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THE PATH LEADING TO YOUR GOALS
What are you doing to help ensure that you are making progress toward your financial goals? Developing and following a written financial plan will give you a road map to help you keep on track. The steps include:
1. ASSESS YOUR CURRENT FINANCIAL SITUATION.
This involves preparing a net worth statement and an analysis of how your income is spent. A net worth statement lists your assets and liabilities, with the difference representing your net worth. Periodically preparing a net worth statement will help you assess whether you are making progress toward your goals.
Even if you don't feel a need for a budget, you should analyze how your income is spent. The analysis can help you find ways to reduce spending and increase saving.
2. ESTABLISH WRITTEN, SPECIFIC FINANCIAL GOALS.
Your goals should be defined in specific, quantifiable terms, so you have a means to measure progress. Also attach a timetable to each goal. If you have several financial goals, you should prioritize them so you devote resources to those most important to you. The most common long-term objectives include:
3. DEVELOP A DETAILED PLAN, WITH SPECIFIC STRATEGIES AND TIMETABLES.
Your financial plan should coordinate strategies in several important areas:
4. IMPLEMENT YOUR FINANCIAL PLAN.
While a financial plan can be prepared in a short time period, implementing the plan requires a lifetime of discipline and dedication. Make saving and investing part of your monthly routine so they become strong habits. Don't become overwhelmed by the amounts you need to save, since it often takes years to see substantial progress toward your goals. Don't try to accomplish too much at once or you may become disillusioned with your entire plan. Strive to make slow and steady progress.
5. MONITOR YOUR PROGRESS.At least annually, review your progress toward your goals:
Developing a financial plan is a complex process that requires coordination of all your finances. But the process can be well worth the effort, giving you a means to help achieve your financial goals. If you'd like help with your financial plan, just call.
Although you shouldn't make investment decisions solely for tax reasons, using proper strategies can help reduce your income taxes:
Carefully consider which investments to hold in tax-advantaged and taxable accounts. Gains from investments held in retirement accounts, such as 401(k) plans and traditional individual retirement accounts (IRAs), are taxed at ordinary income tax rates when withdrawn, rather than the lower capital gain tax rates. While it may make sense to hold investments that produce ordinary income in retirement accounts and investments that produce capital gains in taxable accounts, there are non-tax factors to consider, including your investment period.
Capital losses offset capital gains on a dollar-for-dollar basis, plus up to $3,000 of excess capital losses can be deducted against ordinary income. If you have excess capital losses above that amount, you can carry the loss forward or consider selling investments with gains to take advantage of the loss. You may also want to sell assets with a loss to offset large capital gains.
Use the proper basis when calculating gains from assets you inherited, which is generally the market value on the date the previous owner died.
Keep in mind that the capital gain tax rate on assets held for more than one year is now 20% (10% for taxpayers in the 15% tax bracket). That makes stocks seem more attractive than investments that generate ordinary income, but don't purchase stocks unless they fir in with your specific goals and you are willing to hold them for the long term.
Donate appreciated stock that you have held for over a year to a charity so you can deduct the fair market value. Not only will you get a charitable contribution deduction, but you avoid paying capital gain taxes on the gain. The deduction amount is subject to limitation, based on a percentage of your adjusted gross income.
If you are planning to make an annual gift of $10,000 ($20,000 if split with your spouse) to a child, consider gifting appreciated stock held long term. While your child retains your basis in the stock, he/she may only pay 10% capital gain tax if he /she is in the 15% tax bracket.
Take advantage of a stock loss, even if you think the stock has the potential to increase in value. First, purchase the same number of shares of the stock. Wait at least 31 days and then sell the original shares at a loss. You still own the same number of shares, but can deduct the loss on your on your tax return. You must wait at least 31 days before selling so that you can recognize the loss in the year of the sale for tax purposes.
Make sure to deduct reinvested dividends from your calculation of gains. You already paid ordinary income taxes on those dividends.
50% of the gain from the sale of qualified small business stock issued after August 10, 1993 and acquired at its original issue can be excluded if the stock was held for more than five years. There are limits on the amount of gain eligible for the exclusion.
Capital gains from the sale of publicly traded stock can be deferred if the proceeds are used to purchase an interest in a specialized small business investment company within 60 days. There are limits on the amount of gain eligible for deferral.
Consider investing in municipal bonds since their interest income in most cases is exempt from federal income taxes and, possibly, state income taxes. First, consider the after-tax rate of return of municipal bonds and taxable bonds to see which is better suited for your situation.
If you have bonds that have declined in value, consider a tax swap, which involves selling those bonds and purchasing other, similar bonds. The loss can then be used to offset other capital gains. Be sure to follow the wash sale rules or your loss may not be deductible in the year of the sale.
Please call if you'd like help with your investment decisions.
Planning for retirement is a different process, made even more difficult by the large number of myths surrounding retirement. Some of the more common myths include:
MYTH: RETIREMENT WILL ONLY LAST A FEW YEARS. REALITY: Today, the average 65-year-old man will probably live another 15.6 years while the average woman will live another 19.2 years (Source: U.S. News & World Report, June 29, 1998). But those figures only represent average life expectancies, meaning half the population can expect to live longer than that. Plan on living at least age 90.
