The ideal time to review your finances

By Samiha Khanna

With the income tax deadline behind them, many Americans are eager to file away their financial records until next year. But experts advise not putting those documents away just yet — now is an opportune time to review them, make any necessary changes, and update your financial plan accordingly.

There’s a simple logistical reason that the filing of your tax return presents a good opportunity to go over your financial plan: You can do so while you have all your documents in one place and your login information is fresh in your mind, said Kelley Long, CPA/PFS, member of the AICPA’s Consumer Financial Education Advocates.

“One common roadblock to people making changes to their financial plan is that they forgot login information,” she said. “At tax time, you’re forced to overcome this barrier in order to access your tax documents, so while you’re in there, you might as well take the time to take some financial planning steps as well.”

Another best practice of financial management, Long pointed out, “is to revisit your plan on an annual basis to make sure nothing has changed.” As “tax time is something that happens every year,” she said, “it can be a reminder that it’s also time to make sure no adjustments are needed for your plan.”

This is a strategy already familiar to many high earners and investors. According to a Harris Poll conducted in fall 2017 on behalf of the AICPA, nearly eight in 10 affluent Americans — those with more than $200,000 in household income or $250,000 in investable assets — said they would likely use the information on their tax return to guide their financial plans.

“Tax time brings your financial situation to the forefront,” said Neal Stern, CPA, a member of the AICPA’s National CPA Financial Literacy Commission.

“Organizing and reporting your sources of income, results from investing, and outflows for deductible expenses leaves you with a current road map and a unique opportunity to take a fresh look at whether your strategies are on track to meet your financial goals,” he said. “And it’s early enough to let you see some significant results from course corrections before we ring in the new year.”

A large tax refund is one key indicator that it might be time for an adjustment.

It’s advisable for most earners not to overpay on their income taxes each paycheck, but also not to withhold too little, Stern said.

“A large refund may feel rewarding, but the real winner is the IRS since you’ve given them an interest-free loan from the time the extra money was withheld until the refund is in your pocket,” he said. “On the other hand, a big tax bill from withholding too little may be difficult to manage and may come with costly penalties.”

Opting for more money in each paycheck, instead of a large refund during tax season, can be beneficial, Stern said.

“The extra money can help you enhance your financial future by increasing your 401(k) contribution, especially if you’re not already getting the full company match; saving interest charges by paying down student loan, credit card, or other debt; or building the momentum of investing for your long-term goals,” he said.

With the Tax Cuts and Jobs Act now in effect for 2018, many Americans may want to adjust their financial plans to align with new tax breaks and help them retain the most income. To learn more about how tax reform may affect you, read this helpful overview from the AICPA’s public education initiative 360 Degrees of Financial Literacy.

The AICPA is also offering the free webcast “2018 Taxes: Start Your Money Plan Here” at 1 p.m. ET on Friday, April 27. The webcast will walk Americans through the process of using their tax return as a road map for developing a well-rounded financial plan.

Samiha Khanna is a freelance writer based in Durham, N.C. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, a JofA editorial director, at Ken.Tysiac@aicpa-cima.com.

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