervals: 

• First-quarter payment: April 15
• Second-quarter payment: June 15
• Third-quarter payment: September 15
• Fourth-quarter payment: January 15

Check your state's quarterly payment requirements as well.

Checkpoint 6: Review Certain Items (if You Have a Business)

How well are you keeping track of your expenses and transactions? Keeping a complete record of your transactions throughout the season may mean you lose out on tax-deductible business expenses and may end up paying more in taxes. 

In addition, make sure you keep clear income records so you're ready for tax season. 

Checkpoint 7: Look into Your Investments

You also need to review your investment allocations right now and determine whether you have a strategy in place that applies to your specific risk tolerance and future savings goals.

If you haven't rebalanced your investment portfolio, recent gains may have pushed your allocation toward more stocks and fewer low-risk investments. 

You may need to sell some investments that have made money to offset some of your recent gains. 

Also, note that tax rates on long-term capital gains and qualified dividends did not change for 2021. However, the income thresholds adjusted based on inflation.

In 2021: 

• The 0% rate: Applies for individual taxpayers with taxable income up to $40,400 on single returns, $54,100 for head-of-household filers, and $80,800 for joint returns.
• The 20% rate: Begins at $445,851 for single filers, $473,751 for heads of household, and $501,601 for couples filing jointly.
• The 15% rate: For filers with taxable incomes between the 0% and 20% breakpoints.
• The 3.8% surtax on net investment income: Occurs for single people with modified adjusted gross income over $200,000 and for joint filers with modified adjusted gross income over $250,000.

Get a Comprehensive Checkup

If you have any questions, you might want to sit down with an accountant to discuss how you can save money. A tax professional can also break down your tax situation, especially when things get complicated. Look for a trusted tax professional in your area — ask friends and family — and if you own a small business, ask other small business owners for suggestions.