How to Use Your Tax Return As a Financial Planning Tool

How to Use Your Tax Return As a Financial Planning Tool

After you have filed your tax return, try to avoid just tossing a copy of it into your filing cabinet. According to financial experts, it could play a key role in terms of financial planning.

According to a recently released survey from the American Institute of CPAs, about 55% of American taxpayers have altered their financial plan based on information in their annual tax return, and about 27% make this a yearly practice. On the flip side, a survey by The Harris Poll in late 2020 found that 23% of Americans have no financial plan at all.

Regardless of which category you fall into, your tax return is a valuable tool in building or revising a financial plan, as it provides a succinct overview of your current financial situation.

“One of the biggest challenges with doing a financial plan is probably why so few do it: it requires a lot of information,” said Matt Rosenberg, who is a member of the AICPA National CPA Financial Literacy Commission. “You might as well turn and use that information from your taxes for planning.”

Here are a few ways that your tax return can help you in regards to financial planning.


Consider Changes to Your Family Structure

A good place to start is with the first lines of your 1040 form, which provides the basic information about your filing status. Are you married and filing jointly? Are you the head of your household? How many dependents do you claim? Consider any changes in the past year to your family structure, such as whether a child has gone to college or you have adopted a child.

This information is an excellent starting point for a conversation with your financial planning expert. Each family member who is part of your tax filing could have an impact in terms of estate planning and saving for college tuition, as well as spending for health and life insurance. Your financial planner can talk with you about your goals for each member of your family, as well as important documents you need to have updated and in place, such as durable financial power of attorney and a health care proxy.


Categorize Your Income

Your tax return will provide a concentrated, up-to-date snapshot of your income sources, including your wages or salary, your returns from investments, and Social Security income. With this information, you can categorize income as recurring, sporadic, or one-time, giving you a good foundation for establishing or revising your budget. When this data is combined with your expenses, you’ll know how much money you have left to apply toward your financial goals.


Reconsider Your Withholdings

Many financial planners advise that your withholdings don’t create a situation where you owe or receive a lot of money from the government. Rules governing withholdings have changed, and many Americans haven’t updated their withholdings accordingly. Your tax return will show how the amount withheld over the year aligned with the taxes you owe.

If you received a large return from the government, that means according to some financial experts that you have essentially given the government an interest-free loan for the past year. Conversely, if you owe money at tax time because you withheld too much, you will be charged a penalty.

While you will still pay the same amount of taxes in the end, adjusting your withholding ensures that you will keep the money in the interim.


Adjust Your Retirement Plan

As you refine your retirement plan, your tax return can help you make adjustments to keep your plan current and focused on financial security. Tax returns will show you the impact of your tax-deductible contributions to your retirement plan on your taxable income and help you make decisions such as how to best transition to Medicare or other insurance after you retire without severely impacting your income.

It’s also wise to annually review your beneficiaries, as circumstances can change from one year to the next. For example, in the unfortunate event that your spouse or child dies or you divorce, you’ll need to update your retirement accounts, insurance policies, and beneficiary designations, as these assets will be given to their designees, not through stipulations in a will.


Assess Your Charitable Giving

Rules have changed for charitable giving in recent years regarding itemized deductions, and the result has been that taxpayers are less likely to itemize their charitable giving and reap the tax benefits. Your financial professional can help you make decisions about how and where to direct charitable giving to maximize the tax benefits under changing laws. For example, you may want to condense several years’ worth of charitable giving into one year (rather than giving the same amount each year) so that itemizing these deductions will have more of an impact on your taxable income.

Regardless of your financial goals, examining your tax returns each year will allow you to assess your situation and make changes accordingly to protect and build your personal portfolio.

What You Need to Know about the STEP Act and 99.5 Percent Act

What You Need to Know about the STEP Act and 99.5 Percent Act

Recently introduced legislation suggests that the US Congress is interested in increasing taxes on high-wealth individuals. While none of these bills have made significant advancements in the legislative process yet, individuals whose wealth could be impacted should pay attention to potential changes, particularly to estate law. Significant revisions to tax rules could require you to rethink your estate plans.

Here are two recently introduced bills to keep track of and how they could impact you.


The 99.5 Percent Act

Sen. Bernie Sanders introduced this bill on March 25, and if passed, changes to estate and gift tax law would take effect on December 31. According to Jonathan Blattmachr, principal in ILS Management, LLC, this bill and others like it could “rock the world of every estate planner.”

In a nutshell, this bill, which is aimed at the top .5 percent of wealthy Americans, would expand the number of estates eligible to pay estate tax and would increase the amount of taxes each estate would pay.

