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Summer Tax Check-In: Stay Financially Savvy with These Mid-Year Tips

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Summer brings visions of sunshine, beach days, and relaxation, but amidst the seasonal bliss, it’s crucial not to overlook your mid-year tax check-in. Taking proactive steps now can set you up for a smoother tax season ahead and potentially save you money. Whether you’re sipping lemonade by the pool or planning a weekend getaway, here are detailed tax tips to keep in mind this July.

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1) Review Mid-Year Finances

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Mid-year is an excellent time to review your financial health and make necessary adjustments. Here’s how you can take a deeper dive into assessing income changes, evaluating expenses, and considering retirement contributions:

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Assess Income Changes

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Raises and Bonuses:

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• ‍Impact on Taxes: If you’ve received a raise or bonus, it may push you into a higher tax bracket. For example, if your raise pushes your income from $50,000 to $60,000, this could increase your federal tax rate.

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• ‍Withholding Adjustments: Update your W-4 form to reflect your new income level. Use the IRS Withholding Estimator to help you determine the correct amount of withholding. This ensures you’re not underpaying or overpaying your taxes, which can either result in a tax bill or a smaller refund at tax time.

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Example: Jane received a $10,000 raise. By updating her W-4 and adjusting her withholdings, she avoids a surprise tax bill in April.

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Side Business or Freelance Work:

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• ‍Tracking Income: Keep meticulous records of all income earned from side gigs or freelance work. Use accounting software like QuickBooks or a dedicated spreadsheet to track all earnings and expenses.

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• ‍Estimated Taxes: Calculate and pay estimated quarterly taxes using Form 1040-ES to avoid penalties. The IRS expects tax on all income earned throughout the year, not just from your main job. Resources like the IRS Self-Employed Individuals Tax Center can provide further guidance.

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Example: Mark started freelancing in addition to his full-time job. He uses QuickBooks to track his freelance income and expenses and pays estimated taxes quarterly to avoid penalties.

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Investment Income:

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• ‍Dividends and Capital Gains: Monitor dividends and capital gains from investments. For instance, if you sold stocks for a profit, this could significantly increase your taxable income.

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• Tax-Advantaged Accounts: Consider investing in tax-advantaged accounts like Roth IRAs or Health Savings Accounts (HSAs) to reduce taxable income. Resources like Investopedia offer comprehensive guides on tax-efficient investment strategies.

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Example: Sarah receives $5,000 in dividends and capital gains from her investments. She decides to reinvest this money into her Roth IRA to take advantage of tax-free growth.

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2) Evaluate Expenses

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Work-Related Expenses:

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• ‍Home Office Deduction: If you work from home, you may be eligible for a home office deduction. Ensure you maintain records of expenses such as utilities, rent, and office supplies. The IRS Publication 587 explains the rules for the home office deduction.

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• ‍Professional Development: Expenses related to furthering your career, such as tuition for work-related courses or professional certifications, can be tax-deductible. Resources like the IRS Tax Benefits for Education can provide more information.

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Example: Lisa, a freelance graphic designer, keeps track of her home office expenses and deducts a portion of her rent and utilities on her taxes.

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Educational Expenses:

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• ‍Tuition and Fees Deduction: Eligible tuition and fees for higher education can be deducted, reducing your taxable income. For more details, refer to the IRS Publication 970.

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• ‍Student Loan Interest Deduction: You may be able to deduct up to $2,500 of interest paid on qualified student loans. This deduction is available even if you don’t itemize your deductions.

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Example: Tom, who is taking evening classes for a degree related to his job, deducts his tuition and fees, lowering his taxable income.

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Related: How Interest Is Calculated On Student Loans?

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Charitable Contributions:

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• ‍Documentation: Keep detailed records of all charitable donations, including cash contributions and donated items. Ensure the recipient organization is a qualified charity by checking the IRS Tax Exempt Organization Search.

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• ‍Fair Market Value: For non-cash donations, document the fair market value of the items donated. Tools like IRS Publication 561 can help determine these values.

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Example: Emily donates clothes and household items to her local Goodwill. She keeps receipts and a detailed list of items, which she uses to claim a deduction on her taxes.

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3) Consider Retirement Contributions

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IRA Contributions:

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• ‍Traditional IRA: Contributions to a traditional IRA may be tax-deductible, lowering your taxable income for the year. The maximum contribution for 2024 is $6,500, or $7,500 if you’re age 50 or older.

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• ‍Roth IRA: While contributions to a Roth IRA are not tax-deductible, withdrawals during retirement are tax-free. Evaluate whether a Roth IRA aligns with your long-term financial goals. Resources like the IRS Retirement Plans FAQs provide additional guidance.

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Example: Jack contributes the maximum amount to his traditional IRA, reducing his taxable income and saving for retirement.

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401(k) Contributions:

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• ‍Contribution Limits: For 2024, you can contribute up to $23,000 to your 401(k), or $30,500. if you’re age 50 or older. Maximizing contributions can significantly reduce your taxable income.

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• ‍Employer Match: Ensure you’re contributing enough to take full advantage of any employer match offered. This is essentially free money towards your retirement.

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Example: Maria increases her 401(k) contributions to ensure she gets the full employer match, maximizing her retirement savings and reducing her taxable income.

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Health Savings Account (HSA):

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• ‍Triple Tax Benefit: Contributions to an HSA are tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are also tax-free. For more details, check out the IRS Publication 969.

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• ‍Contribution Limits: For 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage, with an additional $1,000 catch-up contribution if you’re age 55 or older.

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Example: Robert contributes the maximum amount to his HSA, taking advantage of the triple tax benefits and preparing for future medical expenses.

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Conclusion

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As you enjoy the warmth of summer, incorporate these mid-year tax tips into your financial planning routine. Proactively managing your taxes can lead to significant savings and reduce stress come tax season. Whether you’re making strategic purchases, optimizing your withholdings, or maximizing charitable contributions, taking these steps now ensures you’re on track for a financially secure future.

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Remember, financial planning is a year-round endeavor. Embrace the summer vibes while keeping your financial house in order – your future self will thank you.

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Stay tuned for more tips and insights to help you make the most of your money, all year round. Happy summer planning!

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Utilizing Vincere Tax, you'll be paired with a tax expert who will handle your taxes from beginning to end, tailored to your specific circumstances.

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I hope this information was helpful! If you have any questions, feel free to reach out to us here. I’d be happy to chat with you.

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Vincere Tax can help you with the tax implications of business taxes, stocks, bonds, ETFs, cryptocurrency, rental property income, and other investments.

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Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!

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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.