Most taxpayers think about taxes twice a year: in December, the last month of the year to make certain tax moves; and in April, when tax returns are due. In this article, we discuss some things you can do partway through the year to help your tax picture before it is too late to make any changes in December.
Check your withholding
Whether you are working or retired, checking your tax withholding mid-year can save you from an unpleasant surprise next April. The IRS has an easy-to-use tax withholding calculator at https://apps.irs.gov/app/tax-withholding-estimator.
You can use this calculator if you are working at a job that withholds taxes for you, if you are retired and taking a pension, or if you are making withdrawals from a tax-deferred retirement account like a traditional IRA, inherited traditional IRA, or 401(k).
You will need to know how much taxable income you have year-to-date and how much you have withheld in federal taxes. A recent paystub will contain this information. For those taking a pension or withdrawals from a retirement account, you may have to gather this information from your statements.
Your state tax agency may have its own withholding calculator available. Once you know if you should update your withholding, contact your payroll department, pension administrator, or IRA custodian to update your withholding.
If you have a complicated tax situation, consult with your tax preparer before making any changes.
Make charitable contributions
Many people wait until the end of the year to make large charitable contributions. If you have to take RMDs (Required Minimum Distributions) or have highly appreciated stock holdings, giving now may be better for both you and the charity.
Individuals over 70 ½ who own traditional IRAs can make direct contributions to charity. If you have to take RMDs, your donation can count towards your RMD for the year. This strategy prevents the IRA withdrawal from increasing your taxable income for the year. You then do not report the charitable contribution made with these funds but it is still a net tax savings for many people.
Donating appreciated stock (held outside of a retirement account) to charity can often provide you with more benefits than donating cash. When you donate appreciated stock, you do not realize a potentially large taxable capital gain and the full fair market value of the stock counts as a charitable gift.
These contributions can be made at any time of the year and mid-year is a great time to plan out your donations for the rest of the year.
Max out your retirement contributions
Mid-year is a great time to check on your progress towards maxing out your contribution to a 401(k), 403(b), or other type of retirement plan if you are still working. The 2024 contribution limit for a 401(k) is $23,000 plus $7,500 for individuals aged 50 or over.
If you do not currently have a workplace retirement plan, call us at (858) 755-0909 to find out the best ways to save for your retirement.
Watch your realized gains
Paying realized gains taxes can be an unpleasant surprise at tax time if you don’t plan for it. Mid-year gives you the opportunity to see how much realized gains you have accumulated for the year and to predict how much more you will likely accumulate before year-end.
Long-term capital gains (on assets held for more than one year) are taxed at a much more favorable rate than short-term capital gains (on assets held for one year or less). Qualified dividends are taxed as long-term capital gains and most interest is taxed at your short-term gain rate. Many mutual funds and exchange traded funds (ETFs) also distribute long- and short-term capital gains near the end of the year.
Remember, these taxes only apply to investments outside of a qualified retirement plan so you do not need to count interest, dividends, or capital gains earned inside an IRA or a 401(k).
If you have questions about the amount of realized gains in one of the accounts managed by AMM, we would be happy to help provide you with that information and provide a projection for the rest of the year.
Make non-taxable gifts
You can make gifts of cash or other assets to individuals without dipping into your lifetime gift tax exemption as long as you do not exceed the annual gift tax exclusion amount which is $18,000 in 2024. This could include contributions to 529 plans, gifts to children or grandchildren, or gifts to other individuals.
The limit is a per-person per-year limit so someone with 5 grandchildren could gift $18,000 per grandchild in 2024 without involving the IRS. That is a total gift of $90,000! Those with large assets could really take advantage of this limit in order to pass money out of their estates before death.
If you are a married couple, each of you can give $18,000. This means that each person could receive $36,000 without impacting your lifetime exclusion. You would need to file a gift tax return and elect gift-splitting.
Take advantage of clean-energy credits
The IRS has two types of clean-energy credits you could claim: the residential clean energy credit and the energy efficient home improvement credit. The residential clean energy credit lets you deduct up to 30% of the cost of a solar panel system as well as some other clean energy generating systems. This credit can provide large tax savings the year you install and pay for the system.
The energy efficient home improvement credit also provides a credit of up to 30% of the cost of insulation, exterior windows, or exterior doors if they meet the IRS’s criteria. This credit is limited to a certain dollar amount depending on the feature installed.
Call your advisor at American Money Management if you want to take advantage of any of these mid-year tax moves.
