Your Midyear Tax Checkup
Smart tax planning requires some flexibility as the year unfolds. Midyear is a good time to assess how your tax picture looks and to identify appropriate planning strategies.
See Where You Stand
Look at the income you’ve earned to date, and estimate your anticipated earnings for the balance of the year. Also, will you be entitled to claim the same or a similar amount of tax deductions as last year? Have there been any major life changes that may significantly alter your tax picture?
Check Estimated Tax Payments
Generally, taxpayers must make four quarterly installment payments of estimated tax based on the amount of the “required annual payment” to avoid an underpayment penalty. (If you are employed, amounts withheld by your employer are remitted to the federal government and are generally deemed to be paid in equal amounts on each installment date.) The required annual payment is generally the lower of 90% of the tax shown on the current year’s return or 100% (110%, for higher income individuals) of the tax shown on the prior year’s return. If you receive significant income from sources other than your job, or if you are self-employed, you may be required to make quarterly estimated tax payments.
If you are employed, check one of your recent pay stubs to see if your tax withholding is putting you well on your way to paying your 2011 tax. If too much or too little is being withheld, ask your employer’s payroll department for IRS Form W-4 and complete it as soon as possible.
Account for Investment Gains
In conducting your midyear tax review, be sure to consider any capital gains realized as a result of the sale of appreciated capital assets, such as stock. Looking ahead to the balance of 2011, do you anticipate realizing any additional gain(s) from investment sales — or in the course of any other transactions? Remember, the maximum tax rate on net long-term capital gains and qualified dividends is 15% for 2011 and 2012.
Increase Plan Contributions
If you are contributing to a retirement savings plan at work, such as a 401(k) plan or 403(b) tax sheltered annuity, increasing your pretax contributions will reduce the amount of income tax you currently pay. Self-employed business owners who do not already have a tax-deferred retirement plan should consider starting one before year-end. Options to examine include a so-called “solo 401(k)” plan, a Simplified Employee Pension (SEP) plan, or a SIMPLE plan. We would be happy to discuss the advantages and limitations of each type