Time For Your Mid-Year Tax Review – It Could Save You Thousands!!

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mid-year tax reviewHere’s how most people operate when it comes to their taxes…

  • They claim zero dependents on their W-4 (even though they have 4 kids),
  • they pay in way too much out of every paycheck throughout the year, and then
  • they jump up and down and celebrate when they find out that they’re getting $6,000 back from Uncle Sam.

Let me be the one to bring you back down to reality (since everyone else is still in the clouds these days). You didn’t win the lottery. Instead…you simply overpaid on your taxes all year long, and then the government gave some of your money back a year later.

Others have worked their butts off and are earning far more than usual vs. last year (via their own businesses, house flips, or maybe via a promotion at work). This seems like fantastic news at first…but then you discover that you haven’t been paying enough in taxes.

At the end of the year, Uncle Sam will be holding out his hand for the money you owe him…and then he’ll be holding out the other hand for all the penalties you’ve racked up by not paying throughout the year.

Whether you’ve been paying in too much or too little, it’s best to figure this out now rather than in December when there’s very little you can do about it. It’ll only take 30 minutes to do your mid-year tax review, and it could easily save you thousands of dollars. I’d say it’s worth looking into, don’t you??

I was worth it for me!!

Time For The Mid-Year Tax Review – It Could Save You Thousands!!

Liz and I are having a great year financially. I got a nice pay increase at work last year, my website is earning about twice as much as I ‘m used to, and we recently flipped a house for a $27,000 profit. All in all, we’re looking to earn about $40,000 more this year than last year… which is awesome!!…buuuut I’m also a little worried that we’ve been underpaying Uncle Sam.

So, I decided to do my infamous mid-year tax review (I should really host a party for this each year – who’s bringing the guacamole???! ;)) to make sure we don’t owe more than we’re on pace to pay in. And, to make sure I don’t also owe penalties for paying in too little (I really don’t want to piss off the IRS – that’d be a bad move…).

Here are the steps I took to do my mid-year tax review:

mid-year tax review

1) Figure out how much you’ve already paid in taxes

In order to figure out if you’re underpaying or overpaying this year, you’ll need to know how much you’ve already paid throughout the first half of the year. Then, simply double it to get an idea of how much you’ll likely pay for the full year. Your work should have a system that shows you your electronic payment stubs, old W-2’s, and W-4’s. If your work isn’t quite this fancy, call the Human Resources department – they’ll be able to help you.

No matter how you get it, the information you’re looking for will certainly be there. It’s a line titled, “Federal Tax YTD”. Take note of it, then double it. That’s the amount you’re on pace to pay in 2018.

For Liz and I, we’ve paid in $4,000, so we’re likely to pay in about $8,000 by the time 2018 comes to a close.

2) Pull out your tax forms from last year

I’m not a tax professional, nor do I claim to be one. So, instead of filling out all new forms again, I just pull out the old ones to see where everything was placed and how it was calculated from the last year.

3) Changed the work income (Line 7)

Updated the yearly salary with my pay bump. Done.

4) Alter my website earnings from $8,000 to about $18,000 (Line 12)

Man this year is going awesome! And it’s just getting better and better for Uncle Sam as well (seems like President Trump’s plan is working perfectly…. :(). Bumped up the website income by $10,000.

5) Add our earnings from the flip house: $27,000 (Line 17)

Yup, we bought a flip house for $75,000, put $20,000 into it, and sold it for a cool $122,000 after all closing costs and realtor fees. Add it to the income!

mid-year tax review

6) Deduct the new 2018 standard deduction (Line 40)

Instead of getting just the $13,000 deduction, couples are now getting a $24,000 deduction. Booyah! At this moment though, I kind of wish I earned just $24,000…stupid I know, but if you’re behind on your taxes, you get what I mean!

Related: 2018 Federal Income Tax Changes and How They’ll Impact You

7) Eliminate the child exemptions from last year (Line 42)

Womp wommmm.

Last year, Liz and I (and baby Addi) got $12,150 of exemptions. This year, with another baby to be born in September, we should get $16,200, right?? Wrong. The new tax laws stripped away the tax exemptions for kiddos. So, Liz and I are only able to exempt ourselves to the tune of $8,100 ($4,050 per person).

(Update: I was wrong about just the kiddos exemptions being gone. It turns out, ALL exemptions are gone. So instead of that $8,100 that I thought we got, we get nothing…double womp wommmmm…)

8) Alter the child tax credits from $1,000 to $2,000 per child (Line 49)

Instead of getting a $1,000 tax credit like we did last year, we can now deduct $4,000 off our tax bill (thanks baby #2!!).

9) Tack on the additional 15.3% business tax (Line 57)

This one is a little kick to the groin. Yes, we’re getting taxed at our income tax rate for the house flip…but we’ll also likely get taxed an additional $4,000 because of the small-business tax of 15.3%… Suuuucks!

You might have additional items beyond these that pertain to your tax bill – just use the same process, make the tweaks, and figure out your total tax liability!

And the Verdict Is!!!…

So far, we’ve paid $4,000 in Federal Taxes, so we’re on pace to pay roughly $8,000 by the end of the year. Based on my mid-year tax review above, we’ll likely owe $14,000…

Womp wommm…

At year end, we’ll be underpaid by $6,000. If I just let this go, we’ll not only have to pay the $6,000 by April 15, but we’ll also have to pay Uncle Sam interest (6% interest as I understand it…I could be wrong, but I don’t really want to find out the hard way either).

Run your numbers. You might be in a situation like me where you’re underpaying, or (like most) you might be paying in too much! Either way, let’s figure out what we can do to reconcile our taxes to get the difference closer to zero.

