5 Midyear Tax Check-Ins to Save BIG in 2021

Time To Read 8 MIN READ

With summer in full swing, now is the perfect time to take a dip in the pool, fire up the grill, and … review those taxes? 

You bet. Although 2020 is well behind us—thank goodness—new tax rules and other financial programs continue to provide incentives that can serve us both personally and professionally.

And right now is the perfect time to grab them.

As a powerful start, here are 5 midyear tax check-ins you should be thinking about today—while there’s still time to take advantage of them.

1. Check up on your withholdings

If your circumstances changed this year—maybe you changed jobs, got married, or welcomed a new child to your family—it’s worth revisiting your withholding amounts with your employer. You don’t want to end up with a large, unexpected tax bill for 2021.

Then again, you might not want a huge refund either. Why not? Because a huge refund means you’ve been paying more than you had to all year long.

When you take more than you have to out of your paycheck, you’re essentially using the government like a savings account. But the IRS is a terrible place to bank. 

It doesn’t pay any interest, and you can’t withdraw your money early if you need it.

Now, I know plenty of people who withhold more than they have to on purpose, treating that big tax refund like a windfall. But you’ll regret it if you run into trouble during the year, and you’ll pay far too much in interest if you run up your credit cards to compensate.

If you’ve been withholding more than you need to from your paycheck, consider putting that money toward an emergency fund instead.

2. Explore the 2021 change in FSA limits

Speaking of that paycheck, if you have access to a dependent flexible spending account (FSA) through your employer, you should also know that the limits were raised considerably in 2021.

Whether you’re married or single, your FSA limits more than doubled this year, from $5,000 to $10,500 for married couples filing jointly, and from $2,500 to $5,250 for single filers.

Dependents are usually children under 13, but the tax rule also applies to an adult child, spouse, or parent who can’t care for themselves either physically or mentally.

If any of those circumstances apply to you, make an appointment with your human resources rep to talk through your options as soon as possible.

3. Review your retirement contributions

Next, review your 2021 retirement plan contributions. You can catch up on IRA contributions until your taxes are actually due next year, but contributing to your 401(k) through your paycheck has a true end-of-year deadline.

Make sure you’re deducting the right amount from your paycheck to maximize your employer’s matching funds. Believe it or not, you can miss out by contributing either too much or too little. 

If you don’t contribute enough, you won’t reach the limit of what your employer would have been willing to give you in matching funds by the end of the year. That leaves free money just sitting on the table.

But if you contribute too much, you might reach your own limit before your employer has maxed out the amount they would have been willing to match for you. That also leaves free money on the table.

Because every 401(k) is unique, you’ll want to work with your human resources rep on this one too. In fact, that kind of financial advice is one of the most important things your human resources department can do for you. 

I work with great companies every day. As responsible employers, they work hard to plan your employee benefits. They really do want you to make the most of them.

4. Think about the 2021 advance child tax credit

The new 2021 advance child tax credit payments have also begun, letting qualifying parents receive tax credits as up-front cash instead of waiting until the end of the year. 

The catch? If your situation changes enough that you don’t qualify for those payments at the end of the year, you’ll have to pay them back.

More automatic payments are scheduled from August through December, but you have the choice to opt out of the remaining ones if you don’t think you’ll be able to keep them.

If your income has gone up this year—or if you think it will—or if you got divorced and your ex-spouse will be claiming the kids as dependents, those are all red flags that could be warning you to opt out.

But even if those things don’t apply to you, you might want to opt out anyway. You’ll still get any money you’re owed as a lump sum at the end of the year, and you won’t have to risk the alternative.

That said, if you need the money, take it. That’s what it’s for. Especially if you fully expect to qualify for those funds.

If you do take them, those payments don’t count as income. But you’ll still have to report them in your tax filing at the end of the year—not as income, but as a matter of tracking the cash. So be sure to keep up with any payments you get.

Software like Quicken is perfect for that, but no matter what system you use, don’t forget to include any amounts you received when it’s time to file your 2021 taxes.

5. Review your investment moves and business expenses

If you’re thinking about selling stock, buying investment property, or making other investment moves before the end of the year, be sure to consider the tax ramifications ahead of time. 

For example, if you expect to be in a lower tax bracket than usual in 2021, selling investments could have a lower tax impact than they might otherwise. 

That could make this the perfect time to make those financial moves.

Still, it all depends on your unique situation. If you have strong investments and you’re suddenly making less money, you might want to make those moves this year. The key is to assess your position sooner rather than later, before you’re pressed by end-of-year deadlines.

Last, but definitely not least, don’t forget to think about that rental property LLC or any other business investments, even relatively small ones.

It’s extremely important to know what business expenses are deductible, especially now. There are several new “one-time” rules that might never apply again, like improved deductions for business meals.

Even a side hustle can have a lot of genuine business expenses and other deductions you can claim. Don’t pay for things out of your own pocket that your business could legitimately cover!

Also, if you own any kind of company that pays you a salary, now is a great time to evaluate your expected income for the year. Make sure you’re taking full advantage of the differences between wages and partner draws in how they’re both taxed.

By now, you should have a pretty good feel for your annual business income, and there’s still time to make adjustments in the way you handle the rest of 2021. 

Plus, summer is a relatively slow time of year for most accountants. And companies often don’t think about hiring a financial advisor or fractional CFO until the end of the year, when it’s too late to go back in time and make changes. 

If you have questions, now is the best time to ask.

Get organized and bring your files up to date

You won’t be able to make solid decisions for either your personal or your business finances until your books are up to date. If they aren’t, jump on that now. 

Get those numbers as close as you can to real-time data.

Quicken’s automatic downloads can speed up the process, but no matter what system you’re using, be sure you’re entering and reviewing your transactions on a regular basis. It can help you identify problems before they get out of hand, and it can help you take advantage of opportunities like these 2021 incentives.

You should also be filing your receipts in a reliable system in case you need them—to prove either personal itemized deductions or business expenses. (If you use Quicken, here’s a tip: snap photos of your receipts and attach them to their transactions in the software.)

With your books up to date, you can run financial reports like tax schedules or expense reports whenever you need to. If you have a complex personal financial portfolio, reports are just as important for your personal finances as they are for a business.

Use them to see where you are at this point in the year. Check on your capital gains, your business income, your itemized deductions, or anything else you want to see. 

Keeping up with your books isn’t about storing your data away. It’s about using that data to make smart financial decisions.

Whatever system you’re using to keep up with your finances, make it a habit. Check in with your books every morning over coffee, or every evening before you close your computer down for the night.

At the very least, build it into your weekly routine. If you keep up with it as you go, you’ll never have to ask yourself, “What was that receipt for again?” Or, “Where did that deposit come from?” Instead, you’ll know how to categorize those deposits and expenses in a snap, without any extra effort. 

With all the time you’ll save, you’ll have plenty of hours left over for building new opportunities and investments—or just enjoying that summer barbecue.

Cecilia Leung Cecilia Leung is the managing partner of The Entrepreneur CFO, offering CFO advisory services to growing companies. She brings two decades of international financial services experience with the likes of JP Morgan, PricewaterhouseCoopers, and Ernst & Young to her business clients.