- It's the perfect time for a midyear tax checkup, financial experts say.
- Filers may prepare for next year's tax season by reviewing withholdings, retirement contributions, child tax credits, unemployment income and more.
As Covid-19 restrictions lift and summer kicks off, it may be tempting to get distracted by vacations, concerts, barbecues and camping. But financial experts say it's also the perfect opportunity for a midyear tax progress report.
A tax checkup shows if you're on track and may uncover ways to save over the next six months, said Sabina Smailhodzic Lewis, certified financial planner and co-owner at Avant-Garde Wealth in Bowling Green, Kentucky.
With recent law changes, there are new things to monitor as the year progresses. Here's what to include in a midyear tax audit.
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It's essential to review paycheck withholdings throughout the year, said Eric Bronnenkant, a CFP and certified public accountant at Betterment, a digital investment advisor.
As time passes, life changes may affect how much someone needs to withhold every pay period.
"Obviously, there's a lot of things that happen during the year," he said.
For example, getting married, having a child, and income and career changes may impact health insurance premiums, health savings accounts, retirement accounts and more, Smailhodzic Lewis said.
The IRS tax withholding estimator allows filers to double-check the levies taken from their paychecks, cutting the risk of underpaying or overpaying taxes throughout the year, she added.
Moreover, those eligible for the 2021 increased dependent care flexible spending account limit of $10,500 may review how much they want to defer and spend through the rest of the year.
The middle of the year is an excellent time to review retirement plan contributions, such as 401(k) and individual retirement accounts, said Bronnenkant.
Big savers may even consider depositing more with after-tax 401(k) contributions if their plan allows it.
While filers have until the tax deadline next year for IRA or health savings account contributions, they won't have the same opportunity for their 401(k) after the year ends.
"You can't go backward on your 401(k)," he said.
Child tax credit
In a few weeks, millions of families will start receiving monthly payments for the enhanced child tax credit. The 2021 change boosts the credit to $3,000 from $2,000 per child under 17, with an extra $600 for children under age 6.
However, those expecting a tax bill may prefer to opt-out of the payments and receive a lump sum next April, assuming they still qualify. There's also the risk of losing eligibility if someone earns more through the rest of the year, Bronnenkant said.
"For some people, it may be a good time to think about their situation," he said.
Although the deadline to decline the first payment already passed, there's still a chance to unenroll from the others through the Child Tax Credit Update Portal.
Taxes on unemployment income
Those receiving unemployment income may also benefit from a midyear audit. While the default federal tax withholding is 10%, recipients may set aside more with quarterly estimated payments or deductions from a future job, Bronnenkant said.
While next year's tax season is several months away, it's not too soon to start getting organized, Bronnenkant said. Filing receipts and paperwork now will only make it easier to file later.