Here are the primary changes the bill would enact.

  • Reduce the US federal estate tax exemption from $11.7 million to $3.5 million (although the current limit will sunset to just less than $6 million in 2026).
  • Reduce the US federal gift tax exemption from $11.7 million to $1 million.
  • Increase the progressive federal gift and estate tax rate from 40 percent to 65 percent. To break it down, the rate will increase to 45 percent for excess value over $3.5 million, 50 percent for excess value over $10 million, 55 percent for excess value over $50 million, and 65 percent for excess value over $1 billion.
  • Institute a limit of 50 years on generation-skipping trusts, also known as GSTs or dynastic trusts.
  • Allow a $10,000 annual gift tax exclusion per recipient with a cap of $20,000 per donor.
  • Limit minority-interest discounts when valuing some non-business assets for transfer for gifts and estate taxes.
  • Require a 10-year minimum and 25 percent minimum value for remainder interest for grantor retained annuity trusts.

The proposed changes also would add Code 16 to the law, a new section outlining rules for transferring taxation of grantor trusts in the cases of gift and estate transfers and transfers that skip a generation.



Earlier this year, Sanders along with Sens. Cory Booker and Elizabeth Warren introduced the Sensible Tax and Equity Promotion Act. More commonly called the STEP Act, the overall goal of this legislation is to get rid of a loophole that allows people who inherit property not to pay capital gains tax on the property’s increase in value.

Currently, when someone inherits property, its value is “stepped up” to the current market value. Beneficiaries can take advantage of this loophole by immediately selling the property at market value without paying capital gains tax on the increase in valuation. However, if someone keeps the property for several years before selling it, they will be required to pay capital gains on any value the property has added since it was inherited.

This system will change if the STEP Act is enacted. If the property had increased in value, the new law would require the estate to pay capital gains taxes on that increase over the first $1 million in appreciated assets (increases in value less than $1 million would not be taxed). Beneficiaries who inherit a farm or business could spread their estate tax payments under the STEP Act over 15 years. All taxes paid on an asset’s increase in value would be deducted from the estate tax.


Impact on Estate Planning

The Joint Committee on Taxation estimates that the untaxed step-up will cost the US almost $42 billion in revenue in 2021. It also notes that for estates valued at more than $100 million, more than 55 percent of the wealth comes from untaxed capital appreciation.

If these bills are signed into law, estate planners predict they will create significant change for beneficiaries of estates and in the way estates are managed. Many predict it will make the paperwork and administration of estates much more complex, primarily because the historical tax basis for assets will have to be determined. With this anticipated increase in work, estate planners recommend making appointments now to work on your estate and enact your plan before new laws are passed. Otherwise, the demand for services may mean you’ll have to wait to meet with financial professionals.

Analysts aren’t sure yet whether these bills will make any progress in Congress, but because Democrats control Congress, some or all of these changes could become law. Passing the bills would require 50 votes in the Senate, which may be difficult given the legislating body is evenly split between Democrats and Republicans. Regardless, it’s likely that significant changes could be coming to estate tax law, and the best way to prepare is to stay in touch with your financial professional and begin discussing adjustments and changes you’ll need to make to your estate if these proposed rules become law.

6 Financial Tips for Young Adults

6 Financial Tips for Young Adults

With retirement decades away, many young people just entering the workforce imagine themselves to have ample time to get around to saving and planning. However, financial experts recommend that young adults consider their future now, as waiting sacrifices valuable years of saving and planning.

Here are some tips for anyone who is considering their financial future.

1. Pay Attention to Your Spending

Unfortunately, many high schools do not offer practical finance classes that teach basic skills such as budgeting and investing. As a result, many young adults may find themselves with an income but little control over their spending.

Learning how to set limits on yourself and stick to a budget are basic skills necessary for developing a solid financial foundation. That means not running up credit card debt to make purchases or spending your entire paycheck when some of it could be saved, the consequences of which could be significant and lasting. For example, if you use a credit card and don’t pay off your monthly balance, your debt could continue to grow, resulting in a potentially substantial amount of your income going toward interest payments rather than paying down the credit card’s balance.

A better approach is to be more mindful of your spending and potentially delay purchase-related gratification. Do you really need a $7 coffee daily, or could you save that money for a special treat? Is that pair of shoes worth the interest you’ll have to pay on a growing credit card balance?

Making a budget and tracking your spending will force you to pay attention to your spending habits and consider the impact of purchases on your finances.

2. Save Now

The more you save for retirement now, the bigger the payoff will be when you retire. Plus, it’s never too early to establish a lifelong habit of saving.

