Mid-year Tax Planning to Cut Your Tax Bill
It always hit me as being quite idiotic that people treat their accountants like a gym membership. Here is what I mean:
Each January 1st, people make resolutions to lose weight. My exercise classes are full in both January and February. However, starting around March, most of the people who made these resolutions, drop out, which results in a lot of room for the rest of the class.
Accountants are somewhat treated the same way. Most people try to contact their accountants from February to May when they are at the most busy time of the year. The best time to speak to an accountant about tax or business planning is NOT from February to May.
Tax planning is NOT one of those things that people should do only from December through April. It is a year round endeavor. Here are some mid year moves that will help trim that potential bill:
- Max out your 401K contribution or IRA contribution. If you contribute up to $18,500 in a 401K if you are under age 50 and up to $24,500 if you are age 50 or older. . If you don’t have a 401K, you can contribute up to $5,500 to an IRA if you are under age 50 and $6,500 if you are age 50 or over.
- Max out your health savings account. If you have a high deductible policy, (at least $1,350 single or $2,700 with family), you can set these up with any financial institution to cover medical expenses not covered by insurance. You can put away up to $6,900 a year for a family of two or more or up to $3,450 if single. Anyone who is age 55 or older can put away an extra $1,000 per year as long as they are not currently enrolled in Medicare.
Note: There is an unlimited carryover of these funds that can be used for any unreimbursed medical expense in the future.
- Review charitable giving. You could spread your contributions over several years to a charity or you could using something called a “donor-advised fund. This is a fund in which you can contribute this year and get a deduction but you can direct how to give the money to a charity at a future year. Thus, instead of spreading out your charitable contribution over three years, you could give the full amount to a donor-advised fund this year and get the full deduction yet spread out the donation over several years.
- Plan for medical and dental costs. You can deduct any medical and/or dental costs that exceed 7.5% of your adjusted gross income. Bunching them in one year will help you exceed this threshold.
- NOTE: even better would be a Health Savings Account that allows you to deduct unreimbursed medical and dental expenses as a business expense.
I can spend days on midyear planning, but I think that you get the point. You should be meeting with a good tax adviser about these tips as well as other potential ways to make your life less taxing. Also, subscribe to Taxbot’s Taxbot University. It will give you a lot of good tips.
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