Mid-Year Income Tax Saving Strategies

Tips on Planning During the Year to Increase Your Refund

December is a popular time for income tax articles, but changes made then will be too late to have much impact. Starting in the third quarter, taxpayers can make changes that will have a direct benefit in the current tax year.

Income Tax Liability

Mid-year is a good time to assess changes to a taxpayer’s situation. Changes in items such as:

  • Employment
  • Marital Status
  • Number of Dependents
  • Investment gains or losses

can mean changes in tax liability. It may be appropriate to review the number of exemptions, or the additional amount deducted for taxes.

If it is determined that there will be a large amount owed at the end of the year, July is a good time to adjust the deductions to avoid a big bill next April.

Alternatively, if the taxpayer adds additional dependents mid-year (like a newborn or elderly parent) it may allow for reducing the liability in August. There will not be as big a refund in January, but that money will likely be needed in each paycheck.

If the taxpayer had a very large refund or owed a lot of money last year, changing deductions during the year will help control that, and may avoid penalties and interest for underpayment.

A large investment gain may be reason to make an estimated payment. Investment losses are limited to $3,000 each year, although they may be carried forward to future years.

Making Contributions Mid-Year

Some taxpayers make few donations during the year, with the intention of making them in December in order to get the tax deduction. Life being what it is, these people may find that they cannot make the payments and miss out on the deduction.

In order to ensure the deduction, it makes sense to make contributions during the year. Charities can always use the money. Setting aside a particular amount each month will make sure the deduction is recorded.

For Individual Retirement Accounts, the deadline for filing is April 15 of the following year, in order for it to qualify for the previous year’s deduction. For instance, taxpayers have until 4/15/2010 to take a deduction for their 2009 taxes.

However, the same concept applies for making a contribution during the year. An investment made in June could potentially earn income that will be tax deferred. By April a taxpayer may find they do not have the cash to invest in an IRA, particularly if they have a large tax bill.

Making tax planning a year-round practice can help generate a nice refund, or at least lower liability when tax filing time comes.

Leave a Reply

Your email address will not be published. Required fields are marked *