Numerous options are available to help you save for retirement. Your employer may offer a 401(k) and provide matching contributions. If that’s not the case, check into a Roth IRA, which offers tax-free withdrawals (contributions are taxed) starting at age 59 1/2. Although that may seem like a lifetime away, the sum you accumulate over a lifetime of saving will be worth it once you retire.

3. Save for Emergencies

In addition to retirement savings, it’s important to begin building an emergency fund. Ideally, this fund would be enough to cover your expenses for six months if you lost your job. It could also be used to cover unexpected medical expenses, car repairs, or other large, unexpected expenses that don’t fit into your budget.

While traditional savings accounts are easy to use, they don’t generate a lot of interest. Better choices for emergency funds include high-interest savings and money market accounts, as well as short-term certificates of deposit. When you set up an account, make sure that you can withdraw money easily in an emergency.

When making a budget, savings for an emergency fund should be a priority, even if you can only save a small amount. In addition to building your savings over time, this practice should confer some peace of mind since you will be financially prepared for unexpected expenses.

4. Learn about Taxes

It’s important to understand how taxes work, as they can have a significant impact on your income and financial planning. For example, when you get your first job offer, you’ll need to know whether the salary is enough – after taxes – to cover your budget and savings goals. Likewise, if you receive a promotion or otherwise change jobs, you could secure a higher salary that moves you into a higher tax bracket that cuts into your raise. You can calculate your taxes with an online tax calculator.

5. Invest in the Market

 Investing in the stock market can be intimidating, and many don’t invest because they’re afraid. However, following a set of easy rules for investing wisely in the stock market can reap significant advantages.

When purchasing stocks, which offer you partial ownership in a company, buy when they are priced low and sell when their value is higher than what you paid for your shares. Stocks can be purchased individually or in mutual funds, which means that you buy pieces of multiple stocks in the same purchase. New investors should choose mutual funds, as they spread your investment across numerous stocks and are less risky.

6. Enlist a Financial Planner

While managing your own money doesn’t require a finance background, once you move beyond the basics, it can be helpful to bring in a financial adviser. These professionals can assist you with creating an overall financial strategy, including plans for budgeting, saving, and investing. Be sure to hire a financial professional that only charges a fee and is concerned with your best interests rather than a financial adviser who receives a commission when you buy into investments their company supports.

How to Manage the Fees and Costs of Estate Planning

How to Manage the Fees and Costs of Estate Planning

Estate planning is a vital step in not only ensuring that your assets are distributed according to your wishes upon your death, but it also prevents conflict that could arise among your survivors if they are left to make decisions about your estate themselves.

If the cost of estate planning has you thinking twice, consider the possible issues that could arise without it. Young children could be left without guardians, and irreparable rifts could develop between adult children trying to split assets themselves. You would leave a lifetime of assets in the hands of others with no say in where they go next. But if you have an estate plan, your survivors will not have to worry about making decisions about your estate while they are grieving.

Here’s a breakdown of fees associated with estate planning.


Online vs. In-person

While the Internet can be a great source of information, it’s not where you want to spend your money on estate planning. You’ll find plenty of do-it-yourself estate planning kits online (for a fee) that will allow you to create a simple will online, but don’t fall for their easy approach and low costs. This type of planning may work for someone with no beneficiaries and few assets, but everyone else should hire a professional.

The best use of the Internet in estate planning? Using it to do initial research into the field and come up with smart questions for your professional estate planner.



The costs of estate planning will vary according to the professional’s fee and how complex your property is. The cost for a simple, straightforward will could be a low as $150, while a complicated estate may require thousands of dollars.

Estate planning professionals, who can include attorneys and financial planners, typically will charge flat fees or an hourly rate.


Flat Fees

Estate planning professionals using this pricing system will charge a set price, often based on their experience and the work that they offer. If you are offered a flat fee, it’s important to ask the attorney or finance professional what that fee covers, as it may not include extras such as a notary fee, and how they expect payment. Some professionals require the entire flat fee up front, while others may ask for only part of the fee before they start on your plan.


Hourly Rate

Other professionals charge an hourly rate; this will cover all the time that the lawyer or planner spends working on your estate. In some cases, the professional also may ask for an initial retainer fee, which you will pay before work begins.

This fee schedule often applies to more complex estates that will require additional work.


Initial Consultation

Your first meeting with the professional, which can take place in-person or virtually, typically won’t include a consultation fee. During this meeting, which can last up to an hour, you’ll talk to them about your situation and figure out the extent of estate planning you will need. While this meeting may be free, expect to pay for future consultations.

