Tax planning is a way for individuals to review their projected tax liability and to make adjustments prior to the end of the tax year. Mid-year is a good time to review your tax situation to see where you stand in relation to where you thought you might be for the year.

Mid-year is a time when many investors often review their portfolios and investment strategy to see if they are on track. Are there changes in your income or other areas that might impact your tax situation for the rest of the year? If so you still have time to make adjustments in order to avoid an unpleasant surprise come tax time.

Assess your current tax situation

Your mid-year tax review should focus on your current situation and any differences in what you may have planned on in terms of income or deductions. For example, you may have learned that you are in line for a year-end bonus that is higher than you expected.

Are there other changes from the prior year that will impact you when it is time to file your taxes? Have you or will you be getting married or divorced before the end of the year? Are you expecting an addition to your family due to the impending birth or adoption of a child?

These or any number of income or life changes can impact your taxes for the year.

 Maximizing Deductions and Credits

This is a good time to take a look at potential deductions that you are not taking or maximizing. For example, if you are charitably inclined, look at your normal annual contributions and see if you can afford to make several years’ worth of contributions in the current year in order to be able to itemize deductions on your return.

Another example might be an elective medical procedure where you know you will have substantial out-of-pocket costs. If you have other expenses that could be itemized, consider having this procedure done this year. If this brings your out-of-pocket medical costs to more than 7.5% of your adjusted gross income (AGI), you can deduct this excess amount.

Retirement Contributions and Planning

A key tool in reducing taxes can be contributions to a traditional retirement account like a 401(k). The contribution limits for 2023 are $22,500, with an additional $7,500 in catch-up contributions available for those who are 50 or over. These pre-tax contributions provide both a current year tax break as well as the opportunity to build retirement savings on a tax-deferred basis over time.

If you have access to a 401(k) or similar retirement plan, look at your current level of contributions and see if you are able to increase it if you are not currently on track to hit the maximum level for the year. Since contributions are made via payroll deduction, this can be a painless way to increase your contributions and get a significant tax break.

Capital Gains and Losses

So far in 2023, we have seen a fair amount of market fluctuations with solid gains in some areas including technology stocks. This is after a tough year in 2022, preceded by gains in the prior three years.

Mid-year is a good time to review any capital gains or losses within your portfolio. For securities held for at least one year, capital gains are taxed at preferential long-term capital gains rates. In the course of any portfolio rebalancing at mid-year, you might consider realizing long-term capital gains in taxable accounts if selling some of these shares fits into your rebalancing plan.

Additionally, you may be able to offset some long-term or short-term capital gains against any realized capital losses. This can be a tax-efficient way to accomplish any needed rebalancing.

Charitable giving

For those who are charitably inclined, charitable giving can be personally satisfying and financially rewarding. Charitable contributions can be made in cash or by donating appreciated assets such as stocks, mutual fund or ETF shares, art, real estate and other assets. Donations can be made directly to the charity or to a donor advised fund.

The amount that can be deducted will vary based on the type of deduction made. In order to deduct a charitable contribution, you will need to be eligible to itemize deductions on your return.

Donating shares of appreciated securities can be beneficial in that not only will you be able to deduct the market value of the shares, but you will not be responsible for paying any capital gains taxes either.

Record keeping is important. Be sure to keep any acknowledgment received from the charitable organization, a copy of checks written or other documentation in order to be able to verify the donation if the IRS questions it.

Estimated tax payments and withholding

As you review your tax situation at mid-year, be sure to review your tax withholding to be sure it is on track to cover the expected tax on your income from the year. For those who must pay estimated taxes, typically small business owners, freelancers and independent contractors, you will also want to review whether these payments will be sufficient to cover your projected tax bill for the year.

In either case, you do not want to come to the end of the year and find out your tax bill is much larger than what you have paid in.

This is a good time to consult with your tax advisor to help determine where you stand taxwise for the rest of the year. They can also help to ensure that you are in compliance with any new regulations or changes in the tax rules.

If you do not have a tax advisor, or feel you need to find a new tax professional, your Wedbush financial advisor can be of help.

 

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice. Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor.