Personal finance

These midyear tax strategies can trim next year’s bill from the IRS and reduce ‘unwelcome surprises’

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Whether you typically receive a tax refund or a bill, there’s still plenty of time to improve next year’s filing, experts say.

Tax reviews are like twice-annual dentist visits, said certified financial planner Jim Guarino, managing director at Baker Newman Noyes in Woburn, Massachusetts.

“A check-in and cleaning twice a year reduces the risk of unexpected and unwelcome surprises in the future,” he said.

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Here are four midyear tax moves to consider.

1. Review tax withholdings

When starting a new job, you fill out Form W-4, covering how much your employer withholds from your paychecks for federal taxes. 

But you need to revisit those withholdings, especially for major life changes such as marriage, having children or starting a side business.

Top reasons to adjust your withholding:

1. Tax law changes

2. Lifestyle changes like marriage, divorce or children

3. New jobs, side gigs or unemployment

4. Tax deductions and credits shifts

You can use the IRS Tax Withholding Estimator to see if you’re on track, or run projections with an advisor for more complex situations. 

And if you’re expecting a shortfall, there’s ample time to adjust your tax withholding or make estimated payments for the third or fourth quarters, Guarino said.

2. Boost 401(k) contributions

If there’s wiggle room in your budget, you may consider boosting pretax retirement savings, which reduces your adjusted gross income. 

“If you can, now is a great time to increase 401(k) contributions,” said Christopher Lyman, a Newtown, Pennsylvania-based CFP with Allied Financial Advisors.

You can stash $20,500 into your 401(k) for 2022, with an extra $6,500 if you’re 50 or older. Regardless of your savings goal, it may be easier to reach by bumping up your deferrals now.

3. Weigh Roth IRA conversions

With the stock market down from the beginning of the year, there’s a chance to save on so-called Roth individual retirement account conversions.

Here’s how it works: After making nondeductible contributions to a pretax IRA, you can convert the funds to a Roth IRA. While the move jump-starts tax-free growth, the trade-off is paying upfront levies on contributions and earnings. 

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However, a down market may be a great time to pay taxes on the assets you want to convert, Lyman said.

For example, let’s say you invested $100,000 in a pretax IRA and now it’s worth $75,000. You can save on taxes since you’ll convert $75,000 rather than the original $100,000.

Of course, you’ll need a plan to cover those levies, and increasing income may have other tax consequences, like higher future Medicare Part B premiums

4. Consider tax-loss harvesting

Another opportunity when the stock market dips is tax-loss harvesting, or using losses to offset profits, said Devin Pope, a CFP and partner at Albion Financial Group in Salt Lake City.

“We are doing that for our clients right now,” he said.

You can sell declining assets from a brokerage account and use those losses to reduce other gains. And once losses exceed profits, you can subtract up to $3,000 per year from regular income.

However, you need to watch for the “wash sale rule,” which stops you from buying a “substantially identical” asset 30 days before or after the sale.

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