Midyear Tax Checkup: 6 Strategies to Help Optimize Your Financial Health

Your list of annual checkups probably includes visits to a doctor, a dentist, and an automobile mechanic, but it may not include a visit to your tax advisor outside of March or April. By performing a midyear tax checkup, you can help ensure you are following the right tax strategies for your unique situation and avoid being caught off guard by potential tax issues at the end of the year. Below is a list of six checkup items for tax planning that can help with cultivating year-round holistic wellness.

Giving to charity? Consider a qualified charitable distribution (QCD)

The standard deduction for 2024 is $14,600 for a single person and $29,200 for a married couple. Itemized deductions — which can include taxes, charitable contributions, mortgage interest, and limited medical expenses — are an alternative to the standard deduction. If you do not have $14,600 (single) or $29,200 (married) in itemized expenses, you can take the standard deduction. Donating to a charitable organization without itemizing (standard deduction) provides no tax benefit. However, nonitemizers may reap some tax benefits by making a charitable donation through a QCD, which distributes part or all of a retirement distribution directly to the charity of your choice. While it will not count as an itemized deduction, it does lower your taxable income. Your tax advisor can discuss the requirements that are unique to your situation.

Unexpected income? Check withholding or estimated tax payments

Your income may be substantially more now than it was in 2023 due to stock sales, larger retirement distributions, or better business revenue. Having more income is great, but an unexpected bill is not. Consult with your tax advisor to avoid a larger tax bill and/or penalties at the end of the year by ensuring your W-2 has substantial withholding to cover any increase in income. For self-employed individuals, paying estimate quarterly taxes can reduce various types of penalties and your overall tax burden for next year’s return.

Saving for retirement? Consider a “backdoor” Roth IRA

A Roth individual retirement account (IRA) is a superior savings vehicle compared with a traditional IRA. Depositing money in a Roth IRA does not entitle the account owner to a tax deduction, but growth in the account is distributed tax-free. The ability to contribute to a Roth IRA is phased out for high-income taxpayers (starting at $161,000 for a single person and $240,000 for a married couple for 2024). One can work around these income limitations, however, by making a nondeductible contribution to a traditional IRA and then rolling over the account to a “backdoor” Roth account. This allows even higher-income earners to benefit from tax-free growth.

Retiring? Take the required minimum distribution (RMD)

If you are 72½ or older, you must take an RMD from your IRA. The amount is calculated based on your age, the account value, and IRS tables. Failure to take an RMD can result in steep penalties (up to 25%), so be sure to speak with your advisor about the requirements.

Flexible spending accounts (FSAs): Use ’em or lose ’em!

Most FSAs are required to be used by the end of the tax year or the balance is forfeited. Many everyday medical expenses — such as bandages, contact lenses, pain relievers, and even sunscreen — are FSA eligible. Purchase these products now to draw down your account balance and avoid losing funds at year-end. If you have questions about how to use an FSA or which expenses qualify, ask the benefits coordinator at your company.

Use 529 plans to save for education

Post-secondary (and K-12 due to the TJCA) education can be quite expensive, so consider contributing to a 529 plan if you have children or grandchildren. The contributions are not tax-deductible at the federal level, but your investments and gains can be distributed tax-free for any educational expense. Some states do permit a deduction, so check with your tax advisor regarding the specifics for your region. These contributions can remove assets from your estate, with the added benefit of tax-free account growth. Parents and grandparents can maximize the annual gift exclusion ($18,000 per donor, per beneficiary for 2024) by setting up 529 plans for multiple children and grandchildren.

Next steps

If you are unsure whether taking action on one or more of the above tips is right for you, consult with your wealth advisor.

Not a Mercer Advisor client? Our comprehensive wealth management solutions include tax planning along with financial planning, investment management, estate strategies, and insurance solutions. If you’re ready to amplify and simplify your (financial) life, let’s talk.