Tax Planning Strategies: A Mid-Year Tax Tune Up
Mid-year is the time to reassess your tax situation—pause and pivot, as it were. Take a beat to plan to leverage tax credits, maximize deductions, and adopt advanced tax reduction strategies for the back end of the year. Your tax planning strategies may need a tune-up.
Assess your current tax planning strategies
Successful mid-year tax planning starts by assessing your current tax situation. Review your previous year’s tax return to determine how changes in your life will impact your taxes. This isn’t simply administrative orderliness. It’s about giving you the runway to prepare for the rest of the year.
Life is dynamic — your financial goals from January might look different now. Perhaps you’re considering buying a new property, or there have been changes in your business revenue. These shifts can have significant implications for your tax strategies, necessitating adjustments to both your short-term actions and long-term financial planning.
Maybe you changed jobs mid-year and received a sign-on bonus or equity grant; while exciting, this can complicate your tax situation. A newer client of ours recently accepted a job offer with a $150k sign-on bonus and $150k in RSUs. This happened in a year when they received severance from a prior employer and needed help navigating their tax liability. We worked with the client to run tax projections and set quarterly payments to avoid underpayment penalties.
Plan for the remaining year
Focus on adjusting your withholding or estimated tax payments, exploring tax-saving investment opportunities, and planning for upcoming expenses or financial goals. The midyear tax planning process at Brighton Jones involves our team assisting you in making strategic decisions to minimize your tax burden while ensuring compliance with tax laws.
Optimize deductions and credits
Maximizing deductions and credits is a cornerstone of effective mid-year tax planning. You can optimize your tax strategy by exploring tax deductions related to homeownership, tax-advantaged retirement contributions, and eligible education and healthcare expenses.
Converting a traditional IRA or 403(b) to a Roth IRA can offer tax-free growth and withdrawals in retirement. The key is timing—performing a conversion during a year when your income is lower can mean paying less taxes on the converted amount.
Roth conversions offer a great opportunity to convert funds now to use as tax-free distributions in the future. However, you need to quantify the additional tax burden you will pay in the current year and assess if there is enough future benefit. One example is a client who retired early at 55 and will not have RMDs until their early 70’s. This allows us to convert funds annually while minimizing the tax impact. The client plans to defer using the Roth IRA and include those assets in their legacy plan.
Implement advanced tax reduction strategies
Advanced tax reduction strategies, such as loss harvesting, Roth conversions, and optimizing retirement contributions, can significantly lower your tax liability. However, these strategies can be complex, and consulting with a tax professional or financial advisor is crucial to determine the best approach for your situation.
If you’re expecting substantial capital gains from investments, consider the timing of these gains. It might also be advantageous to sell in a year when your other income is lower to reduce the overall tax rate applied to the gains.
Many clients come to us with concentrated stock positions. It can be tricky to diversify these assets without incurring unwanted capital gains. If possible, we may split the gain over two tax years by staggering our sales as we did for a client who needed to raise funds for a home down payment. By taking a holistic approach to our client’s balance sheets, we also pay for their cash needs over multiple years. We will look for opportunities to diversify large positions when we have a lower income year. For some clients, those first years of retirement may be an optimal time to consider this. For others who are charitably inclined, we may consider gifting strategies to minimize their taxes and maximize the impact of their gift with appreciated securities.
Keep accurate records
An organized system for tax documents is essential for effective mid-year tax planning. Tracking expenses and receipts throughout the year and utilizing digital tools simplify record-keeping. Accurate records ensure a smoother tax preparation process and maximize your tax savings.
Leverage tax credits and deductions
Identifying beneficial deductions and exploring tax credits can significantly reduce your tax burden. Charitable contributions and business expenses can provide substantial tax savings, while tax credits directly reduce your tax liability.
The Brighton Jones Tax Advisory team can help you identify targeted deductions, maximize eligible tax credits, and develop comprehensive tax planning and strategies tailored to your financial situation.
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