Why summer is the perfect time for tax planning

June 02, 2017 : H&R Block

The 2017 halfway point is the perfect time for tax planning. With six months to review and six months to forecast, taxpayers have a good idea of how the year is shaping up but they also have enough time to make course corrections more meaningful and less painful. Changing how much tax is withheld from their paychecks, updating their financial and household information with the health insurance marketplace, tracking their possible tax benefits and estimating their income can help them maximize their tax outcome in April.

1. Update tax information with an employer

The W-4, which taxpayers provide their employers when they start their job, is important to keep updated because it determines how much federal income tax is withheld from every paycheck. Depending on the number of allowances a taxpayer selects and their marital status, more or less tax will be withheld from each paycheck. But the right number of allowances in 2016 may not be the right number of allowances for 2017. The optimum number of allowances can change with common life events like births, weddings, graduations and home purchases or sales. However, an estimated two in five taxpayers don’t update their W-4 when they experience major life changes.

Updating the W-4 may be beneficial even if a taxpayer did not experience a major life change. For example, taxpayers who got a big tax refund this year and would rather get more money throughout the year may benefit from changing the information on their W-4.

Online tax calculators can help taxpayers figure out how best to adjust their W-4.

2. Update information with a health insurance marketplace

Taxpayers who have health insurance through a state or federal marketplace may qualify for the advance premium tax credit (APTC) to help make their premiums more affordable. The size of the tax credit for 2017 is based on estimates taxpayers made as early as November 1, 2016 of what their household income and family size would be for 2017. Because the tax credit is paid directly to the health insurance provider throughout the year, the taxpayer has to settle up at the end of the year on their tax return, calculating if too much or too little of this tax credit went toward their premiums.

They can help ensure that the APTC is as accurate as possible by notifying their state or federal marketplace immediately of any changes to their household or income. The sooner they notify the marketplace, the better chance they have at minimizing the impact in April.

3. Track possible deductions and credits

Deductions and credits are usually based on expenses paid or other actions taken before the tax year ends. Taxpayers who plan ahead can maximize their deductions by making charitable donations, investing in qualifying retirement accounts or other tax advantaged accounts, such as an HSAs. Taxpayers should keep good records of their donations and other expenses they plan to deduct or use to qualify for a credit, both to make the tax filing process easier and to be prepared in the case of an audit.

4. Estimate income

Estimating income can be one of the most difficult parts of tax planning for the self-employed and small business owner. But correctly estimating or projecting their income is an important step in preventing underpayment penalties. To avoid the estimated tax penalty, by the end of the year they must pay 90 percent of the tax they owe for the current year or 100 percent of the tax owed for the previous tax year.

They can pay what they owe by making estimated tax payments four times a year: in April, June, September and the following January. If they have a traditional job as well, or they file jointly with a spouse with a traditional job, they could instead adjust their withholding with their regular employer to cover the taxes they will owe from their small business or self-employment income.

As the year wears on, taxpayers will get an even better idea of what life changes and financial situations will impact their 2017 tax return. But the runway for meaningful and painless change will shorten. So now is the perfect time for a quick tax review and tax forecast. For tax planning help, taxpayers should consult a trusted tax professional.

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