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January – July: Your Midyear Tax Checkup

by Craig Moser on August 24, 2018

Summer is almost over and children are either back in school, or soon will be.  It’s a good time to review what 2018 has held so far.  Did you get married or send a child to college?  Did you retire or turn 70 1/2 years old ? Personal financial events like these can result in tax benefits or liabilities.  Waiting until the end of the year or next Spring to review them may be too late.  Now is a good time for your tax checkup.

Change In Marital Status

Changing your marital status generally results in tax consequences.  In the case of marriage, filing a joint tax return may save on taxes.  Remember to perform a tax checkup on your W-4 Form.  Do you need to change your exemptions?

Divorce is very different and may significantly increase your tax liability.  Again, remember to reevaluate exemptions on your W-4 Form. For those divorced in 2018 and earlier, receiving alimony is considered and is taxable while paying alimony is tax deductible.

Child Starting College

The American Opportunity Tax Credit (AOTC) can be worth up to $2,500 per child each year for 4 years.  To get the full credit, your adjusted gross income must be $80,000 or less for those who file single, or $160,000 or less for joint filers.  The credit is phased out as incomes increase.  Also, different college-related tax credits have different rules.  Because every situation is different, you should look into which works best for you.

One thing to remember is you can’t use the same qualified college expenses to calculate your tax-free withdrawal from a 529 plan and a federal tax break.  This means if you pay the full college bill using an untaxed 529 withdrawal, more than likely, you won’t be eligible for a college tax credit.

Retirement or Turning Age 70 1/2

If you retired this year, or are planning to, now is a good time for your tax checkup.  Withdrawing money from your savings account(s) during retirement, and how how much you withdraw, can have a significant impact on your taxes.  In addition to determining how long your savings will last, a tax-smart retirement income plan can help you determine the best strategy for your individual situation.

Turning 70 1/2 means you need to begin taking required minimum distributions (RMDs) from tax-deferred accounts.  While there are some exceptions, you generally have until April 1 of the following year to take your first RMD.  After the initial withdrawal, you must take a RMD withdrawal by December 31 to avoid a hefty penalty.  If you decide to wait and take your first RMD the following year, you will pay tax on 2 RMDs when filing your 2019 return.

Changing Jobs

If you changed jobs (or plan to this year), be careful on how you handle any rollover 401k or similar plan.  If you a check sent directly to you, 20% is automatically withheld for taxes.  In addition, not depositing the money into a new plan or IRA within 60 days results in taxes on the withdrawal plus an additional 10% penalty if you’re younger than 55 years old.

Midyear Tax Checkup

Even if you haven’t experienced any significant changes this year, it’s still a good time to look at your tax situation. Are there was you can save more money for your retirement?  Can you move money from your estate by gifting it to children and/or grandchildren to reduce taxes?  Can you manage your charitable giving differently to increase tax benefits?  A little planning now might just save you a headache later.

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