By H. William (Bill) Wolfson, DC, MS, MPASSM, CFP®
As 2017 ends and 2018 begins, this may be a great time to reevaluate your financial health. For many, 2017 proved to be a financial market bonanza, depending on whether you participated in the financial arena and how your investments were allocated. Prior to year end, there may be time to review profits and losses with the tax implications of selling and netting, or keeping and carrying over into 2018.
Gains vs. Losses
Investments held more than a year are taxed as a capital gain, while those held one year or less are taxed as ordinary income. Similar gains and losses may be netted (long term/long term or short term/short term). “Strategic tax-loss harvesting could help you reduce your taxes on realized capital gains,” according to Fidelity. Additionally, up to a $3,000 loss may be claimed, with any excess carried over to the following year. If you are carrying losses from previous years, this may be a good time to review possible 2017 gains and take advantage of this accounting opportunity. If working with a financial professional, now is the time to have this and other tax reduction opportunities discussed.
Resolutions vs. Goals
Setting goals is different than making a New Year’s resolution. Resolutions are often mindless and self-limiting statements—often forgotten as quickly as they were made. Goals require thought and action steps to become real. They must be reviewed daily and involve written affirmations that are read daily. You must believe your own thoughts and written goals for them to become a reality. It takes time for this to materialize. You must work your plan and not be deterred by obstacles or challenges. To achieve your goals, consider it a test of will power, strength of personal fortitude and conviction. Napoleon Hill said it best, “Whatever the mind can conceive and believe, the mind can achieve, regardless of how many times you may have failed in the past.”
Review: Save, Spend or Tweak
Any new year presents with new opportunities and challenges—2018 perhaps more so because of the tax changes anticipated. The following sections should be considered for new participation or reviewed if you already have an involvement with a product or investment. Asking questions can save you money, especially when comparing like products or, better yet, having the ability to reduce the costs of previously purchased products. Remember, it is your money to spend and invest wisely…but it is important to save when you can without compromising quality.
Qualified Plan Contribution
In Congress, the Senate recently passed its tax legislation and now must confer with the House to finalize the joint legislation before it is sent to the president for his signature. Assuming no changes to previously approved 2018 program amounts, qualified retirement plan contributions, (i.e. 401(k), 403b, 457, etc.) will rise to $18,500 with a $6,000 catch-up if someone is over age 50. IRA contributions will remain at $5,500 with a $1,000 catch-up if someone is over age 50. For traditional IRA’s, “If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income.” If you are not contributing to any of the myriad of retirement plans available, times a-wastin’!
Health Savings Account
If you participate in a high-deductible health insurance plan (HDHP), you should give serious consideration to a Health Savings Account (HSA). “HSAs offer account owners a triple tax advantage, contributions reduce taxable income, earnings on the account build up tax-free and distributions for qualified expenses from the account are not subject to taxation,” according to the Employee Benefit Research Institute. In some instances, a HSA offers more savings opportunities compared with a conventional retirement savings account.
According to the IRS, “For calendar year 2018, the annual limitation on deductions for an individual with self-only coverage under a high-deductible health plan is $3,450 and family coverage is $6,900. High-deductible health plan is defined as a health plan with an annual deductible that is not less than $1,350 for self-only coverage or $2,700 for family coverage, and the annual out-of-pocket expenses (i.e., deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,650 for self-only coverage or $13,300 for family coverage.” Plus, if you are age 55 or older, you are permitted an additional $1,000 contribution. And if your employer contributes to your HSA, the contribution is tax-free to you.
Insurances Reviewed and Re-evaluated
Review all your insurances and get updated competitive bids on homeowners, comprehensive umbrella liability coverage, automobile and increased aggregate coverage limits with deductible comparisons, office overhead, disability (own-occupation with definition), office liability, malpractice, long-term care, etc. Replace, purchase or add other coverages when necessary and appropriate.
Term life insurance is payable if you die during the period of coverage. You pay a premium and at the end of a year the insurance expires unless you renew. It generally has no cash value. Whole life and other similar policies offer life insurance and build cash value. If you own these types of policies an updated policy illustration should be requested yearly. It is important you compare the current data to when it was first purchased. The policy may not have the same anticipated value after being in effect over time. Ask questions, and have your agent fully explain the current status of your policy. As an aside, if the policy is no longer needed, instead of lapsing it ask about options for keeping it in force with no additional payments, selling it to a third party or taking any cash value. However, be aware some of these options may trigger a taxable event. It is your policy, and all your available options should be thoroughly vetted and understood!
Estate Plan, Investment and Tax Review
Review your estate plan and make sure you have important and necessary documents completed by a knowledgeable attorney. These include but are not limited to: a will (with suitable trustee and custodian designations), durable power of attorney, health care proxy and living will, correct beneficiary and contingent beneficiary designations, appropriate trust documents, etc. In 2018, the annual tax-free donee gift amount increases to $15,000. Additionally, the estate and gift tax exclusion will be $5.6 million per person.
Financial portfolios and related investment allocations should be reviewed and rebalanced as necessary. Given the 2017 upward run of the financial indexes, style drift may have occurred with holdings and should be evaluated. If working with fiduciary financial professionals, quarterly financial statements should be reviewed for errors and a comprehensive annual review should be scheduled. If paying quarterly taxes, remember to make it by the due date to avoid penalties and interest. The myriad of laws, rules and regulations are complex, and unless you are capable of self-directing your estate plan, investments and taxes, it is best to have a team to consult with on these and other important matters.
Saving and Debt Reduction
If you do not have an emergency fund, it is time to allocate some amount monthly for this dedicated account. Start small but ensure a minimum contribution is always made until at least three months expenses are deposited. Maintaining specific accounts for necessary expenses can help allocate income as it is received versus having one account to pay all expenses. If money is deposited into a specific account for a specific reason, it should only be used for that purpose. This may help those requiring discipline to pay expenses when due to have the money available to do it.
The plan should include reducing and ultimately getting out of debt. Review all your discretionary expenses and ask yourself if you can do without or is there a real need to have whatever it is you’re buying. The differences between needs and wants may appear to be easy to explain or differentiate in one’s mind but harder to delineate in the real world. Before making that purchase, ask yourself if you really need it.
Without compromising quality, shop and compare expenses and purchases to maximize savings which translates to more cash in your pocket. Make 2018 your year—no matter where you are in the financial and personal scheme of things. If you have more questions than answers, it is always fine to ask for help. Consider consulting with a fiduciary professional who is entrusted with and should be expected to put your needs first.
H. William (Bill) Wolfson, DC, MS, MPASSM, CFP®, is a financial consultant and advisor. Dr. Wolfson retired after 27 years of active practice. He is a member of the American Chiropractic Association (ACA), New York State Chiropractic Association (NYSCA) and Florida Chiropractic Association (FCA). Dr. Wolfson served as the ACA New York delegate and received the prestigious ACA Delegate of the Year Award in 2011. Dr. Wolfson can be reached at (631) 486-2792 or firstname.lastname@example.org. View more published articles here.