Mid-Year Tax Review

We are a few months past tax time, and as usual there were lots of complaints. One of those complaints is that taxes are not biblical. Remember the verse from Mark 12:17: “So Jesus said to them [Pharisees], ‘Repay to Caesar what belongs to Caesar and to God what belongs to God.’ They were utterly amazed at him.”

Even in biblical times, over 2,000 years ago, Jesus was telling people to acknowledge the government and pay taxes as required. He didn’t add any qualifiers about how the tax money is used by the government or whether we agree with government policies, only that we are required to pay taxes.

The other complaint we heard this year is people getting smaller refunds than last year. Keep in mind that refunds have nothing to do with how much you paid in taxes. In order to see how much you paid in taxes, look at your W2 form for this past tax year and compare that to your W2 form from the previous year.

Looking at how much you paid in taxes is a totally different animal than how much you got in your refund.

Many people make the mistake of claiming zero dependents on their W-4 (even though they have 4 kids), and pay way too much in taxes each payday, then celebrate when they get a big check back from Uncle Sam in the form of a tax refund.

All a big refund means is that you paid the government too much in taxes and they gave it back to you. You gave Uncle Sam interest-free use of your money, which you could have been using through the course of the year.

The flip side of paying too much is paying too little. Maybe you are self-employed and you ended up paying taxes plus a penalty last year because you had not been paying enough in taxes.

Your goal should be to stay as tax neutral as you can be, which means not paying in excess and not getting anything back. That’s pretty hard to do, but a mid-year tax review will help you see your current tax situation to determine if you need to make any adjustments. A mid-year review makes sense whether you are an employee or self-employed.

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 no time to make adjustments.

In order to figure out if you’re underpaying or overpaying this year, start by calculating how much you’ve already paid throughout the first half of the year. Your latest pay stub from the end of June should show you the year-to-date paid in taxes. 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 this year. So if you have already paid $2,000 at the end of June this year, you are on pace to pay $4,000 at year-end.

Once you know how much you are on pace to pay this year, pull out your tax form from last year and do a comparison. Is your salary the same as it was last year? Is it less or more? Do you have additional income this year that you did not have last year? Part-time job? Inheritance? Bonus?

Go through each line of last year’s return and enter in an estimated amount for this year to help you calculate the total estimated taxes you’ll owe for the current tax year. Do your estimates show you will get a refund or are you going to have to pay? Remember, the goal is to be tax neutral.

If your calculations show you will owe more than you will have paid, it’s time to make some adjustments to avoid the penalty that comes with underpaying. If you are underpaying, you want to use as many legal tax breaks as possible to bring your liability back to zero:

  • Increase the contributions to your Health Savings Account
  • Increase your tax-deferred investment contributions (401k  and IRA.)
  • Decrease the number of dependents on your W-4 to start paying in more taxes. Use the IRS Withholdings Calculator: https://www.irs.gov/individuals/irs-withholding-calculator.

If you are overpaying, the solution is also simple. Use that same IRS Withholding Calculator to update your W-4 and increase the number of dependents. Try ticking up the number of dependents one at a time until you get to the correct contribution dollars. And that’s it!

If you got a $2400 refund last year (which is a little less than average) changing the number of dependents you claim means increasing your monthly income by $200 each month. Would you rather have the $200 to spend on your family or would you rather make a monthly $200 interest-free loan to the government?

We encourage you to do a mid-year review to be sure you are as tax neutral as possible. If you can keep more money in your pocket instead of giving a free loan to the government, do it!

Just remember that getting a big tax refund check is not a reason to celebrate. It simply means you gave the government more money that you needed to and they gave it back to you. You could take that amount of money and bury it in the back yard each month to achieve the same result.

This blog started with the Bible verse from Mark 12:17 which said to pay to Caesar what belongs to Caesar, but if Caesar creates rules that allow you to pay less . . . then take advantage of those opportunities!

Check out the Manage Your Money God’s Way podcast for more on doing a mid-year tax review.

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