Tax Planning and Financial Planning Go Hand in Hand

With tax season coming to an end, it’s the ideal time to use this year's tax return to help update your financial plan. If you’re in the group of one in four Americans who do not already have a financial plan, it may be time to create your first one.¹

Creating a financial plan from scratch may seem like an overwhelming task; however, having your tax information as a reference may significantly assist this effort. Here are some ways to learn more about how your income tax return provides clues for the financial planning steps to take during the upcoming year.

Tax Information Might Influence Your Financial Plan

Every piece of information you provide on your federal and state income tax returns might impact your financial plan.

Making a financial plan may depend on these factors:

• Your filing status
• Your number of dependents (and their ages)
• Your taxable income
• Your effective tax rates
• Your taxable Social Security and Medicare (FICA) wages
• Your deductions (like real estate taxes, mortgage interest, health care expenses, or charitable deductions)
• Your credits (like the child tax credit or earned income tax credit)
• Whether you pay interest on a student loan or have a child in college
• Whether you contribute to a health savings account

This data may help you answer questions such as:

• Should I contribute to a traditional individual retirement account (IRA) or a Roth IRA?
• Should I save for my child's college expenses in a 529 account or prioritize paying down my existing student loan debt?
• Does it make more sense for my minor children to file their income tax return or for me to claim them as dependents?
• Should I double this year's charitable deduction (or contribute two years at once) so I may itemize my deductions?

By having all of the information in front of you, when re-evaluating your finances, you may be able to decide what short- and long-term financial goals are suitable. You may consider adjustments as needed when your situation changes.

Planning to Make Next Tax Season Easier

The information you glean from this year's tax season may help you plan out the rest of your year. It may also help when preparing tax returns for the next tax season. If you received a hefty refund, you might want to update your withholdings to lower the amount taken from each paycheck. This adjustment may provide more money to save or use to pay off debts during the year, rather than waiting to receive your tax refund in April.

If you owed money at tax time or had to pay an underpayment penalty, it is worth updating your withholdings to the amount necessary to cover your tax payments. Doing so may help you avoid any unpleasant surprises next April and give you a better idea of your true tax liability.

No matter your income, budget, or financial situation, financial planning may be the key to helping you keep more of your hard-earned money. Having a plan enables you to manage finances in alignment with your financial goals, whatever they may be. Contact us today to review and update your personal plan.