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Assessing
Where You Go from Here
It takes the American taxpayer an average of 28 hours and six minutes to complete the
1040 tax form and handle its related recordkeeping. That’s a 40 percent
increase since 1997 and a collective 6.1 billion hours.1
 One
positive outcome from all that time and energy is that taxpayers get an unobscured, unabridged look at their financial situations. Income, account
balances, debts, and taxes are in plain sight as they complete their tax
returns.
Preparing your taxes presents an ideal opportunity to evaluate whether you’re
on track to achieve your financial goals. Here are a few questions to help you
assess your situation.
Are Your Assets Properly Allocated?
A solid financial program will take into account your time horizon and long-term
goals in determining how assets should be allocated among various investment
options. Over time, however, these percentages can shift as the value of your
portfolio changes. For instance, if your portfolio’s bond holdings appreciated
at a much different rate than its stocks or stock funds over the past several
years, it may not be in line with your original allocation, and it may be time
to adjust your holdings to keep the plan balanced. Remember that there may be
tax implications associated with rebalancing.
Will Current Deductions Cost You Later?
Tax-deferred plans can play an important role in building funds for a retirement
portfolio, and your annual tax-deductible contributions may help push you into a
lower tax bracket.2 However, you may also want
to evaluate whether it would be beneficial to increase your contributions to
nondeductible retirement plans (such as a Roth IRA) or taxable plans to help
lower your tax liability during retirement.3
Are Debts Improving Your Situation?
Using debt to pay for a home or even a car can be beneficial in the long run.
But high credit-card bills may prevent you from taking advantage of
opportunities to invest for retirement or other financial goals.
It can take days or even weeks to prepare your taxes. Consider this time as an
opportunity to take a closer look at your financial situation to determine
whether you are well positioned for the future.
1) National Taxpayers Union & NTU Foundation, 2002
2) Distributions from traditional IRAs and most employer-sponsored retirement
plans are taxed as ordinary income and, if taken prior to age 59½, may be
subject to an additional 10 percent federal tax penalty. Qualified Roth IRA
withdrawals are free of federal tax and not included in gross income.
3) Before you take any specific action, be sure to consult with your tax
professional.
© 2002 Emerald Publications
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