Time for a Mid-Year Tax Check-Up?

Mid-year tax

Do you ever feel like you scramble to get tax information together and ensure you’re minimizing what you need to pay?

The mid-year tax check-up can be a useful exercise to help ensure you are prepared early. Basically, if you can reserve a little time over the summer to review your tax situation, you can ward off any unpleasant surprises at the end of the year.

Who can benefit from a mid-year check-up? The bottom line is that most businesses — along with any individual who has seen significant changes throughout the year — should consider checking in with their tax professional.

Let’s take a closer look:

Free download: Ask these tax questions mid-year

Benefits of a mid-year tax check-up

Many businesses and individuals find themselves in a “reactive” position when it comes time for end-of-year taxes. They discover that they owe an unexpected amount or that they didn’t make the most of potential deductions while they could. Of course, this oversight can create financial strain and stress for those involved.

To look at the issue from the opposite perspective, a mid-year tax check-up allows businesses and individuals to be proactive. For example, the business might assess and discover that it’s a great time to change their entity type, or to expand into a different state. The individual or business might discover early that they’re behind in terms of tax payments, allowing them to avoid a snowballing situation. They might find that they can make better use of available deductions rather than scrambling at the last minute to fulfill them.

When you look at it, a year is a long time in financial terms. So many things can change that it’s a bad idea to only look at taxes once per year. For businesses still getting used to changes under the Tax Cuts and Jobs Act (2017), it’s important to ensure that you’re compliant with new rules as well.

A mid-year tax check-up can save a major end-of-year scramble Click To Tweet

Significant financial changes

One of the triggers for action at a mid-year tax check-up is if you’ve had any significant financial changes since you last planned for the tax year. There are many common situations that can have a significant impact on your tax liability. Here are some examples:

  • Changes in relationship status, such as getting married or divorced, or becoming widowed.
  • Any significant increases or decreases in income.
  • An increase or decrease in your number of dependents.
  • Selling or acquiring a business.
  • Substantial gains from the sale of stocks or bonds.
  • Buying or selling rental property.
  • Buying or selling your primary residence.
  • Being the beneficiary of an inheritance.
  • Retiring (planned or unplanned).
  • Making significant purchases for a business.
  • Making unplanned withdrawals from an IRA or pension plan.
  • Getting significant investment income or income from asset sales.

Mid-year tax

Questions you should have answered

Even if you haven’t had any significant changes happen, a review of your tax situation can still be helpful to ensure that you are prepared. Here are a few key questions to have answered:

Is our business structure still the most appropriate type?

The structure of your business has significant tax and legal implications. Many businesses start out as basic sole proprietorships or LLCs, but find that as they grow a different structure may suit them better.

A tax or legal professional can talk you through the relative pros and cons of various business entity types. For example, if you’ve experienced business growth, you may have needed to hire more people and would benefit from more liability protections. The question of business entity type is a balance between legal and tax implications.

Are we getting capital gains from taxable investments?

Mid-year is the perfect time to assess your taxable investments and determine if they are producing a capital gain. If so, then you can proactively look for ways to reduce your tax liability.

For example, you might assess your entire investment portfolio to determine which options are operating at a loss. “Tax loss harvesting” is a strategy where you time the sale of losing investments to counteract realized gains from productive investments. If you leave this too late, you may miss out on valuable time to research the best moves to make.

Have we experienced significant financial changes?

Any number of business or individual activities can significantly change financial projections from the beginning of the year. Sometimes a business may have needed to pivot to avoid a loss-making activity, or an individual may have changed jobs and received a significant raise.

Anything that we outlined in the “significant financial changes” section should be assessed.

Do any law changes affect us?

While the Tax Cuts and Jobs Act introduced the largest sweeping changes to tax law in decades, there are often smaller changes introduced every year. A mid-year check-up offers the chance to review any changes and assess their impact.

For example, some areas of tax law that experience change relatively regularly include:

  • Adjustment of tax brackets for inflation
  • Deductions for medical expenses
  • Health insurance requirements
  • Mortgages
  • Tuition costs
  • Childcare costs.

Are we maximizing potential deductions?

There are many possible ways to maximize your deductions, so let’s look at common deductions for both businesses and personal taxes:

Business deductions

  • Vehicle expenses. You can claim either the IRS standard mileage deduction or your actual costs. One thing that commonly trips businesses up is failure to keep good records of vehicle use. Mid-year is a good time to check that records are being properly kept for your vehicles.
  • Contract labor. Make sure to issue a 1099-MISC to any contractor who receives $600 or more in payment from your company within a given year.
  • Supplies. Again, mid-year is a good time to check that records are being properly kept.
  • Interest on business purchases made on credit.
  • Fees and insurances.
  • Legal fees.
  • Advertising expenses.

Personal deductions

  • American Opportunity Tax Credit — You can claim the first $2000 spent on books, tuition and school fees, and 25% of the next $2000, for a total possible deduction of $2500.
  • Child and dependent care tax credit.
  • Mortgage interest deduction.
  • IRA and 401k contribution deductions. (If you’re able to contribute the maximum, you can maximize your deductions. Check if you need to make any adjustments mid-year).
  • Home office deduction.
  • Health Savings Account contribution deduction.

Do you have any kids starting college?

This is a big event mid-year and often leads to more costs for parents. If you don’t qualify by income for the American Opportunity Tax Credit, there may be other college deductions that you do qualify for. This possibility is something to explore with your financial advisor.

Do you have a change in marital status?

A change in marital status can make a huge difference to your tax obligations. If you are getting married, it’s possible that you may save on taxes by filing jointly. If this is the case and you currently use a W4, you may need to re-evaluate your tax withholding rate.

A divorce also changes things in that you may find yourself with higher tax liability as a single taxpayer. Under new rules for 2019, alimony payments will no longer be tax deductible and alimony recipients will no longer include the payments in their taxable income.

Mid-year tax

Is your income approaching the net investment income tax threshold?

If your income is approaching NIIT (or the “Medicare surtax”), then you may be liable for another 0.9% in Medicare tax on top of the standard 2.9%.

If your mid-year check-up shows that you are likely to exceed the NIIT threshold, then you can look at strategies such as deferring earned income or contributing more to tax-advantaged retirement accounts.

What questions should you ask regarding your tax situation? Download here

Final thoughts

Even if you haven’t experienced any significant changes since the beginning of the year, a mid-year tax check-up is still a great idea. It’s always better to ensure that everything is on-track and that records are being kept up-to-date early rather than scrambling at the end of the year.

The same can be said for any sort of compliance activities in your business. Leaving these things as a once-per-year job can make the task bigger than it needs to be. Keeping up in stages will help you to stay on top.

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