Many traditions occur throughout the holidays, and perhaps new traditions will be established. The end of the year is also a great time to reflect. With time off around the holidays, everyone can benefit from spending a couple of hours to ensure finances are in order for the coming year. Here are four areas to consider for the upcoming tax season:
Taking a Financial Snapshot
Add up your fixed expenses and compare it to your income. How much money do you have left over for your discretionary spending? Use this spreadsheet to help: Personal Financial Statement Spreadsheet. If your income is not double your fixed expenses, not including your monthly savings, you may want to look at ways to increase your free cash flow. If your income is less than double your fixed expense you may not have flexibility in your budget for unexpected expenses or you may not be saving enough for retirement.
Now compare your fixed expenses to your savings account. How many months of these expenses can you cover? Holding 6 months’ worth of expenses in savings is a good rule of thumb. If you are more concerned about your job security or the amount of time it may take to find a job you may want to hold more. Building an emergency reserve is more important than investing.
Write down all your assets and add them together. Do the same for your liabilities. An important step in building and managing your wealth is knowing where you stand year-over-year. Seeing the progress you have made over the course of the year can give you reason to celebrate.
Contributions and Distributions
Maximize contributions to tax efficient tax accounts. In 2023, individuals who participate in a 401k or 403b can contribute $22,500 and an additional $7,500 if age 50 or older. Individuals who utilize Roth or Traditional IRAs can contribute $6,500 and an additional $1,000 if age 50 or older. You have until Tax Day to contribute to an individual IRA. The holiday season is a popular time for giving. If you are charitably inclined, the limit on charitable cash contributions is 60% of the taxpayer’s adjusted gross income (AGI).
Reevaluating Your Investment Portfolio
Rebalancing your investment accounts has been a reliable method for building sustainable wealth. Markets have a tendency to operate in cycles, so selling assets that have performed
well and buying assets that have underperformed fits the investment mantra of sell high, buy low. As long as you have confidence in the underlying investment, this investment process should continue to help individuals achieve financial success.
If you have incurred losses in taxable accounts, you may want to consider selling those holdings to offset realized gains and potentially $3,000 of ordinary income (or $1,500 each for married taxpayers filing separately). Learn more about the benefits of tax-loss harvesting to lower your tax bill. It is best to contact a tax professional before making tax related decisions.
Review Estate Plans
Estate planning is important. Wills and powers of attorney (both financial and healthcare) are documents everyone should have in place. Adding or updating beneficiaries to accounts is an important step to ensure the money intended for those beneficiaries avoids probate. Consulting with an estate planning attorney is the best way to ensure your assets are properly titled and beneficiary designations are in place.
Take some time to review the above areas of focus. Once you determine the areas that are most important to your financial health you must turn those ideas into goals. Make sure they are realistic and achievable. If you have additional questions or want help developing action items to reach your goals contact a financial advisor to get their thoughts on what can be most impactful to your situation.