Summer is here, 2016 is half over, and it’s a great time to organize your taxes. It seems most of my clients wait until January to look for their records, organize their charitable donations, and review investment accounts. While it may not be fun to spend a Saturday afternoon in July reviewing your tax records, it will help you save money and time in the long run.
Review Tax Withholding
Midyear is the perfect time to review your year to date gross pay and the taxes that have been withheld so far. It is easy enough to annualize your year to date wages and tax withholding, and review a tax table to determine if you are on track. If you see that too little taxes are being withheld, you have plenty of time to adjust the allowances you claim on Form W-4 with your employer. Also, if you have self-employment income or income from interest, dividends, royalties, and such, you need to make sure you are paying in adequate estimated tax payments. The first two estimated tax payment due dates have passed, but you have time to “catch up” in September and January. While the penalty for underpayment will be imposed if you pay late, it will be much less than it would be if you neglect to make the payments.
Review Investment Accounts
When you receive your June 30 statement from your broker, review the performance of the account for the first six months of the year. If you have realized a lot of capital gains, instruct your broker to harvest some losses in the last six months of the year to try to offset the capital gains. Is your income higher this year than in other years? If so, you may want to consider investing in tax-exempt municipal bonds or you could consider gifting financial assets to family members in lower tax brackets.
Review Retirement Accounts
One of the best ways to reduce taxable income is to invest in your company’s 401(k) plan. Many employers will allow you to make changes in your contribution level at mid-year and increasing your retirement plan contribution is always a wise move. If you are considering an IRA for 2016, why not start making monthly contributions to the IRA account now? The contributions will start earning interest earlier and you won’t be faced with finding $5,500 in early 2017.