Midyear tax strategies
There is still plenty of time to make an impact on your taxes. Checking your tax information now reduces the chance of a surprise when you file your tax return.
You may need to change your withholdings. Examining your withholdings is particularly important if you’ve had any major life changes.
A decrease in dependents could increase your taxes by thousands of dollars.
It’s important to check your withholding if your spouse began working or had a major change in pay. If one spouse has relatively large wages and the other spouse begins a low paying or part-time, the tax consequences could be significant. The amount of withholding from a low-paying job would be very little or possibly none. The additional income would increase the taxable income, and the increase would be taxed in the high bracket.
For example, if the couple were currently in the 32% tax bracket and the other spouse started a job making $20,000, the additional taxes would be $6,400. However, since the wages were relatively small, the employer would typically withhold very little taxes or none. This would increase the tax liability by $6,400, with very little taxes being withheld.
If you or your spouse started a side business, the taxes could be substantial. Self-employment income is subject to self-employment tax in addition to income tax.
The self-employment tax rate is approximately 15%. If they were in the 22% tax bracket, the combined tax on the profit would be about 37%.
Reviewing business profit mid-year will enable the owner to project the profit and taxes for the year.
The owner may want to make a large expenditure rather than pay more taxes. Examples would be an increased marketing plan or a major business expansion. Purchasing assets allows flexibility in the amount expensed for the year. Generally, assets other than real estate can be partially or completely expensed by the business owner.
You may consider increasing your 401(k) contributions to reduce your taxes. The contribution limit is $20,500 for 2022. The limit is increased by $6,500 if you are 50 or older. Increasing your contributions has the benefit of reducing your taxable income while also increasing your retirement funds.
Since the stock market is down, tax-loss harvesting is another option for reducing your taxes. Selling stock at a loss can enable you to deduct a loss of up to $3,000 from your regular income. Any loss exceeding $3,000 can be carried forward to future years.
If your withholdings are insufficient, you can make estimated payments for the third and fourth quarters to catch up.
The IRS Tax Withholding Estimator tool can be used to see if your withholdings are correct. However, you may need to talk with a tax adviser if your situation is complex.
Reviewing your taxes mid-year can help prevent a surprise when filing a tax return.
David Zubler has an accounting degree and computer science degree with high distinction and has experience as an accounting manager and controller in manufacturing, and has owned his tax/consulting business since 1990. David Zubler is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org.