Fitting Tax Planning into your Financial Puzzle Helps you Make the Most of your Money
Taxes are an important piece of your financial puzzle.
You spend a lot of time working to earn money, so it's worth taking the time and trouble to figure out how to make the most of that money.
The basic rule of tax planning is: Don't let taxes drive your basic decisions, but do consider taxes as you develop your financial plan.
The first step in creating a tax plan may surprise you: A good way to begin is by taking a close look at your cash flow.
You will find that you need to have money in order to take advantage of tax-saving opportunities such as purchasing a home or investing in retirement accounts.
So controlling your spending is an important part of reducing your overall tax burden.
Next, think about how you've done your taxes in the past, and whether you've had any changes in life circumstances.
Below are some situations that could affect your taxes.
However, this list is far from complete and the descriptions don't cover everything, so be sure to have a talk with your tax adviser about any of these circumstances.
1. YOU CHANGED JOBS. If your new employer has a tax-deferred retirement plan such as a 401(k), take advantage of it as quickly as you can.
2. YOU HAD SELF-EMPLOYMENT INCOME. If you are self-employed, full- or part-time, consider setting up a self-employed retirement plan.
There are several to choose from, including SEP-IRAs, SIMPLE-IRAs, money purchase pension plans and profit-sharing plans.
When you're self-employed, you might have a number of opportunities to take advantage of tax deductions for business expenses.
But don't spend money just to get a deduction; after all, it's the money you keep that counts!
3. YOU BOUGHT A HOME. You can deduct mortgage interest and property taxes, so when you purchase a home your total tax bill may drop.
Take some time to refigure how much you're paying in estimated or withheld taxes, and adjust accordingly.
You aren't doing yourself a favor when you overpay the government, even if you get a big refund.
When you sell your home, you are eligible for a capital gains tax exclusion: $250,000 for singles, $500,000 for married couples filing jointly.
This must be your primary residence, and you must have lived in it for at least two years.
Unfortunately, if you must sell your home at a loss, you are not permitted to deduct the loss.
4. YOU GOT MARRIED. When you get married, you may file your annual tax return together with your spouse, or separately.
When you file jointly, you both must sign the tax return, and you are both responsible for making sure the tax gets paid. So if your spouse doesn't pay the tax, you may have to.
Most married couples would pay more taxes if they chose to file separate returns, but not all.
To determine whether filing jointly or separately would result in a lower combined tax bill, figure your taxes both ways and decide.
Note that if you file separately, you will not be responsible for the tax owed by your spouse.
Often newlyweds are in for a shock from the so-called "marriage penalty," which occurs when your combined taxes as a married couple are higher than when you both were filing individual returns as single taxpayers.
The penalty tends to be higher for two-income households and for high-income couples.
5. YOU HAD CHILDREN. If you have a child (or children) that you claim as a dependent, you can cut your tax bill by $500 per child in 1999. The credit is reduced above certain income limits.
If you hired child care, or other home care assistance that benefits your kids, you may be able to claim a dependent care tax credit on your return. You and your spouse must work at least part-time, unless you're a full-time student or disabled.
Your children must be under 13 years old or disabled.
Don't forget the "nanny tax."
You must pay social security tax for household employees earning more than $1000 a year.
Strictly speaking, financial aid isn't a tax issue, but it's an important part of your financial plan if your kids might be going to college.
In the current financial aid system, the money you've invested in retirement plans is not considered an asset when you and your child apply for financial aid.
For that reason, it might be a mistake to forego retirement plan contributions in order to invest in a taxable account for your child's education.
Consult with your planner on this.
Also, take a look at the financial aid calculators, which are readily available online. One good one is www.finaid.org.
6. YOU GOT DIVORCED. There are many aspects to taxation and divorce, including the issue of who gets which assets.
If you're thinking about getting a divorce, definitely consult your attorney and get some planning advice.
One item deserves mention: When you sell your house could be significant.
You may transfer property between ex-spouses with no tax consequences if the transfer is completed within one year of the divorce.
Lee Matthew is a financial planner in Albuquerque.
She is an associate of Kathleen Winslow & Associates, LLC, and an investment adviser and Registered Representative offering securities through Financial Network Investment Corporation, a securities broker/dealer (member SIPC).
To reach her, call 880-1646 or write 2201 San Pedro NE, Building 25.
Kathleen Winslow & Associates and FNIC are not affiliated.
biz 
...go to bookmarks
E-mail Story
Print Friendly
