If you were hit with an unexpected tax bill in April, you’re not alone. For high earners, taxes can be complicated, and catching up on the details can sometimes lead to unpleasant surprises.
Whether you had a large one-time payment or discovered gaps in your planning, it’s not too late to make adjustments for the rest of the year. A mid-year tax review offers the opportunity to fine-tune your strategy, minimize your tax liability, and prevent a repeat of the same situation next tax season.
#1: Review Your 2024 Tax Return
The first step in your tax planning is to revisit your 2024 tax return. While it’s tempting to push taxes out of your mind until next year, taking a moment to carefully review your return now can uncover missed opportunities for deductions, credits, and other adjustments. This proactive approach can help you avoid costly surprises and position you for better tax outcomes in the future.
Here’s what to look for:
- Deductions. Were there any personal or business expenses you overlooked that could have been deducted? For example, if you’re self-employed, double-check that you included all eligible business expenses.
- Credits. Did you miss any tax credits that could have lowered your bill? Certain credits, such as the Child Tax Credit or energy-efficient home improvement credits, can make a significant difference.
- Income. Make sure you properly reported all income sources, and consider whether you overlooked any options for offsetting taxable income, such as investment losses or retirement contributions. Also, take note of any over- or under-withholding based on your income, and adjust accordingly to avoid surprises in the future.
By carefully reviewing your return, you can identify areas for improvement, even after you’ve already filed. This exercise can set the stage for a more streamlined and efficient tax plan moving forward.
#2: Adjust Withholding and Estimated Tax Payments
One of the most common causes of an unexpected tax bill is insufficient withholding or estimated tax payments throughout the year. This is especially true for high earners, who often have income from multiple sources, such as a salary, bonuses, investment income, or side businesses.
If you’re an employee, adjusting your W-4 with your employer is a simple fix. The IRS offers a helpful tool called the IRS Tax Withholding Estimator, which can help you determine if your current withholding aligns with your anticipated tax liability.
If it doesn’t, make the necessary adjustments as soon as possible. For high earners, the IRS’s standard withholding rate of 22% might not be sufficient to cover your total liability, so you may want to increase your withholding to ensure you don’t end up with a large tax bill at the end of the year.
For those who are self-employed or earn income outside of regular paychecks, quarterly estimated tax payments are a must. These payments help smooth out your tax liability throughout the year and prevent you from facing a large bill when tax season arrives. The IRS requires self-employed individuals to estimate and pay taxes based on expected income, so it’s important to calculate these payments carefully.
If you’ve missed making sufficient estimated payments during the first half of the year, don’t worry—you can increase your payments for the second half to avoid steep underpayment penalties. Currently, the penalty rate for underpayments is 7% per year, compounded daily, which can quickly add up. Adjusting now can help you avoid this costly penalty and ensure you’re on track for the rest of the year.
#3: Maximize Tax-Deferred Account Contributions
One of the most effective strategies to reduce your taxable income is by contributing to tax-advantaged accounts. If you haven’t already, now is the time to take full advantage of options like a traditional 401(k) or IRA. The more you contribute, the lower your taxable income will be, and the greater your potential tax savings.
For 401(k) accounts, if your employer offers a match, make sure you’re contributing enough to take full advantage of it—this is essentially “free” money for your retirement. If you’re already maximizing your contributions, consider whether you could increase them further to take full advantage of the annual limit.
If you’re eligible, you might also consider increasing contributions to a Health Savings Account (HSA). HSAs are unique in that they offer a triple tax benefit: contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. It’s one of the most tax-efficient ways to save for future healthcare costs, and it can significantly reduce your current tax liability.
#4: Implement Charitable Giving Strategies
Charitable giving is another great way to reduce your taxable income while supporting causes you care about. If you’re looking for ways to offset your tax bill, consider strategic charitable donations before the end of the year.
- Donor-Advised Funds (DAFs). If you anticipate a higher-than-usual income year, a Donor-Advised Fund (DAF) can be a smart strategy. With a DAF, you can make a large charitable contribution and receive an immediate tax deduction, while retaining the flexibility to distribute the funds to your chosen charities over time. This gives you the benefit of maximizing your deduction now, while supporting causes that matter to you at your own pace.
- Bunching Contributions. If you typically make charitable donations on a yearly basis, consider bunching your contributions into one year. By grouping multiple years’ worth of donations together, you may be able to itemize deductions and exceed the standard deduction threshold, leading to a larger tax benefit overall. This strategy allows you to accelerate your giving in a way that maximizes your tax savings in a single year.
- Qualified Charitable Distributions (QCDs). If you’re 70½ or older and have an IRA, you can direct up to $108,000 in 2025 to a qualified charity directly from your IRA. This distribution won’t count as taxable income, making it a powerful way to reduce your taxable income while supporting the causes you care about. It’s an efficient option for fulfilling your charitable goals without increasing your tax bill.
#5: Reevaluate Investment Strategies
Your investment strategy can have a significant impact on your tax planning, particularly when it comes to managing capital gains. If your portfolio has generated more gains than expected, leading to a higher-than-anticipated tax bill, there are steps you can take to minimize the tax impact going forward.
Here are a few ways to reduce the tax burden on your investments:
- Tax-Loss Harvesting. If you’ve sold investments that resulted in capital gains, consider using tax-loss harvesting to offset those gains. This strategy involves selling other investments that have lost value to realize a loss, which can then be used to offset the taxes owed on your gains.
- Managing Equity Compensation. If you have equity compensation, like stock options or RSUs, it’s critical to optimize your tax strategy around these assets. For example, exercising stock options or selling RSUs can trigger taxable events, and timing those sales strategically can help you minimize taxes.
- Capital Gains Exclusions and Other Benefits. If you’ve experienced a significant life event, such as selling a property, make sure you’re aware of any capital gains exclusions that may apply. For example, if the home you sold was your primary residence, you may qualify for an exclusion of up to $250,000 ($500,000 for married couples) of capital gains. Be sure to account for these exclusions and other tax benefits to avoid overpaying on taxes.
By carefully evaluating your investment strategies and aligning them with your tax goals, you can optimize your portfolio to minimize taxes while continuing to grow your wealth.
TrueNorth Wealth Is Here to Help
Tax planning isn’t just about avoiding a hefty bill—it’s about creating a thoughtful strategy that supports your broader financial goals. As you move into the second half of the year, these steps can help you stay on track and ensure your tax planning is as effective and efficient as possible.
Even if you feel confident in your approach, partnering with a financial professional can offer valuable insight tailored to your unique situation. At TrueNorth Wealth, our team of fiduciary CFP® professionals is here to guide you through complex tax laws, maximize your tax-saving opportunities, and help you avoid costly mistakes. Together, we’ll build a comprehensive financial plan that not only addresses your tax strategy but also aligns with your long-term financial objectives.
TrueNorth Wealth is among the top Wealth Management firms in Utah and Idaho, with offices in Salt Lake City, Logan, St. George, and Boise. At TrueNorth Wealth, we focus on helping our clients build long-term wealth while maximizing the enjoyment they receive from their money. We do this by pairing our clients with a dedicated CFP® professional backed by an incredible team.
For our team at TrueNorth, it’s about so much more than money. It’s about serving families all across Utah and helping them achieve freedom and flexibility in their lives. To learn more or schedule a no-cost consultation, visit our website at TrueNorth Wealth or call (801) 316-1875.
