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Use tax time to organize your finances

February 23, 2021

Have you ever scrambled to pull together items needed to complete your taxes too close to the deadline? I certainly have, and I know I am not the only one.

This time of year is dreaded by many Americans, not only because of potential additional tax owed, but because of the coordination and organization required. This sometimes results in bit of procrastination of this annual task.

If this describes your approach to tax time, consider putting a positive spin on it this year by viewing it as an opportunity. In the four years I’ve worked in wealth management, I’ve learned how important it is to keep financial data organized. As you collect this year’s tax forms and receipts, I urge you to take some time to get the rest of your finances in order.

You can work through this checklist as a guide and touch base with your financial advisor to ensure no opportunities are overlooked

Get your balance sheet in order

You can’t expect to reach a goal without knowing where you’re starting from. Update your personal balance sheet (assets versus liabilities). Everything proceeds from this first step, so take the time to bring these numbers up to date.

Assets could include bank, investment, and retirement accounts; trusts; educational accounts; business ownership stakes; real estate; and valuable property. You likely know your liabilities, but a check of your credit report could remind you of items you missed. Categorize assets and liabilities based on how they are used (i.e. liquid vs. non-liquid assets or whether liabilities are tied to an asset).

Your balance sheet should illuminate any areas that help or hurt your financial situation. It may also prompt you to shift your asset balance and allocation.

Set up a process for updating your balance sheet regularly and tracking your net worth over time.

Optimize your pre-tax contributions

Make the most of your pre-tax contributions to retirement and health accounts by matching them to your needs, which may change from year to year. Of course, it will be important to make sure you qualify to contribute. If you have any questions, check with your financial advisor or CPA.

For example, from January to April 15, contributions to an Individual Retirement Account (IRA) can be applied to the current tax year or the next tax year. Depending on which year’s income you want to reduce, tell your IRA custodian which year the contribution applies to.

Another way to optimize pre-tax contributions is to review your flexible spending account (FSA) or health savings account (HSA) contribution and spending levels. Have you left money behind in an FSA in recent years? Are you paying health expenses with after-tax dollars but haven’t maxed out your contributions? Analyze your typical annual health care spending so you know how much to contribute each year. While you can only change your FSA contributions during open enrollment, you can change HSA contributions at any time.

Designate and update your beneficiaries

Don’t let your beneficiaries get determined by the state or a plan default. Check the beneficiary listings on wills, life insurance, annuities, IRAs, 401(k)s, qualified plans and anything else that would affect your heirs.

If you’ve named a trust, have any relevant tax laws changed since you did so? Have you provided for the possibility that your primary beneficiary may die before you? Does your plan address the simultaneous death of you and your spouse? An estate attorney can help walk you through these various scenarios.

Review account titling and access

You might have your finances in order, but can anyone else follow your plan in in emergency or after your death?

If one partner dies and an account is titled only in their name, those assets can’t be readily accessed by the survivor. The solution may be creating joint accounts, but it’s not always that simple. Titling has implications across a range of estate planning issues, as well as other situations such as Medicaid eligibility and borrowing power, too. Review your account titling and discuss with your team of professionals.

Ensure someone is authorized to access your finances in an emergency, whether it be a partner, will executor, family member or friend. Plan how this person will get all the information he or she needs if needed to access your assets and take care of your liabilities.

Automate what you can

Do you spend a lot of time moving money around that could be automated? Set your paycheck up to automatically deposit specified portions into various accounts. These could include an investment account, emergency fund, or vacation account. It’s also a good time to reconfirm your employer match for retirement accounts and increase your contributions to allow more time to generate tax-deferred gains.

Check in with your advisor

Your advisor can help offer specialized tools, impartiality, and experience earned by dealing with many market cycles and client situations. Communicate openly about what’s happening in your life today and what may happen in the future so they can help you get your finances in order and manage them.

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