What You Can Do If You’re Under-withholding

If, after your mid-year tax review, you discover that you’re paying too little in taxes, these are you main options to bring your tax liability back to zero:

  1. Increase your HSA contributions (max $3,450 for individuals, $6,900 for those on the family plan in 2018)
  2. Increase your tax-deferred investment contributions (ie. load up your 401k so you don’t have to pay excessive tax this year – max of $18,500 in 2018)
  3. Contribute to a SEP IRA if you’re self-employed and are paying yourself a salary
  4. Reduce your earnings by investing in your business
  5. Decrease your W-4 dependent number (to start paying in more taxes)
  6. Start paying in quarterly amounts for your business income (this can be set up through your tax professional)

Alright, so what is it that we’re going to do to equal out our under-withholding?

1) I’m probably going to max out my HSA contributions

Since Liz and I are expecting a baby boy in September and will have a big bill coming anyway, my first choice will likely be to load up on the HSA account (as long as you use the money for medical expenses, you’ll NEVER have to pay tax on this money. It’s a great deal!). We’ve already got $8,000 sitting there, but it wouldn’t hurt to have some extra cushion – especially if there are complications.

  • We contributed $650 so far this year
  • My employer contributed $1,000
  • Which means we can contribute another $5,250
  • Since we’re in the 22% tax bracket, this will bring down our tax liability by $1,155. Not a ton, but it’s something.

2) Contribute more to our after-tax 401k

Up until now, I’ve been contributing to the Roth 401k, which I believe is the wiser choice. BUT, in this situation, it would be better to make the pre-tax investments than pay the additional taxes to the government and lose that money forever. So far, I’ve contributed $2,700 into the Roth 401k, which means I can still contribute $15,800 into the traditional 401k.

If I contributed the $15,800, I would reduce my tax liability by 22% of that $15,800, which is $3,476.

With these two actions, I’ll pay in $4,631 less in taxes. Not quite to the $6,000 I owe, but we’re getting close!

(Next, I unfortunately don’t draw a salary from my business, so I don’t think I can start a SEP IRA (option #3 from above), otherwise that would be my next course of action.)

3) Invest more into my business…or pay the tax

I could invest more money into my rental property and improve the kitchen or something…but that just wouldn’t yield the additional income necessary to make it worthwhile (I don’t want to spend money just for the sake of not paying taxes. It’d be ludicrous to pay $6,000 for new kitchen appliances to avoid $1,500 in taxes and earn no higher rents for the investment.

What would make more sense in my situation is to invest in my blog – perhaps I could pay a company to improve my SEO or site speed, which would then improve my visitor numbers, and increase my revenue for next year. This would likely be my next course of action.

What You Can Do If You’re Over-withholding

If you’re over-withholding, the solution is pretty simple. Get a hold of your W-4 at work and increase your allowances. Want to know what number you should claim? This post from Forbes is actually pretty helpful. If after the change you still figure out that you’re paying in too much, just increase the allowances to a larger number (I suggested ticking it up one at a time until you get to the correct contribution dollars).

And that’s it!

Did You Do a Mid-Year Tax Review?

Alright, be honest. Did you do a mid-year tax review?

  • If you did, what did you discover?
  • Were you paying in too much in taxes or too little?
  • What are you going to do about it?

You saw my course of action above. It’s a bit of a hassle, but if I can pay that money to myself instead of the government, I’ll absolutely take that road every time.

How about you? How did your mid-year tax review come out?

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13 comments to Time For Your Mid-Year Tax Review – It Could Save You Thousands!!

  • James Cooper

    Good article, Derek. One other thing that you can do is on Line 6 of the W-4 “Additional amount, if any, you want withheld from each paycheck”, assuming you receive two paychecks a month have $110.00 withheld additionally from each check until the end of the year. If you are to receive 13 paychecks until December 31 then $100.00 additional should get you right into the ballpark. Again, good post.

    • Yup – good point. I forgot to mention that – partially because we already claim 0 (since this helps us cover the additional income we make from the website and the rental property). It’s good to bring up though. Thanks!

  • Kris McDonald

    Hi Derek,
    Great article. My understanding is the personal exemptions in 2018 is eliminated so that $4050 per person is no longer available for anyone. Where are you seeing the exemption ($4050 each)still applicable for you and your wife? I hope you are right but as I’m reading it many people who used to itemize won’t for 2018 and without the personal exemptions their taxes will be rising. For our household (married no children) the loss of the personal exemption raises our taxable income by 3 grand….2017:$19000 itemized deductions and $8100 personal exemptions….2018 only $24000 standard deduction. Please share your source. I’m hoping to be incorrect lol.

  • Hayley

    This article came just in time. Thanks for posting. I was about to do ours and saw this. My husband and I just got a raise and my bonus was larger. Time to check everything again!

  • Nick Kantor

    I’ve been using the IRS Withholdings Calculator for years. It’s not always available when tax codes change because they have to update it but it’s updated now for 2018. Check it out: https://www.irs.gov/individuals/irs-withholding-calculator

  • Emily

    Thank u for this reminder. We just had our first bambino, we need to change our dependents. We can both do that right. Or only one of us?

    • Hi Emily. Typically, we always upped our dependent info for the breadwinner. I’d start there, then calculate what you’ll likely owe and see if your tax payments match what you’ll owe for the year. If you’re still paying in too much, then update both W-4’s. Hope that helps!!

  • […] Related: Time for Your Mid-Year Tax Review – It Could Save You Thousands! […]

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