Note to Individual Income Tax Payers: Don’t Underemphasize Midyear Tax Planning

For anyone looking to optimize their tax posture for the fiscal year, taking the time to do a midyear tax checkup is essential. In addition to getting a raise, sending a child off to college, or anticipating retirement, savvy taxpayers should also consider other changes which may not be so obvious. Waiting until the end of the tax year to take these situations into account could mean missing out on benefits or paying more taxes than anticipated. Here are situations taxpayers should assess now:

 Surpassing the Net Investment Income Tax Threshold

During the year, high earners can pass the net investment income tax (NIIT) threshold or Medicare surtax. The 3.8% tax applies to individuals and couples who have net investment income and modified adjusted gross income (MAGI) over certain thresholds: $200,000 for individuals, $250,00 for couples filing jointly, and $125,000 for married couples filing separately. Taxpayers owe an additional 0.9% in Medicare tax with earned income above these levels. Shifting investments that earn income to retirement accounts and deferring earned income could be enough to avoid the NITT threshold.

Consider the 2017 Retirement Account Limits

Qualified retirement plans continue to be tax-friendly and an excellent way to lower taxable income. Here are some numbers to consider for the 2017 tax year:

–   Individuals can contribute as much as $18,000 to a 401(k) or 403(b). Anyone 50 or older can add $6,00 through a “catch-up” contribution.

–   IRA contribution limits are $5,500 for qualified taxpayers under 50 and $6,500 for those 50 or older. This is true for traditional and Roth IRAs. Remember that although both Roth and traditional IRAs have benefits, a traditional IRA can reduce taxable income in the current year.

–   For anyone who is self-employed, simplified employee pension (SEP) plans allow contributions of up to 25% of compensation or a maximum of $54,000.

For anyone who will be 70 ½ or older, it’s also important to remember that a required minimum distribution (RMD) may be taken from tax-deferred retirement accounts. Typically, taxpayers have until April 1 to take out their first RMD. After the initial distribution, however, each annual distribution must occur by December 31. This means anyone who is waiting to pay their first RMD until next year has to pay tax on two distributions in their 2018 tax return.

Tax Breaks for College Tuition

Taxpayers sending a child off to college this year should check to see if they qualify for the American Opportunity Tax Credit (AOTC), which can be worth up to $2,500 each year for four years for each eligible student. If this credit lowers the amount of tax owed to zero, taxpayers can have 40% of any remaining amount of credit refunded to them up to $1,000. To be eligible for the credit, the IRS says a student must:1

  • Be pursuing a degree or other recognized education credential
  • Be enrolled at least half-time for at least one academic period beginning in the tax year
  • Not have finished the first four years of higher education at the beginning of the tax year
  • Not have claimed the AOTC or the former Hope credit for more than four tax years
  • Not have a felony drug conviction at the end of the tax year

Anyone sending a child to college should always be mindful that a federal tax break and a tax-free withdrawal from a 529 college savings plan cannot be calculated with the same qualified college expenses. This means taxpayers paying for a college bill solely with a tax-free 529 plan will most likely be ineligible for college tax credits or deductions.

Remember that full-time college students younger than 25 can still be claimed as dependents, which is an exemption of $4,050 in 2017. Children who are not full-time students lose the deduction when he or she turns 19.


  1. Internal Revenue Service. “American Opportunity Tax Credit.” Accessed June 29, 2017.
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