5 tax questions that will help your financial plan

February 23rd, 2018 by Anchor Bay Capital's Investment Team

For most of us filing taxes is a necessary evil. We get it done in the least painful way with the least amount of time taken out of our busy lives. We often have one focus: What’s the bottom line? However, this year I recommend setting aside a few minutes to really review your tax return. A quick review of the numbers might have a meaningful impact on your financial plan.

As a financial planner, one of the key pieces of information that I always ask clients for is a copy of their tax forms. Without reviewing this information, it would be extremely difficult to give accurate advice. Here are five questions you can ask yourself after you file your taxes to set yourself up for a successful year ahead:

1. Are your withholding or payments set up right?
Getting a big refund is fantastic news! However what this really means is that you overpaid the government during the year and you could have been using that money for your own purposes. I typically recommend making an adjustment to withholdings and start putting that excess cash to work. Likewise, if you owe some money, it may be time to adjust your tax payments so that you don’t have to come up with cash next year.

2. Are you saving enough for retirement?
Pre-tax savings into a retirement plan directly lowers your gross income. You will find your retirement contributions on line 28 of your 1040 for company plans and line 32 for IRAs. Contribution limits went up this year for a 401k to $18,500. So if you want to max the contribution it is time to make an adjustment. Also keep in mind, it may make sense to fund a Roth IRA in addition to a company plan.

3. Should you start a side hustle?
Not all income is created equal when it comes to taxes. You will notice that line 12 of your 1040 is for business income and Line 17 is for income from business investments like real estate rentals, partnerships, s-corps, etc.  If you’ve read the books, The Richest Man In Babylon, or Rich Dad, Poor Dad, you know that creating multiple income sources is one of the keys to significant wealth. This may be the year you add some extra income or start a business. Just make sure you understand how to structure your income so that you can optimize this cash flow.

4. Are you giving to causes that you care about?
On schedule A, you report your gifts to charity. I have written before about establishing a family giving plan. It is helpful to consider what you are passionate about and then evaluate if you are contributing to the areas where you would like to make a difference.

5. Where does the money go?
This is the most important question, the one that really makes a difference in your progress toward your goals. Check your refund amount from last year on line 10 of your 1040. Can you account for that money? Did it help your financial picture or increase your net worth – through lowering debt or increasing assets? What about your total cash flow – is it structured properly to lessen your tax burden and allocate money to your lifestyle and goals? This is where a financial planner can help! We are here to be a resource and give some guidance and accountability when you need it.