Tax Planning Strategies for Today

Procrastinators beware: Tax planning isn’t just something you have to deal with at the end of the year and then again in April.

While it’s tempting to pay your taxes and forget about them until next year, a mid-year review can ensure you aren’t overpaying Uncle Sam.

“People should look at their tax exposure mid-year because those that do tend to pay less in taxes than people who do not,” says David McKelvey, partner at accounting firm Friedman. “There are moves that taxpayers can make, but the real value is the ability to plan out actions for the balance of the year.”

Mid-year tax planning can also make life less stressful when April 15 rolls around, especially for those that change tax brackets and might be facing a bigger-than-normal bill.

“Often, individuals will put off tax planning until the end because it is much easier to summarize and estimate finances for the remainder of the year when they are already three-quarters of the way done,” says Megan McManus, CPA and tax manager at accounting and business consulting firm Sensiba San Filippo. “However, for some tax rules and exemptions, there is a limited window of opportunity to take advantage of the rules.”

To help reduce any surprises come tax season and take full advantage of all eligible breaks and credits, experts offer the following tips:

Look at Your Tax Bracket

People with taxable income of more than $400,000 for individuals and $450,000 for couples are subject to the highest income tax rate, which according to McKelvey, currently stands at 39.6%. If you expect to fall into the top tax bracket this year, he says now is the time to create strategies to reduce your taxable income.

For instance, he says you can take steps to defer income or accelerate deductible expenses to get into a lower bracket. Even if you aren’t a high earner, any moves to reduce your taxable income means less money you’ll owe Uncle Sam. “If you find you may be close to jumping into the higher bracket, steps can be taken to reduce income,” he says.  “Increase retirement contributions, harvest losses from investment accounts, look at non-taxable investments and gifts to charities.”

Max Out Your Tax Advantaged Retirement Account

Many employers offer their workers some form of a retirement savings plan that often includes a match offering, and experts say the middle of the year is a great time to make sure you are taking full advantage of your benefits package.

Increasing your retirement contributions can help build your nest egg quicker, but it can also help you pay less taxes, says Sarah Deierlein, an enrolled agent at Tax Defense Network.

"Most people have their highest taxable income during their working years. Therefore, by maximizing your savings and reducing your taxable income now, you will be able to pay tax on the income when you are retired and your taxable income is lower each year," says Deierlein. She noted 401(k) accounts allow for up to $17,500 in contributions or $23,000 if you are 50 or older, and IRAs allow for $5,500 in contributions or $6,500 if you are over 50.

Consider Your Investment Gains and Losses

If you are lucky enough to realize (or plan for) significant capital gains from investments this year, now is an ideal time to sell some underperforming investments to generate losses to help offset your gains.

This move is extremely important if you are a high earner because the capital gains for taxpayers in the top bracket is 20% this year, says McKelvey. He says you may even be able to repurchase those underperformers as long as you wait at least 31 days after selling them.

Check Up on Your Medical Expenses

If you have a lot of out of pocket medical expenses, experts recommend looking into enrolling in a flexible spending account or a health savings account.

These accounts let you cover medical expenses with tax-free dollars and reduce your taxable income for the year. According to McKelvey, you can contribute up to $3,300 per year for individuals and $6,550 per family.

“One thing to note is that the use-it or lose-it policy been amended by The Affordable Health Care Act, meaning that an employee can now have up to $500 from their Healthcare FSA rollover into the next year without losing any funds,” notes McManus.