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    Mid-Year Tax Planning

    Year-end tax planning is on the agenda for many taxpayers, with good reason. That said, you don’t have to wait for November or December to make some smart moves. Planning in June or July can lead to tax savings that could be reduced or lost altogether if you wait for late fall to act.

    Here are some ideas to consider.

    Retirement Plan Contributions

    Go over scheduled salary reductions for contributions to 401(k)s and similar employer plans. Be sure to find out if any employer match is offered and, if it is, that you’ll be eligible for the full match.

    Beyond matched contributions, consider unmatched contributions. The 2019 limit for 401(k) salary deferrals is $19,000 ($25,000 for those age 50 or older), so some or most of your contributions might be unmatched.

    Debt Repayment

    Paying down outstanding loans delivers a return equal to the interest rate. Therefore, paying down a credit card balance with interest rates of 12%, 15%, or more is often a savvy move.

    In addition, paying down a loan without tax benefits is better than paying down a loan with tax-deductible interest. If you took the standard deduction for 2018 rather than itemizing your deductions, and likely will do the same in 2019, prepaying your home loan is a better deal. The same is true for student loan debt, if deducting the interest is not likely.

    Also keep in mind that current tax law makes it more difficult to deduct interest on home equity loans and home equity lines of credit (HELOCs). If you’re in that situation, prepaying a HELOC with a 6% interest rate is the same as earning 6%, after tax, with no investment risk, which may be appealing.

    Roth IRA Conversions

    Under current law, income tax rates are generally lower than they were in 2017. However, tax brackets are scheduled to return to pre-2017 rates after 2025. With that in mind, you may decide to convert some money saved in traditional IRAs to Roth IRAs in order to avoid withdrawing that money in the future at the higher pre-2017 tax rates.

    However, keep in mind that current tax law also prohibits recharacterization (reversal) after a Roth IRA conversion. So the amount that’s converted will generate a tax bill for this year.

    And that’s where mid-year tax planning can pay off. By this point in the year, you may have a better idea about how your taxable income will change from 2018 to 2019, and that may put you in a position to be more confident in taking steps that might minimize your 2019 tax bill. If you need help with this kind of mid-year planning, please contact our office and we would be happy to help you.

    This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.