It’s that time of the year again. The days are getting longer as the sun is coming out of hibernation, plants will soon be sprouting up, and of course there’s the dreaded tax season.
As a result of the Tax Cuts and Jobs Act, the greatest certainty is that things this year will be different from last. How you will be affected by tax reform is deeply dependent on your personal financial situation, but there are a few changes that will affect most people.
Widespread changes affecting many people include:
SALT limitation of $10,000 – State and Local Taxes paid that can be deducted against your federal return are now limited to $10,000 (this can be a big deal for property owners in higher tax coastal states).
Standard deduction increased – Many people who may have previously itemized their taxes will no longer do so, and this may come as a shock to those had hoped to deduct charitable donations.
Changes to paycheck withholding – For many, it may come as a surprise that their effective tax rate has declined, but they don’t get a refund. Why? The government changed how much is withheld from your paycheck resulting in an increase in take-home pay. Tax refunds are nice, but holding onto the correct amount of your hard-earned pay throughout the year is better.
Consider your financial goals
In the event you do end up with a tax refund, you’ll want to make sure to put that money to good use. Chances are you may have started to think through your financial objectives before coming into this money, though identifying your financial goals and updating your financial plan can be a burden on your precious time off. As a result, many people seek the help of a trusted professional, or less fortuitously avoid the topic until a life event forces them into action.
While it’s normal to feel tempted to treat this money like a windfall, you’ll want to be smart about how to manage this money -- just as you would any other money. Some things to consider:
Pay off existing debt - You can use your tax refund to pay off any existing debt or pay down your mortgage to reduce ongoing interest costs. Here, you’ll want to consider the rate of interest on that loan, as well as whether the interest is tax deductible.
Build an emergency fund - It’s always important (but not always feasible) to have close to six months’ worth of living expenses saved in case you have an employment gap or run into any emergencies. If this isn’t something you currently have, consider putting some money aside for your rainy-day fund.
Invest - Whether you’re planning on sending your kids to college or just want to save for your own retirement, working with a professional to invest your money is a great option. Think it’s too soon to plan for these events? For some, that is the case but you still need a strategy to continuously grow your financial assets and keep them working just as hard as you are.
Have some fun - Of course, it’s okay to set aside a small part of your refund to enjoy it. Just be sure not to lose sight of your long-term goals.
The bottom line
There’s a lot to consider when you’re figuring out what to do with an unexpected lump sum of cash. Don’t be shy about talking to a financial advisor who can help you sort things out. Paceline is always here to help. For a free, no-obligation consultation, or a Portfolio Second Opinion, please contact us.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.