Mid-Year Tax Planning: Strategies to Help Reduce Your Tax Bill Next Year

If you owed more in taxes than expected this year, now is the perfect time to start planning ahead.

Many people only think about taxes during filing season, but some of the most valuable tax-saving opportunities happen months before year-end. Proactive planning throughout the year can help improve cash flow, maximize savings opportunities, and reduce unwanted surprises next April.

With tax season behind us and summer approaching, now is an ideal time to revisit your financial strategy and evaluate areas where adjustments may help position you more effectively for next year.

Key Takeaways

• Reviewing your W-4 mid-year allows you to adjust federal tax withholding to prevent a large balance due or an excessive refund.
• Taxpayers can take advantage of the 2026 401(k) limit increase to $24,500 along with additional catch-up options for those 50 and older.
• Utilizing HSAs and FSAs helps you pay for medical and dependent care expenses using pre-tax dollars to lower your taxable income.
• Selling underperforming investments can help offset capital gains and reduce your taxable ordinary income by up to $3,000.
• Proactive moves like 529 contributions and tracking medical expenses are most effective when managed well before the December 31 deadline.

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Review Your W-4 Withholding

Your Form W-4 determines how much federal income tax your employer withholds from each paycheck. Even small updates can make a meaningful difference.

If you owed more than expected this year, increasing your withholding may help reduce the likelihood of another large tax bill next spring. While this could slightly reduce take-home pay during the year, it may create more predictability when taxes are due.

On the other hand, if you received a large refund, it may be worth revisiting your withholding strategy as well. A sizable refund often means you paid more taxes throughout the year than necessary. Adjusting your withholding could allow you to keep more money in each paycheck and redirect those dollars toward savings, investing, or other financial goals.

You can easily adjust your withholding by using the IRS Withholding Estimator tool online to determine the right amount, then submit a new Form W-4 to your employer’s HR or payroll department. It’s particularly important to update your W-4 after major life events such as:

• Getting married or divorced
• The birth or adoption of a child
• A significant change in non-wage income (i.e., capital gains)

Manage Estimated Tax Payments

While withholding covers wages, you may need to make quarterly estimated tax payments if you receive significant income from self-employment, interest, dividends, or capital gains. For 2026, you generally must pay as you go if you expect to owe at least $1,000 in tax after subtracting your withholding and credits.

To avoid underpayment penalties, you should aim to pay at least 90% of your 2026 tax liability or 100% of your 2025 tax (110% if your 2025 adjusted gross income was over $150,000). Remaining on schedule with the June, September, and January deadlines can help you maintain steady cash flow and avoid interest charges next spring. 

Maximize Retirement Contributions

Retirement accounts remain one of the most effective tools for reducing taxable income while building long-term wealth.

For 2026, the IRS increased the 401(k) elective deferral limit to $24,500 for employees, up from $23,500 in 2025.

Additional catch-up contributions include:

• Age 50 and older: additional $8,000
• Ages 60–63: enhanced “super catch-up” contribution of $11,250

This allows some individuals to contribute as much as $35,750 annually into tax-advantaged retirement accounts.

Traditional 401(k) contributions may provide several benefits:

• Contributions are generally made with pre-tax dollars
• Taxable income may be reduced
• Investments continue growing tax deferred until withdrawal

Self-employed individuals may also have additional retirement planning opportunities through accounts such as:

• SEP IRAs
• SIMPLE IRAs
• Solo 401(k) plans

Traditional and Roth IRAs can also play an important role in tax planning. For 2026, IRA contribution limits are expected to remain at $7,500 annually, or $8,600 for individuals age 50 or older, unless further inflation adjustments are announced.

Depending on income levels and workplace retirement plan participation:

• Traditional IRA contributions may be tax deductible
• Roth IRAs may provide tax-free qualified withdrawals in retirement

Evaluate Roth Conversion Opportunities

A mid-year Roth conversion involves moving funds from a traditional IRA or 401(k) into a Roth IRA. While you must pay income tax on the converted amount in the current year, the assets then grow tax-free and provide tax-free withdrawals in retirement. This strategy can be especially effective in 2026 if you find yourself in a lower tax bracket than usual or if you expect tax rates to increase in the future. 

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Because there are no income limits on conversions, this is also a primary way for high earners to build Roth assets even if they are phased out of making direct contributions. It is important to pay the resulting tax bill using funds outside of the retirement account to maximize the growth potential of the conversion. You should also be aware of the five year rule, which requires the converted funds to remain in the account for five years to avoid potential penalties on withdrawals.

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Take Advantage of HSAs and FSAs

Tax-advantaged healthcare accounts can create meaningful savings opportunities while helping cover medical and dependent care expenses.

If you participate in a high-deductible health plan, a Health Savings Account (HSA) may offer valuable tax advantages:

• Contributions may be tax deductible
• Investment growth can accumulate tax free
• Qualified withdrawals are tax free

For 2026, HSA contribution limits are:

• $4,400 for self-only coverage
• $8,750 for family coverage

Individuals age 55 and older who are not enrolled in Medicare may contribute an additional $1,000 catch-up contribution.

