Midyear Tax Check-In: Do You Have an Optimized Tax Strategy?

It might seem like we just rang in the New Year, and suddenly, in the blink of an eye, the year is half over. 

So it could come as a surprise to hear that it’s time to start thinking about taxes again. That’s because midyear is a good time to develop a strategy to achieve the best possible outcome for next year’s tax-filing season.

Tax Planning vs. Tax Preparation

When most people think of taxes, they think about that hectic time before the April filing deadline. But at BGM, we encourage clients to think of taxes as a continuous process that should be coordinated with your overall financial goals.

To develop that mindset, it helps to understand the difference between tax planning and tax preparation: 

• Tax preparation involves organizing your financial data from the prior year, ensuring it is in compliance with the various federal and state requirements and filing it with the applicable authorities.
• Tax planning is a continuous process that involves assessing and adjusting your tax situation as the year goes on. The goal is to optimize your situation by uncovering savings opportunities and limiting any surprises in the tax preparation process. 

Now that you know the difference, it’s easier to see how careful tax planning leads to an easier, less surprising tax preparation process—and, most importantly, helps to achieve your financial goals.

Planning Beyond the Current Tax Year

Tax planning is an excellent way to optimize your current year’s tax situation. However, using the less-hectic summer season to engage in midyear tax planning with an experienced accountant, you can be even more forward-looking.

A midyear meeting with a CPA is an excellent opportunity to talk about aspects of your life that may be changing in the next few years, such as:

• Having children or children approaching college years
• Changes in marital status
• Changing jobs
• Starting or acquiring a business
• Exiting a business
• Retiring
• Creating or changing an estate plan

All of these life events have tax implications that can be planned for ahead of time. 

What to Expect During a Midyear Tax Planning Session

At BGM, we recognize that tax issues and goals differ for everyone, and every year is different, too. That said, during a midyear tax appointment with BGM, you can expect to engage in the following steps:

1. Reviewing Your Financial Goals

Like all types of financial planning, tax planning is driven by your goals. You might have different tax goals for yourself, your family and your business. 

• If you’ve established goals in previous planning, now is when we can revisit those and see if you’re on track.
• If you haven’t established goals previously or have not done tax planning in the past, now is a great time to do it.

The clarity you and your tax advisor gain from reviewing goals helps frame the rest of the session. For example, if your main goal is to retire as soon as possible, we will use different tax strategies than we would if your main goal was philanthropy or buying a business. 

2. Reviewing Your Financial Situation for the Year So Far

Midyear is often the first opportunity to have a good picture of how the year is shaping up financially. Questions and discussion points to touch on include things like:

• Are you earning more or less income this year compared to previous years?
• If you have a business, do we have a good picture of what the remainder of the year will look like?
• Are your expenses (personal or business) increasing or decreasing?
• Has your financial picture changed (or do you expect it to change) due to life events like selling a home, starting or exiting a business, getting married or having a child?

3. Reviewing the Prior Year’s Tax Return

With a clearer idea of how your current year is shaping up, we can then look back on the previous year’s tax return. And we can use that to strategize how your return might change this year. As your income goes up or down, you could see changes in:

• Your marginal tax bracket: When income fluctuations move you into a higher or lower tax bracket, you may qualify for credits or deductions you weren’t eligible for before. 
• Your investment income tax rate: What was your tax rate last year on dividends and capital gains? How are your investments doing this year? There may be opportunities to take action with your investments to optimize your tax situation. 
• Deductions: Whether you itemize or take the standard deduction can impact decisions such as charitable giving and how to handle medical expenses. 

 4. Create a Tax Strategy That Supports Your Goals

Having reviewed your goals, prior year’s taxes and this year’s financial situation, we’re ready to plan. We’ll not only look at the rest of the year but also potentially further into the future.

This starts with an income projection. By projecting your income for the rest of this year, we can estimate your potential tax liability. We’d want to account for upcoming life events, investment activity and more. By looking at future income in this way, we can recommend tax strategies to save you money or help you achieve your financial goals.

Here are some of the tax strategies we may discuss, depending on your needs:

Roth Conversions

A Roth conversion involves moving money from a pre-tax retirement account like a traditional IRA or 401(k) to a Roth IRA. Those who do Roth conversions usually do them to rebalance their retirement holdings between pre-tax and Roth and to minimize Required Minimum Distributions, or RMDs. 

Current law requires people to take RMDs from pre-tax accounts each year starting in the year you turn 73. RMDs will require you to recognize income during retirement. The mix of your retirement holdings between pre-tax and Roth should be properly managed to ensure control over your tax situation post-retirement. 

Roth conversions have certain rules and restrictions, and the money you move will be taxed in the year you make the conversion. Therefore, you want to be strategic in the years that you choose to implement this strategy. Ideally, you’ll want to do conversions in years when your income is lower and you are paying lower marginal rates.

Charitable Giving

Charitable donations are tax-deductible, provided that you are itemizing your deductions. With changes to the standard deduction several years ago, far fewer taxpayers are getting the full taxable benefit of their philanthropic donations.

If charitable giving is an important piece of your financial plan, there are a number of strategies that can help you meet your charitable goals as well as maximize the tax benefit to you. Possible strategies include:

• Qualified Charitable Distributions from your IRA in lieu of taking the RMD
• Bunching charitable donations in a single high-income tax year with a Donor Advised Fund
• Donating appreciated securities rather than cash

Tax-Advantaged Savings 

You can reduce your taxable income by contributing more to your 401(k), IRA or other pre-tax retirement accounts. The investments grow tax-free, and you pay taxes only when you withdraw funds. 

Health savings accounts, or HSAs, also reduce taxable income. You get a triple tax benefit from an HSA: 

• Contributions are pre-tax.
• You invest the contributions and they grow tax-free.
• You can withdraw the funds tax-free at any time if you use them to pay for healthcare expenses. 

Tax Loss Harvesting

We want to keep a close eye on your investment activity during the year. If we’ve had significant capital gains realized during the year, we may want to examine your investment portfolio to identify unrealized losses that could be sold to minimize your tax burden.

Tax-Conscious Investing

Depending on the types of accounts you have, you may want your portfolio to generate as little income as possible. If so, we can explore exchange-traded funds (ETFs) and mutual funds with low turnover rates. 

On the other hand, you may want a portfolio that generates a lot of dividend income. Either way, you can use tax planning to understand how your investment allocation will affect your overall tax exposure.

It’s Always the Right Time to Check In With Your BGM Accountant

Regardless of what point in the year you’re reading this article, ask yourself, “When was the last time I talked to a tax pro?” If it’s been more than a few months, consider reaching out and scheduling a conversation.

Whether you’re a business owner, a high net-worth individual or experiencing life changes that affect your financial plan, there’s never a wrong time to engage in tax planning. The BGM team specializes in creating customized tax plans and strategies to help clients achieve all of their financial goals, both personal and business.