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Summer Tax Check-up

What’s the best part about summer? That’s right – tax planning!


I mean, let’s be real, you can only do so many summer activities before it starts to get a little repetitive and boring. Beach day, boating, drinks on a patio, hiking at a state or national park…


You’re thinking it too – when can I get back in front of a spreadsheet?! (If this isn't you, skip to the Conclusion).


Well, here’s your solution – do some mid-summer tax planning.


Why is summer a good time for tax planning?


Aside from getting you out of the heat and sun, tax planning in the summer lets you take a step back, review where you’re at so far this year, and gives you ample opportunity to adjust if something is off.


Alright, so what are the steps?


First, gather the documents:

  1. Your tax return for last year (if it’s finished – if not, this might be a little harder)

  2. Your latest paystubs

  3. Any other income information

    1. Roth conversions, investment income, rental income, asset sales, etc.


There are two things to consider when you’re doing tax planning.

  1. The IRS wants you to pay the taxes you owe throughout the year (either through withholding or quarterly estimates).

    1. If you don’t pay 90-100% of your tax liability, you might have to pay penalty interest IN ADDITION TO your regular tax liability.

  2. If you don’t know how much tax you’re going to owe, you can use the safe harbor rules to avoid penalty interest:

    1. If your income is BELOW $150k ($75k if Married Filing Separately), pay at least 100% of LAST year’s tax liability.

    2. If your income is ABOVE $150k ($75k if Married Filing Separately), pay at least 110% of LAST year’s tax liability.


Now, as mentioned above, the issue is usually figuring out what THIS year’s tax liability is going to be, so we generally shoot for the percentage of LAST year’s tax liability that will avoid penalties.


If you’re looking at your 2023 tax return, you can find your total tax on line 24 of form 1040.


Let’s say that line shows $20,000, and your income last year was $160,000.


You can avoid penalties by making sure you withhold $22,000 this year (110% of $20,000). If you’re making quarterly estimates, the IRS wants you to make those payments equally each quarter, so you’d pay $5,500 on April 15th for first quarter, June 15th for second quarter, September 15th for third quarter, and January 15th for fourth quarter.


If you’re going the estimates route, you’ve probably noticed an issue here – two of those deadlines have already passed. So you can see why it’s important to make sure you’re having proactive conversations with your financial planner or tax preparer to make sure you're staying ahead of the IRS.


If you’re a W2 employee, now that you know you should withhold $22,000 over the course of this year, the rest becomes pretty simple. Take a look at your latest paystubs – specifically the YTD Federal Tax and the Federal Tax Withheld on your latest paystubs. If what you’ve withheld year to date (YTD) plus the amount you're set to withhold the rest of the year is $22,000 or higher, then you’re probably all set! Of course, if your income changes throughout the year, you’ll need to take that into account.


But what if you’re not all set?


Let’s say your YTD Federal Tax Withheld is $9,000, the withholding per paycheck is $750, and you have 12 paychecks left this year. You’re on track to withhold $18,000 ($750 x 12 + $9,000), so you’re on track to withhold $4,000 less than you need.


Take that deficiency ($4,000) divided by the number of paychecks you have left this year (12) to figure out how much MORE you need to withhold per paycheck for the rest of the year. In this case, the additional withholding would need to be about $333 to hit the safe harbor rules. The next steps would be to update your W4 at work to add additional withholding of $333 per paycheck.



Keep in mind that this is just how to hit the safe harbor amounts – if your tax liability is much higher this year than it was last year, you still might need to pay in. The safe harbor rules just help you avoid penalties for underpayment.


It’s also possible that your tax liability will be far lower than last year’s, in which case you will have over withheld and will receive a refund.


All of this is about federal tax rules – depending on the state you live in, there may be different rules about tax withholding and quarterly tax estimates.


Rules may also differ depending on the industry in which you work.



Taxes can kind of suck. But planning ahead can make them suck less, and working with a professional can make it easier. If your head was spinning before you made it 3 lines into this post (or if you're one of those people who ENJOYS summer activities), that’s a good sign that you should consider delegating this work to a professional.

Head over to my scheduling link if you'd like to have me do this stuff for you.


As always, keep in mind that you don't have to go it alone. I’m Austin Preece, a financial planner in Eau Claire, Wisconsin, and I work virtually with people across the US. Check out my website to see what it's like to work with me and reach out if you have any questions.

If you found this post helpful, help spread the word! Share with friends and family that you think may benefit as well. But remember, this is solely for educational purposes - it's not advice.

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Jul 01

This was very informative! I love how you simplified the tax planning process. thank you for sharing!

Replying to

I'm glad you found it helpful!

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