Tax planning is not just about how much money you make. It is also about where your income comes from, how it is taxed, and whether your current strategy still fits your situation.
Two taxpayers with the same income can end up with very different tax bills depending on their mix of wages, business income, investments, retirement distributions, or rental activity. That is why summer is one of the best times to pause, review your income sources, and make adjustments before year-end.
A midyear tax check-in now can help reduce surprises later and give you more opportunities to make proactive decisions while there is still time left in the year.
Step 1: Take inventory of your income sources
Most income falls into a few core categories – wages from an employer, self-employment, freelance work, investment earnings, and any side income you pick up along the way. Other types of income you may have include:
- Retirement income (pensions, Social Security, IRA or 401(k) withdrawals)
- Rental income from real estate
- Business distributions (for S-corp or partnership owners)
- Interest from savings accounts or bonds
If you aren’t sure, take a moment and look at last year’s tax return. It’s a great place to start. Then consider any changes you expect.
Step 2: Get familiar with the different types of taxes
Not all income is taxed the same way. And these differences can add up quickly.
- Wages are subject to a progressive income tax from 0% to 37%. So know the rate your next dollar of tax will pay. Also don’t forget wages are subject to payroll taxes like Social Security and Medicare (7.65%).
- Self-employment and freelance income is subject to the same tax rates as wages except most don’t automatically withhold taxes and may also be subject to self-employment tax (15.3%). So planning here needs to consider quarterly estimated tax payments.
- Investment earnings can be subject to a variety of tax rates such as interest and short-term capital gains (up to 37%), qualified dividends (0% to 20%), or long-term capital gains (0% to 20% depending on the holding period and income type).
- Retirement income may be fully taxable (up to 37%), partially taxable (varies), or tax-free (0% for certain Roth distributions).
- Rental income is generally taxed at ordinary income rates (up to 37%), though deductions can decrease your total taxable income.
- Business distributions vary by entity and may be taxed at ordinary income rates (up to 37%) or pass through with no additional tax at the distribution level (varies).
Step 3: Tips to manage your tax burden
- Align your tax payments with how you actually earn. If a growing portion of your income is coming from somewhere outside a traditional job, withholding alone may not cover your tax liability. W-2 income is handled automatically, however freelance, investment, or rental income often requires quarterly estimated payments to avoid penalties.
- Use withholding and estimates together. Adjust paycheck withholding to pair it with estimated payments when income is uneven or comes from multiple sources.
- Pay attention when your income changes. These income shifts can catch people off guard with a higher tax bill if they don’t adjust their plan early in the year.
- Be intentional about when income and expenses hit. Sometimes you have control over when you earn income or pay expenses. Used correctly, adjusting your timing can help smooth out your tax bill, especially if you’re self-employed or have investment income.
- Check your plan throughout the year. Your income mix can change quickly, and small updates can make a big difference. A quick review during the year can help you stay on track and avoid surprises later.
Final step: Meet with your advisory team
The most effective tax strategies are rarely created in March or April. They are built gradually throughout the year through proactive planning, timely adjustments, and regular conversations with your advisory team. Summer is an ideal time to revisit your income, withholding, estimated payments, and upcoming financial decisions while there is still time to make meaningful changes before year-end.
By understanding how your income is taxed and reviewing your strategy now, you can avoid surprises later and put yourself in a stronger position for next tax season.
Tax Planning Now = Less Surprises in Tax Season
Whether your income comes from a business, investments, real estate, freelance work, or traditional wages, proactive planning can make a meaningful difference in your tax outcome.
Alloy Silverstein’s tax advisors work with individuals and business owners year-round to help identify planning opportunities, adjust strategies, and prepare for upcoming tax obligations before deadlines arrive. Contact our team to schedule a midyear tax planning review.
