As we head toward the end of the year, now’s a good time to see if your finances are on track.
That’s because if you need to make adjustments, you still have time to do so.
“You’re starting to get a clear picture of how this year’s turned out,” said Sean Duncan, president of SMD Consulting&Accounting LLC in Frisco, Texas. “Between now and Dec. 31, you want to have the opportunity of making changes to what you’re doing and not doing it in a panic mode.”
Here are the areas of your finances you should evaluate:
GOALS AND PRIORITIES: There are numerous scenarios that could cause your financial goals to shift.
For example, you may be looking to retire earlier or later than you had originally planned. Or the upcoming birth of a child may prompt you to think about diverting funds to purchase a house.
Think hard about what you hope to accomplish financially — both this year and the future — to make sure your money is working for you.
You should be able to look at your portfolio and have a reason for owning every investment. If you can no longer justify the investment, it may be time to think about getting out of it.
In a similar vein, you should also reassess your risk tolerance. Are you still comfortable with what you own? Are you carrying too much or too little risk in your portfolio?
The stock market’s recent gyrations may have thrown your original asset allocation out of kilter.
That means you’ll need to rebalance and adjust your investment portfolio to bring it back to your original asset allocation mix.
TAX PLANNING: Now is the perfect time to review your tax status because many changes that you’ll want to make should be done before Dec. 31.
“If you are unsure of your tax situation due to a job change or changing income, run a tax estimate to see where you are,” said Wade Chessman, president of Chessman Wealth Strategies in Dallas. “Make sure you have proper withholding or that sufficient quarterly payments have been made.”
Personal and financial changes should signal a check of your withholding. Those include marriage, divorce, the birth or adoption of a child, the purchase or sale of a home, and retirement.
It’s also time to start gathering your receipts and making any necessary purchases. That’s because the deduction of state and local sales taxes from your federal income tax return expires at the end of this year.
“Don’t cheat yourself out of it,” Duncan said.
STOCK LOSSES: “If you have a dog of a stock and that thing is never coming back, look if you can create a capital loss to offset something else,” Duncan said.
That’s what’s known as “tax-loss harvesting” or “tax-loss selling.” It’s selling investments at a loss to offset a capital gains tax bill.
It’s typically used to limit the recognition of short-term capital gains, which are usually taxed at higher rates than long-term capital gains.
If you’re considering tax-loss selling, make sure that you don’t let tax concerns be the sole driving force for how you invest.
Also, be aware that not everyone agrees that this is the time to harvest tax losses. Rick Salmeron, certified financial planner at the Salmeron Financial Network in Dallas, said investors may want to wait on the chance that the capital gains tax rate will jump in the next few years.
“On that chance, you might be better off paying any taxes on your gains this year in order to preserve your losses for next year, when those losses may be more valuable from a tax perspective,” Salmeron said. “After all, over the long haul you should have more gains than losses or it doesn’t make sense to invest.”
The wild card here is how Congress tackles the deficit issue.
“A lot could change between now and year-end with Congress possibly taking up significant tax reform as part of its work on the budget deficit,” said Mark Luscombe, principal federal tax analyst at CCH, which publishes materials for tax professionals.
ROTH CONVERSIONS: Taxpayers who convert a traditional IRA into a Roth IRA must pay taxes on the amount converted. However, in 2010, a special perk allowed taxpayers to spread that tax liability over two years, thereby encouraging many to make the conversion.
A year later, some taxpayers may want to rethink that decision.
“If you converted a traditional IRA to a Roth IRA in 2010, and your Roth IRA has sustained losses as a result of the recent market downturn, you may want to consider whether it makes sense to undo your conversion,” said Shashin Shah, certified financial planner at SGS Wealth Management in Dallas.
“When you recharacterize (undo the change), your conversion is treated for tax purposes as if it never happened,” he said. That way you can avoid paying income tax on the value of IRA assets that were lost.
For example, Shah said, assume that last year you converted a traditional IRA worth $100,000 to a Roth IRA that now is worth $60,000 because of the market downturn.
“If you don’t undo the conversion, you’ll pay federal income tax on $100,000, even though the current value of those assets is only $60,000,” Shah said. “If you undo the conversion, you’ll be treated for tax purposes as if the conversion never happened, and you’ll wind up with a traditional IRA worth $60,000 — and no resulting tax bill.”
Whether it makes sense to undo your Roth conversion depends on several factors, including the extent of your losses, your expectation of where the markets are headed and whether you have already filed your 2010 income tax return.
Taxpayers who filed for an extension last spring have until Oct. 17 to file their 2010 return and to undo a Roth conversion made last year.
If you’ve already filed your 2010 return and want to undo a Roth conversion, consult a tax professional.
So, as we head into the homestretch of 2011, make things easier on yourself by determining what adjustments you need to make before the year ends.
“It’s like navigating a ship,” said Duncan of SMD Consulting. “You’re adjusting the rudder as you go, and you’re steering it to keep it relatively on a straight path.”
Source: MCT Information Services