6 Tax Strategies to Consider Midyear

Maximize Savings with a Summer Tax Checkup

After finishing your 2023 taxes, you might feel a sense of relief and think you can postpone thinking about filing for the 2024 tax year until much later. However, as summer approaches, it’s an opportune moment to begin planning your strategy to potentially lower your 2024 tax bill. Taking early action can yield benefits when it comes time to file next April.

6 tax-planning strategies to consider:

1. Examine your W-4 withholdings

Many individuals complete their W-4 form when starting a new job and then rarely revisit it. However, now could be an ideal moment to review your withholdings.

Your employer uses your W-4 form to determine the appropriate amount of federal tax to withhold from your paycheck, taking into account your income level and whether you plan to take the standard deduction or itemize deductions. Changes in your income or tax situation may mean that your current withholding is inadequate, potentially leading to a higher tax bill at year-end, or excessive, resulting in reduced cash flow throughout the year.

There are several specific reasons why updating your W-4 might be necessary:

• If you have added a dependent since your last W-4 update, adjusting your withholdings can be crucial. Updating your W-4 allows you to account for dependents, which is particularly beneficial if you plan to claim the Child Tax Credit (CTC). The CTC provides a tax credit of up to $2,000 per qualifying child under 17 years old, directly reducing your tax liability. For dependents who do not qualify for the CTC, they may be eligible for the Credit for Other Dependents, which can provide a credit of up to $500. This credit is nonrefundable and can reduce your tax liability to zero, but not below.
• If you have taken on additional work, such as multiple jobs or income from freelance or contract work, you may need to manage multiple W-4 forms or receive a Form 1099-NEC. If you have multiple W-4 forms, filling them out identically to your first form may lead to incorrect withholding amounts. For income reported on Form 1099-NEC, taxes are typically not withheld automatically, requiring you to make quarterly estimated tax payments. One approach is to adjust withholding on one W-4 job to cover the tax liability generated by income from your other job.
• If you plan to itemize deductions instead of taking the standard deduction this year, updating your W-4 can align your withholdings with the deductions you anticipate claiming. This adjustment may lower your total tax withholding for the remainder of the year.

Reflect on your tax situation from 2023. Did you owe a significant amount or receive a large refund during the last tax season? Consulting with a tax professional can help determine if adjustments to your W-4 are advisable for the current year.

To update your W-4, typically, your employer’s human resources department can provide guidance on how to submit a new form and when the changes will take effect.

2. Look for tax losses to harvest

Consider reviewing your taxable investment accounts to evaluate potential opportunities for tax-loss harvesting. This strategy involves selling investments at a loss to offset realized gains and up to $3,000 of ordinary income per year, depending on your filing status.

One challenge of tax-loss harvesting is maintaining your desired investment portfolio mix while selling positions. A strategy to achieve this involves selling a losing investment and replacing it with a similar but not substantially identical security. It’s important to be aware of the wash-sale rule, which restricts claiming a tax benefit if you repurchase the same or a substantially identical investment within a 61-day window after selling it at a loss.

3. Reconsider itemizing

If you’ve purchased a home or incurred significant out-of-pocket medical expenses this year, you might consider itemizing your deductions. Itemizing can be beneficial if you anticipate that your total deductions, including these expenses, will exceed the standard deduction thresholds for 2024, which are $14,600 for single filers and $29,200 for married couples.

There are 5 main categories of itemizable deductions. These include medical expenses, home mortgage interest, state and local taxes, charitable contributions, and theft and casualty losses due to a federally declared disaster. Each deduction category has its own set of rules and limits, ensuring that you meet the requirements for each deduction you claim.

If you anticipate itemizing your deductions, it’s advisable to start organizing now by maintaining thorough records of the expenses you intend to claim. This preparation ensures you have all necessary documentation in order when it comes time to file your taxes.

Planning ahead for itemizing deductions can also influence other financial decisions throughout the year. For instance, if you anticipate itemizing deductions this year instead of taking the standard deduction, you might consider “bunching” several years’ worth of charitable donations into the current tax year. This strategy can maximize your deduction for charitable contributions in a single tax year, potentially providing greater tax benefits compared to spreading out donations over multiple years.