As you meet with estate planning professionals to determine which one you will work with, be sure to ask each how much they charge, what fee schedule they use, and what services they provide for that cost. This information will help you choose both an affordable service and one that can handle your estate.


Can My Bill Increase?

Yes. Even if your financial professional has given you a rate and detailed list of services that rate covers, it’s still possible they will run into work outside of that scope once they delve into your estate. To offset any surprises, talk to them up front to understand when and how much they charge in extra fees.


Managing Your Estate Planning Costs

To keep your estate planning in your budget, you can take steps in advance to minimize the costs.

  • Prepare your questions: Before you start shopping for an estate planner, know what you need. Read up on basic estate plans, which documents are required, and what you need to know more about.
  • Shop around: Don’t work with the first person you talk to. Take time to learn about various firms, read their reviews, and compare what they offer. You also can schedule consultations with each one to gain more points of comparison.
  • Ask about costs: To avoid unexpected fees and costs, talk frankly about money during your consultation. Ask questions about their fees, rates, and scope of work so that you’ll know what you’re paying for and what could become an extra cost.
  • Sign a contract: This is not the time to take a business on its word. Have the firm draft a work agreement, including costs, that both of you sign.
This Is How to Preempt Conflict over an Unequal Estate Plan

This Is How to Preempt Conflict over an Unequal Estate Plan

The COVID-19 pandemic has caused many people take financial actions like postponing retirement and to re-evaluating their estate plans. When it comes to the latter, an issue many grapple with is how—and whether—to equally allocate their assets to their children.

While dividing one’s estate into equal parts seems fair, often children have made different life choices, have different characters, and aren’t in equal life circumstances. A survey conducted by Merrill Lynch Wealth Management and Age Wave in 2018 found that many Americans don’t want to distribute inheritances to their adult children equally.

For example, 25 percent of respondents said they believed an adult child with their own children should receive more of an inheritance than an adult child with no children. About two-thirds said they believed an adult child who provided care for them should get more that those who did not provide care.

“How do you define equity?” Lisa Hanks, a California-based estate planning lawyer, recently told the New York Times. “It is different for different families.” For many, equity and equally are two different things.

Sibling Discord

As you consider how you will divide your own estate, you may find that issues of equity are complex and sensitive. For example, you may have one child who you believe will always need extra help, while your other child has a high-paying job in a stable industry. Or, you may have an adult child with special needs who will need expensive care after your death.

However, even in cases where one child may clearly benefit from extra inheritance, other siblings may not always be on board. Unequal inheritances can lead to conflict between siblings when the estate is divided. Some fights become so unmanageable that siblings take each other to court. In some cases, siblings who receive less believe that siblings with a larger share of the inheritance must have manipulated or influenced the parent to leave them more. This can lead to bitterness, distrust, and broken relationships after a parent dies.

Estate planners suggest that when parents create unequal inheritances, they should have a conversation with each child to explain their reasoning. Families also can hire mediators to facilitate discussions about inheritances to help siblings understand their parents’ decisions.

For example, one mediator described to the New York Times a situation where she helped a father and two of his sons, who were financially successful, discuss the father’s desire to leave more money to his third son, who had issues with his finances and health. In the end, the two financially successful sons decided they would prefer for their brother to receive a larger inheritance because they wanted to have a good relationship with him and were concerned that they might otherwise become financially responsible for him later in life.

Navigating an Unequal Inheritance

Here are several situations a financial planner can help you work through if you are considering an unequal distribution of your estate between your children.

  1. Factoring in an “Early Inheritance”

Some parents provide one child with extra financial support early on, such as paying for graduate school or helping a child with a down payment on a house. To balance out their gifts, parents often want to factor in this type of “early inheritance” into their will.

Experts recommend that parents discuss the early inheritance with their children and document the gifts in their estate plan. If parents have loaned a child money, the will should include a promissory note outlining the amount and terms of the loan, how much has been repaid and whether the balance should be deducted from that child’s share of the estate.

While including past gifts may complicate your estate plan, not acknowledging them in your will can create resentment in children who did not receive substantial financial help from you while you were alive.

  1. Repaying a Care Provider

In some cases, one adult child served as their parents’ primary caregiver at the end of their life and parents want to reward this child. However, siblings may not be on board with the inequity it could cause in their parents’ estate.

To avoid real or perceived inequities, when the estate is drawn up to compensate a caregiving child, financial planners often advise families to create a personal caregiving agreement that defines the caregiving services and the value of their contribution in the estate, such as extra money to buy a house or more of the estate. As always, parents should also talk about these decisions with their children.

