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General
Don’t Forget to Make New Year Financial Resolutions
By Tony DiSorbo
Owner, DAS Associates
The start of the New Year is always an exciting time when resolutions are made and we reflect on the past year. We also look to the future and begin to make changes that will improve our lives, whether it is losing weight, spending more time with family and friends or starting a new exercise program, everyone can do something that will improve their lifestyle. But don’t forget about your finances.
The New Year is also a great time to evaluate your financial future. Why not make 2006 the year you establish comprehensive long-term financial strategies? With the help of a financial advisor, or on your own, you should evaluate your current investments to make sure they are in line with your objectives and risk tolerance. You should also establish strategies for helping you accomplish your investment goals, such as retirement planning, estate planning, cash flow analysis and education planning. Along with any well-devised program, it is also important to look at your current insurance needs in order to determine that you have adequate coverage for you and your loved ones.
The New Year also brings with it many changes, challenges and opportunities from a financial future standpoint. For example, you may be able to increase your contribution to your employer-sponsored retirement plan in 2006. The employee contribution limits have increased to $15,000 for 2006, in addition, if you are 50 years of age or older, you have the opportunity to contribute an additional $5,000 as a catch-up contribution. From an estate-planning standpoint, the estate gift tax has been reduced to 46% and the estate tax exemption has been increased to $2 million.
Year-end tax planning concerns the timing and method by which you report your income and claim your deductions and credits. The basic strategy is to time your recognition of income so that it will be taxed at a lower rate, while timing your deductible expenses so that they may be claimed in tax years when you are in a higher tax bracket. However, from a tax standpoint, steps to lower your tax bite should be taken all year-round and not just at year-end.
For instance, you may want to accelerate the recognition of capital gains if you have capital losses and need to offset them, or if you expect to be in a higher marginal tax bracket next year. In terms of capital gains, the top long-term tax rate is 15% (for most type of assets) for taxpayers in tax brackets greater than 15%, while the top ordinary income tax rate is 35%. By converting some of your ordinary income to long-term capital gain income, it may be possible to reduce your federal income tax liability.
Utilization of professionally developed tax checklists may help you think about, for instance, shifting income at year-end to family members who are in lower tax brackets to minimize your overall taxes. Other strategies may be available for a married couple to calculate their taxes two ways - married filing jointly and married filing separately - in order to minimize income tax liability. You should consult with a qualified tax advisor for information pertaining to your situation.
Why not make one of your 2006 resolutions be to get your financial affairs in order? Not only could you potentially see substantial tax savings, but you will also create confidence for your family knowing your finances are in proper order. If you feel you need expert help with your finances, please contact a tax or financial professional.
The author is a CLU and ChFC designee, a Registered Investment Advisor and registered representative of Jefferson Pilot Securities Corporation, member NASD, SIPC.
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