MYTH: ONLY 60% TO 80% OF PRE-RETIREMENT INCOME WILL BE NEEDED DURING RETIREMENT. REALITY: This may be true if you won't be very active during retirement, but more and more people expect retirement to include extensive travel and expensive hobbies. On the other hand, if you have several children who have just finished college and have just paid off your mortgage, you may be able to get by with even less than 60% to 80% of your pre-retirement income. Analyze your individual situation to determine how much you'll need.
MYTH: SOCIAL SECURITY AND PENSION PLAN BENEFITS WILL PROVIDE MOST OF YOUR RETIREMENT INCOME. REALITY: Even at current levels, Social Security benefits don't support a very lavish retirement. And many believe that changes will be made to the Social Security system that will likely reduce benefits. In addition, many companies are switching from traditional defined-benefit plans to defined-contribution plans, such as 401(k) plans, which require you to make contributions. Even those covered by a defined-benefit plan will find that most plans do not provide cost-of-living adjustments.
MYTH: YOU'LL STOP WORKING ENTIRELY WHEN YOU RETIRE. REALITY: For a variety of reasons, more and more retirees are taking on part-time employment, consulting assignments, or starting businesses. Keeping active both mentally and physically are major reasons, but work can also help from a financial standpoint.
MYTH: YOU CAN WAIT A FEW YEARS TO START SAVING FOR RETIREMENT. REALITY: The amounts needed to ensure a comfortable retirement can be huge. The sooner you start saving, the smaller the amounts needed to save.
MYTH: YOU ONLY NEED TO PLAN FOR YOU AND YOUR SPOUSE IN RETIREMENT. REALITY: Having started families later than past generations, many retirees may find that their children are still in college or could still be living at home. At the same time, aging parents may need financial assistance.
MYTH: YOUR HOME'S EQUITY CAN SUPPLEMENT RETIREMENT INCOME. REALITY: Unless you plan to sell your house and either rent or move to a smaller home, your home will probably not provide much in the way of additional income.
If you'd like help dealing with these realities, please call.
Wondering if you should utilize an Education IRA to help fund your child's college education? Before doing so, be aware of the restrictions involved:
Despite these restrictions, you may still want to consider an Education IRA. In particular, those with incomes so high that they won't qualify for the Hope Scholarship Credit, Lifetime Learning Credit, or other financial aid should look into Education IRAs. If your income exceeds the limits for making contributions, you can ask grandparents or other relatives with income less than the limits to contribute for your children. Your child can also make contributions to his/her own Education IRA, since there is no earned income requirement for contributions. If you'd like to discuss whether you should use an Education IRA to help fund your child's college expenses, please call.
Aren't you excited to discover you will receive a tax refund? Most people are. However, what you may not realize is that government is giving you your money back interest free. In 1998, $114.3 billion in tax refunds were paid to taxpayers. Almost 70% of all individual taxpayers received refunds, with an average refund check of $1,365 (Source: Internal Revenue Service, 1999).
So, what can you do about this? To start, don't view your tax refund as a forced saving program. If you're concerned that you would just spend the difference each paycheck, you could have that amount automatically transferred to an investment account every pay period. (Remember that an automatic investing plan, such as dollar cost averaging, does not assure a profit or protect against a loss in declining markets. Because such a strategy involves periodic investment, consider your financial ability and willingness to continue purchases through periods of low price levels.)
If too much federal tax is being withheld from your paycheck, fill out a new W-4 to determine how many allowances you should claim. For 1999, every allowance exempts $2,750 of income withholding. Don't confuse allowances with the exemptions claimed on your tax return. You can claim additional allowances for items such as itemized deductions that exceed the standard deduction , the child tax credit, and education credits.
I know that taxes can be a confusing subject and it may be hard to believe you don't want a tax refund. If you have questions, please call.
Who pays estimated taxes? Estimated tax payments are required if your tax liability will be $1,000 or more than amounts withheld from your salary. Generally, individuals who receive significant income from sources not subject to withholding, such as dividends, interest, capital gains, self-employment income, rent, alimony, partnership interests , and S Corporation interests, must make estimated tax payments.
In 1999, individuals with adjusted gross income (AGI) over $150,000 in the preceding year must pay either 90% of the current year's tax liability or 105% of the prior year's tax liability. The 105% figure will become 106% for 2000 and 2001, changing to 112% in 2002, and 110% starting in 2003. Individuals with AGI not exceeding $150,000 must pay either 90% of the current tax year liability or 100% of the prior year's tax liability. These provisions allow individuals who cannot easily estimate their income before year end to avoid penalties by basing estimated tax payments on the prior year's tax liability.
Estimated tax payments are generally made in four equal installments on April 15, June 15, September 15, and January 15. However, if you don't receive income evenly throughout the year, you can make estimated tax payments based on actual income for the period. Be careful to pay the right amount with each installment - paying extra in later periods does not exempt you from penalties for under payments in earlier periods.
It is important to review your tax situation early in the year so you make proper estimated tax payments and avoid penalties. Please call if you'd like help evaluating your tax situation.
Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.
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