  1. Taking Care of Stepchildren

Blended families can create added complications when drawing up an estate, as research has found that parents with no stepchildren are much more likely to treat their children equally than families with stepchildren. To ensure assets are distributed as the deceased intended, financial planners recommend being specific in how the estate is set up.

For example, a husband with children from a previous marriage may want to create a trust that provides for his spouse and bequeaths his remaining assets to his biological children after she dies. Alternatively, the husband could specify that certain amounts of his estate should go directly to his children rather than leaving everything to his spouse or name his children beneficiaries of a life insurance policy.

Regardless of careful estate planning, however, inequities can creep in. To best preserve sibling relationships, parents should always lay out detailed estate plans in advance and talk to their adult children frankly about their estate and the reasoning behind their decisions.

Guarantee Retirement Income with a Deferred Income Annuity (DIA)

Guarantee Retirement Income with a Deferred Income Annuity (DIA)

Two key considerations in retirement planning are ensuring that you outlive your retirement income and that your financial plan can withstand changes in the market. Pensions used to provide this assurance, but as these types of savings plans become rarer, you may have to create your own guaranteed retirement income.

Deferred income annuities (DIAs) are a sometimes-overlooked financial tool that fortify retirement portfolios and guarantee that retirees will have a cash flow, regardless of market ups and downs. While financial advisers generally will not recommend investing the majority of your portfolio in a deferred income annuity, many do advise retirees to include them in their portfolios.

Why are these financial tools such a good idea? The main reason is they provide a guaranteed income for life, whether you live to 80 or 100. While the income they generate may not be enough to cover all your living expenses, they can provide peace of mind and a reliable source of income in your retirement years.


How Deferred Income Annuities Work

Unlike other investments that produce income, deferred income annuities guarantee income as long as you are alive—no matter how long your lifespan. This works because DIAs operate on the concept of the “mortality credit,” which means that the assets from annuities whose recipients live for shorter periods of time stay in the “mortality pool” to work for recipients who live longer. DIAs are managed by insurers, who can share risk with other clients.

To build a DIA, a buyer invests a one-time amount or makes incremental payments to an insurer, who invests the money and guarantees a regular income later on. The investor can choose when to start taking payments, although most begin at age 80 or later to ensure they have an income in the last year of life.

The key to maximizing income from DIAs, which convert part of your savings into regular income, is to invest before you retire. An early start can mean a higher stream of income after you stop working. Financial advisers generally recommend DIAs for everyone except those who can’t afford to commit their money to an investment, as DIAs are not liquid.

There are several good strategies for investing in a DIA. First, make a DIA part of a diversified portfolio, since it is not impacted by market conditions. A DIA can stabilize income projections and provide assurance that your basic bills will be covered in retirement (along with other guaranteed incomes from sources such as Social Security and work pensions). Investing in a DIA incrementally long before your retirement date also is an excellent way to build your own pension fund.

You and your spouse can each buy your own DIA, or you can buy one as a couple with a joint payout that guarantees the surviving spouse will continue receiving payments. For those concerned that they will die before they receive payouts or before payouts exceed the amount of the original deposit, ask your insurer about a return-of-premium option that will give beneficiaries the original deposit back. Be aware that this option will reduce the payout amount a little.


Why DIAs Are a Good Choice

The biggest advantage of DIAs is that you don’t use them until many years after you’ve invested. For example, if you buy a DIA when you are 50 years old, but don’t withdraw income until you are 80, you’re benefiting from annuities growth after 30 years of compounding interest.

Unlike an IRA or 401(k), which also grows over time and offers tax advantages, a DIA that’s not in a retirement plan (aka a nonqualified annuity) does not require you to begin withdrawals at age 72 to defer taxes. Additionally, DIAs do not have limits on how much you can contribute each year.

DIAs also provide more flexibility in how you distribute your retirement savings. For example, if you retire at age 70 and invest part of your savings in a DIA that you won’t use until you are 85, you can use the rest of your retirement money for income during the 15 years between 70 and 85. This will allow you more freedom with your money early in retirement, because you know you have a guaranteed income planned for your later years.


When Should You Buy a DIA?

The best time to buy a DIA is five to 10 years before you plan to retire, usually between ages 55 and 65. This will lengthen the duration of your deferral period and increase the size of your payouts.

Deferring the payout also allows you to make additional investments in your DIA over a long period of time, taking advantage of potentially lower interest rates as rates fluctuate. Investing in an asset that provides guaranteed income also reduces the need to take on riskier investments or to sell your investments in a down market to generate cash flow.