4. Boost your pre-tax contributions

Contributions made to traditional employer retirement plans, traditional IRAs, and health savings accounts (HSAs) can lower your current federal taxable income directly, as they are funded with pre-tax dollars. If you have the financial flexibility and it aligns with your overall financial strategy, consider boosting your contributions to these accounts:

• Participants in employer-sponsored plans like 401(k) and 403(b) can typically contribute up to $23,000 for the 2024 tax year, with December 31 as the deadline for contributions. Individuals aged 50 and above have the option to make catch-up contributions of up to $7,500.
• For traditional IRAs, you have until the federal tax filing deadline in April 2025 to contribute for the 2024 tax year. The contribution limit is $7,000, which increases to $8,000 if you are aged 50 or older and eligible for catch-up contributions. Contributions to traditional IRAs may offer immediate tax benefits for the current year. However, consider the potential long-term tax advantages of Roth IRA contributions as well.
• If you are enrolled in a high-deductible health plan (HDHP), you may qualify to contribute to a health savings account (HSA), which allows you to save for both current and future qualified medical expenses. For the 2024 tax year, individuals can typically contribute up to $4,150 annually to an HSA. Families covered under a high-deductible health plan can contribute up to $8,300 per year. Individuals aged 55 and older can make an additional catch-up contribution of $1,000. For married couples covered under a family HDHP and sharing an HSA, if one spouse is 55 or older and not enrolled in Medicare, they qualify for a single catch-up contribution of $1,000. If both spouses are 55 or older and neither is enrolled in Medicare, they must each maintain separate HSAs to each contribute the catch-up amount, resulting in a combined maximum contribution of $10,300 for catch-up contributions. It’s important to note that the aggregate limit for non-catch-up contributions spouses can contribute to separate HSAs is $8,300.

Unlike a flexible spending account (FSA), funds in a health savings account (HSA) can roll over from year to year, allowing them to potentially grow over time if not used immediately. Once you reach age 65, you can withdraw HSA funds for nonmedical expenses without penalty, though these withdrawals are subject to income tax.

These contributions not only have the potential to lower your tax liability for the current tax year but also serve as investments in your future financial security.

5. Plan for RMDs

The SECURE 2.0 Act, effective January 1, 2023, raised the age for initiating required minimum distributions (RMDs) from certain retirement accounts from 72 to 73. By 2033, this age requirement will further extend to 75 years old.

Withdrawals from traditional 401(k)s and IRAs are subject to income tax, but strategic planning can help minimize the tax impact. It’s crucial to adhere to required minimum distributions (RMDs) to avoid penalties. Beginning in 2023, the SECURE 2.0 Act reduced the penalty for failing to take an RMD to 25% of the amount not withdrawn (down from 50%). This penalty can be further reduced to 10% if the account owner withdraws the missed RMD and files an amended tax return promptly.

6. Consider a Roth conversion

Given ongoing market volatility and potential future tax increases, now might be an opportune moment to consider a Roth conversion. This involves transferring funds from a traditional IRA into a Roth IRA.

A Roth conversion allows you to capitalize on the benefits of a Roth account, such as no required minimum distributions (RMDs) and tax-free withdrawals during retirement. Although you will owe taxes on the converted amount, the advantage lies in potentially paying taxes at current rates, which could be lower than future rates. Additionally, converting when stock prices are lower can mitigate the tax impact on the converted funds.

For high-income earners, another strategy to explore is the backdoor Roth IRA. This method involves making nondeductible contributions to a traditional IRA (contributions for which you do not claim a tax deduction) and then converting these funds into a Roth IRA. It differs from a standard Roth conversion, where tax-deductible contributions from a traditional IRA are transferred to a Roth IRA.

Choose the moves that are right for you

Each individual’s tax circumstances vary, so it’s advisable to seek guidance from a tax professional to devise a financial strategy tailored to your needs. Taking time to plan during the summer can provide peace of mind, ensuring you’re well-prepared when tax season arrives.

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