Flexible Spending Accounts (FSAs) may also help reduce taxable income by allowing pre-tax contributions for qualified healthcare expenses, including:

• Prescriptions
• Eyeglasses and contact lenses
• Certain over-the-counter healthcare products

Dependent Care FSAs may help families manage childcare expenses by using pre-tax dollars for qualifying costs such as:

• Daycare
• Before- and after-school care
• Summer day camps

Consider College Savings Strategies

529 college savings plans can provide tax-efficient ways to save for future education expenses.

While contributions are not deductible on federal income taxes, many states offer state income tax deductions or credits for eligible contributions.

It is worth checking your specific state’s rules, as some states require you to use their in-state plan to receive a deduction, while others offer tax parity, allowing a deduction regardless of which state’s plan you choose. 

In addition to education planning benefits, 529 plans may also support broader gifting and estate planning strategies. Contributions exceeding annual gift tax exclusion amounts may require filing a gift tax return.

Recent changes under the SECURE 2.0 Act have added even more flexibility; you can now roll over up to $35,000 of lifetime unused 529 assets into a Roth IRA for the beneficiary. To qualify, the 529 account must have been open for at least 15 years, and the rollover amount is subject to annual Roth IRA contribution limits. 

Starting in 2026, families have a new tax-advantaged option: the 530A Trump Account. These are custodial-style IRAs for children under age 18 that do not require the child to have earned income. You, family members, or even employers can contribute a combined total of up to $5,000 annually ($2,500 cap for employer-only portions). 

Additionally, eligible U.S. children born between 2025 and 2028 may receive a one-time $1,000 seed contribution from the federal government to jumpstart their long-term savings. 

Harvest Investment Losses Strategically

If portions of your investment portfolio declined in value this year, tax-loss harvesting may help offset taxable gains and potentially reduce your overall tax liability.

Capital losses can offset capital gains, and if losses exceed gains, taxpayers may generally deduct up to:

• $3,000 annually against ordinary income
• $1,500 if married filing separately

It is important to remain mindful of the IRS wash-sale rule, which generally disallows a deduction if the same or substantially identical investment is repurchased within 30 days before or after the sale.

Evaluate Charitable Giving Opportunities

Charitable giving can support causes that matter to you while also creating potential tax benefits.

Donations of qualifying assets including cash, securities, real estate, and vehicles may be deductible if you itemize deductions and maintain appropriate documentation.

For those who don’t have enough deductions to exceed the standard deduction threshold, a bunching strategy using a Donor-Advised Fund DAF can be effective. By contributing several years’ worth of planned donations into a DAF in a single tax year, you may be able to itemize and receive a larger immediate tax benefit while distributing the funds to charities over a longer period.

Depending on your financial situation, charitable strategies may also help offset a portion of adjusted gross income. If you are age 70.5 or older, you have access to one of the most powerful tax-saving tools: the Qualified Charitable Donation (QCD). This allows you to transfer up to $105,000 (for 2026) directly from your IRA to a qualified charity. Not only does this satisfy your Required Minimum Distribution (RMD) if you are of age, but the amount is also excluded from your taxable income, regardless of whether you itemize or take the standard deduction.

Because tax rules surrounding charitable deductions can be complex, working with a financial advisor and tax professional may help determine whether itemizing deductions or taking the standard deduction makes the most sense for your situation.

Review Updated Standard Deduction Amounts

For the 2026 tax year, the standard deduction has increased to $16,000 for single filers and $32,200 for married couples filing jointly. Heads of household should see an increase to $24,150. Additionally, taxpayers age 65 and older may qualify for a new $6,000 deduction per person, which phases out if your modified adjusted gross income exceeds $75,000 for singles or $150,000 for joint filers. Knowing these base amounts is essential because you generally only benefit from itemizing expenses like mortgage interest or charitable gifts if their total exceeds these higher thresholds. 

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Track Medical and Dental Expenses

If you experienced significant medical or dental expenses during the year, maintaining organized records may be beneficial.

Certain unreimbursed healthcare expenses may qualify as itemized deductions if they exceed 7.5% of adjusted gross income.

Keeping detailed records throughout the year can make it easier to evaluate potential deductions during tax season.

Plan Ahead Before Year-End

The best tax strategies are rarely implemented in March or April.

Many valuable planning opportunities occur throughout the year, which is why proactive tax planning can be so important. Reviewing withholding, maximizing retirement and healthcare accounts, evaluating investment strategies, and considering charitable giving opportunities early may provide greater flexibility before year-end deadlines arrive.

Because every financial situation is unique, working with a trusted financial advisor and tax professional can help identify strategies tailored to your goals and position you more effectively for the year ahead.

Take the guesswork out of mid-year tax planning by booking a consultation to tailor these strategies to your financial goals.

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