Midyear Tax Planning Strategies: What to Do Now

It probably feels as though you just filed your taxes — and here we are offering an article on midyear tax planning. The truth is that while many people are understandably tuned into taxes in March and April when filing season is in full swing, tax planning is most effective as a year-round endeavor.

Of course, that's in part because taking a proactive approach to tax planning can help minimize your tax burden when filing season inevitably arrives. But the peace of mind that can come from taking charge of your finances (and your taxes), so that you can focus on living your best life, is valuable as well. 

So, with that in mind, here are a few midyear tax planning strategies and tips.

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Midyear Tax Planning: First, Know Your Goals 

On its face, tax planning involves looking at your various sources of income and considering the ins and outs of different tax deductions, credits, and exemptions. But to be most effective, at least at the start, tax planning should be about you and your personal and financial goals. So, try to begin your midyear tax planning process with a strong sense of where you are financially and where you want to be.

• This might mean revisiting an existing list of short-term, mid-term, and long-term wants and needs to see what you have accomplished during the first part of 2023. 
• Also, make note of which goals need more attention, and why. 
• On the other hand, if you haven't had a chance to write down goals for this year, midyear is a great time to do that. 
  

For example, maybe you want to continue feeling comfortable in retirement, so your emergency savings will need a boost. Or perhaps you want to travel more, so you'll need sufficient cash to spend at a favorite destination.

• Writing your goals down and assessing them through a midyear lens can help clarify them. 
• In turn, the clarity that you gain from revisiting personal and financial goals can help your tax adviser (if you have one) know how best to help you.

Tax Planning Strategy: Meet and Discuss

Another helpful step for midyear tax planning is meeting with a trusted tax or financial advisor and discussing your goals. This is a good time to get answers. 

• For example, you might want to get your advisor's take on where you are now relative to this time last year in terms of your potential tax liability. 
• Also, where are you now compared to where you expected or wanted to be at this point in 2023?

Maybe your goals have changed significantly since you last met with your advisor. Life can move fast, and our perspectives on what's important in our lives can shift quickly (or subtly) as well. A midyear tax planning meeting is a good time to make your advisor aware of any life shifts or changes in your financial situation, personal circumstances, or perspective. (Those might impact your taxes). 

Also, common circumstances like selling your home (or wanting to), buying a car, or starting or ending a business, job, or marriage can have significant tax consequences. Be prepared to share that kind of information with your tax advisor so that you have a complete picture of your potential tax liability for the year. (The more vivid that picture, the easier it will be for you or your advisor to tailor tax strategies to your situation.)

Tax Planning Strategy: Assess and Estimate

Of course, a major aspect of midyear tax planning involves assessing and estimating your taxable income. So it's a great time to take stock of your various sources of income (earned and unearned) and estimate your tax liability. 

Knowing your potential tax burden midyear can help you map out estimated tax payments and, if you're collecting a paycheck, make critical midyear tax withholding adjustments. Additionally, if you're self-employed, midyear is a great time to assess the state of your business and potential liabilities so that you can make estimated tax payments if needed.

Retiree Tip:

• When you're assessing and estimating, if you're an older adult or retiree, don't forget about required minimum distributions (RMDs). 
• There are new rules governing RMDs thanks to SECURE Act 2.0, which was passed in 2022. 
• The age for taking your first RMD changed to 73 and there is a bit of penalty relief if you fail to take your RMD on time. 

Also, take some time to assess your Social Security income. Due to inflation adjustments, many older adults have seen increases in their Social Security checks, which, for some, can affect tax liability. (Generally, up to 85% of Social Security benefits may be taxable.) 

Tax Planning Strategy: Minimize and Maximize

A complete picture of your goals, life shifts, and income is important because taxes and seemingly endless tax rules can be complicated. Thankfully, you and every other taxpayer are entitled to legitimately take advantage of deductions, credits, and exemptions. 

Given that, another reason midyear tax planning is helpful is that reducing tax liability and taking advantage of tax deductions often hinges on timing — that is when it's best to incur certain expenses or income.

For example, you might have plans that will trigger capital gains or losses, or you may end up taking two RMDs in a year. Or you might have to make estimated tax payments due to higher-than-expected dividend income. The tax burdens associated with these kinds of events might be minimized at tax time because you are engaged in midyear tax planning now.

• Also, while you are considering ways to minimize your taxable income, remember that charitable giving doesn't have to wait until the end of the year. 
• Midyear is a good time to make charitable donations and, yes, you could potentially reap tax benefits later as well if you end up itemizing deductions.

Midyear Bottom Line: Get and Stay Organized 

Midyear is a great time to think about what went wrong during the most recent tax filing season and to vow to do better next year. For example, if you weren't happy with your preparer last tax season or are ready to make a change for other reasons, take time now to look for a qualified tax professional. Or, if you have been doing your own taxes, perhaps you want to investigate different filing options or find a trusted source of advice to guide you next time.

• Additionally, midyear is a great time to read up on changes and key amounts that could affect your tax liability for 2023. Stay tuned to inflation-adjusted amounts for tax credits and deductions you typically claim. 
• And if you are collecting Social Security, make a note of the yearly cost-of-living adjustment (COLA). 
• Also, pay attention to state tax changes. Many states have passed major tax legislation this year, and those changes can impact your finances and taxes.

But most of all, use midyear to get (and stay) organized.  

• When potential tax-related paperwork or information flows in, keep it in one place. 
• Consider scanning important documents or, in some cases, shredding what you don't need. (It's generally a good idea to keep tax records for at least three years from when you filed your tax return. But if securities losses or bad debt are involved, you might need to hold onto those records for up to seven years.) 
• Above all, create a system that works for you to track income, expenses, donations, and the like. 

Doing those things and engaging in the goal-setting and strategizing aspects of midyear tax planning should help free up time to do what you love most — which, for many people, probably isn't taxes. 

Note: This item first appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.