With more than half the year in the rear view mirror, it’s time to start thinking about your potential annual tax liability and actions you can take to legally minimize what you will have pay the IRS. Here then are some easy to action mid-year tax moves that you should have on your radar now, rather than waiting till December 31st.
Review or finish up your tax return
If you received an extension to file back in April, finish up your tax return now, rather than rushing again in October when late filings are due. If you filed on time then take some time to review your return to identify areas where you can possibly get some tax breaks you missed out on last year.
If you received a big refund this year – then don’t be fooled into thinking that this is a good thing. All you did was give Uncle Sam (a.k.a the American government) a tax free loan.
The most likely reason for large refunds are that people withheld too much in their paychecks because they didn’t adjust their withholding based on life events like marriage, kids or job changes. Ideally you should have just enough tax – not too much, not too little – withheld from your paychecks to meet your eventual annual tax bill.
Changing your withholding is easy. Just contact your payroll department and submit a new W-4 (online now). The IRS also provides a good worksheet to estimate out your ideal withholding.
Claim those day camps via the child and dependent tax credi (CTC).
Most working parents are well aware they can claim the child and dependent care credit to help cover day care expenses for the kids. But don’t forget about day camp costs during summer.
When school’s out, day camps are a good substitute for or supplement to regular child care options. The IRS thinks so, too. It allows you to count the day camp (not overnight camps) costs toward your child care credit claim. Just make sure you hang to those receipts for when you file your taxes.
Start an IRA
One tax break people often overlook are tax-deductible IRA contributions which can be taken today (if eligible) that will significantly reduce your taxable income, while providing financial security in retirement.
You can make a deductible IRA contribution (subject to income limits) as late as April 15 of the subsequent tax year, but the earlier you start the more likely you are to save and enjoy the benefits of compounding.
Opening an IRA is easy and cheap via low cost online brokers; making regular contributions is the hard part.
Also don’t forget to make the most of your employer 401K account by contributing the maximum or at least enough to get the employer match. 401K contributions come out of your paycheck before taxes are calculated, meaning you’ll get a small but immediate tax break on your earnings.
Make charitable contributions sooner rather than later
A lot of people with till year end before giving to charity, but avoid the rush and do something that helps others now. The IRS allows rewards you for these good deeds by allowing you to write off out-of-pocket costs you incur related to your charitable activities.
For example the cost of food you buy for your kids school fund raiser could count as a charitable contribution. If you drove your car for charity, you can deduct 14 cents per mile.
Buying a house?
While the home-buyer credit has long expired for non-military members, there are still many tax breaks for home buyers. This includes mortgage interest, deducting points on your loan and even moving expenses. So if you are in the market for a home, remember to add in the potential tax breaks when figuring your total cost of ownership.