As we move into the holiday season, the last thing many people want to think about is financial planning. But with our ever-changing tax environment, it’s important to review how these changes will affect your tax bracket, especially if you have income that changes every year or an investment portfolio that changes. If you don’t spend the time now, it could be painful when it comes time to write the tax check.
This is illustrated by a recent situation with a client. This client called a few weeks ago about a big tax bill due to a substantial investment return she had in 2012. (Talk about waiting until the last moment to do your taxes.) I reminded her that it was her choice not to make the investment changes I had suggested to eliminate that capital gains tax. (She’ll be making them this year.)
For many of us, keeping track of financial statements from multiple sources can be confusing. If you are self-employed, you also have to organize all your expenses for the year.
If you have an investment portfolio, keep track of what transactions you make because the timing of some of your buys or sells could make a huge difference in your net profit.
Many people focus on whether they make the difference between an 8 percent profit or a 10 percent profit, depending on what investment they choose. On that investment, the tax difference that you pay could be the difference between a 24 percent income tax bracket or 34 percent bracket, or no tax at all. If you only look at the 2 percent difference in the profit margin, you may miss the 10 percent spread in your income tax requirement. That’s a huge net difference.
For those of you who bring a shoebox full of receipts and financial statements in to your financial adviser, take note of some helpful suggestions. All financial companies, whether they are mutual funds or simply your bank, send you forms throughout the year, most commonly as monthly statements. Keep these statements in order in individual folders instead of their envelopes. This will make your life much easier at tax time.
With investment companies such as those that manage mutual funds or other stock or retirement investments, you’ll get two types of statements throughout the year. Every time you have any type of transaction on your investment – whether it be a dividend disbursement or new money going in – you will get a confirmation statement. These statements simply confirm the transaction.
You’ll also get a quarterly statement that simply recaps all your activities for the previous three-month period. Take a few moments to look at your quarterly statement. If you see all of your transactions from your confirmation statements on your quarterly statement, you can shred all those confirmations. When you get your year-end statement, make sure all the transactions are on it, then shred all the quarterly statements. Now you only have one recap statement for each institution.
Something you might want to consider to help ease the pain at tax time is to accomplish another objective when you gather this information. This is a good time to begin the process of mapping out your financial plan. Think about it, all the forms you are gathering for your taxes are the same ones you’ll need for you own financial plan.
Look back at prior years’ tax returns. Did you overpay and get a refund? Some people see that extra money as a forced savings account, but think about it. That is no-interest savings. Consider instead adjusting your tax payments and invest the difference. If you owe taxes at the end of the year, you’ll have the money to pay it but at least you get to keep the interest.
If you choose not to take this task on yourself, you have options. What specifically do you need help in? How complicated are your needs? When talking to people who can help with finances, find out how many hats he or she wears and whether they are generalists or specialists. Just like doctors and attorneys, financial advisers each have a specialty.
Once the hubbub of the boat show is over, sit down with someone and map out your short-term and long-term financial goals. Talk to several people and ask a lot of questions. You don’t have to divulge all your specifics until you feel comfortable with the person. You must get that feeling of trust before you do anything.
There is plenty of time left until the end of the year. You can still fund your retirement accounts or implement other tax strategies. For those of you who have a business, you even have time to set up a new retirement account to save you even more money come tax time.
Information in this column is not intended to be specific advice for anyone. You should use the information to help you work with a professional regarding your specific financial goals.
Capt. Mark A. Cline is a chartered senior financial planner. Contact him at +1 954-764-2929 or through www.clinefinancial.net. Comments on this column are welcome at firstname.lastname@example.org.