Financial Planning Guide - 2021 | Best Guide - CPA Clinics
Steps to managing income and expenses include:
Several tax advantages are available to help save for education expenses.
The purpose of insurance is to transfer the risk of loss to a third party to prevent catastrophic financial loss should that risk become a reality. For this reason, people choose to insure the larger risks and take on the smaller potential losses at their own risk.
Planning Tip: Individuals may want to ask their insurance agent about purchasing umbrella liability protection. The cost is typically economical and it can provide additional protection from a liability loss.
Stocks, bonds, money markets, mutual funds, commodities, real estate, and options are the most common types of investments. Most financial professionals will recommend diversifying an investment portfolio across the different spectrum of investments. Investors need to be aware of the risks involved with any investment.
In addition to the economic logic that a financial transaction must have, it is important to evaluate the tax consequences of those transactions.
Knowing the basis and holding period in advance of a transaction can prevent costly tax consequences. Selling highly-appreciated assets will increase the amount of tax owed. Selling investments that are below basis can provide tax benefits by allowing a dollar-for-dollar reduction against capital gains. In addition, individuals are allowed to write off investment losses in excess of gains up to $3,000 per year. Any amount not used can be carried forward to future tax years.
Example: Val owns the following shares of stock.
Val wants to make a $5,000 charitable donation by selling stock and contributing the cash to charity. If she sells both stocks and donates the proceeds, she will generate a taxable capital gain of $1,000 and take a charitable deduction of $5,000. Instead of selling both stocks, Val could gift stock A to the charity, along with the proceeds from the sale of stock B. Her tax result would be a capital loss of $2,000 from the sale of stock B and a charitable deduction of $5,000 ($4,000 FMV of stock A, plus $1,000 proceeds from the sale of stock B). She thus avoids paying tax on the $3,000 appreciation on stock A while achieving the same charitable deduction.
A life insurance or annuity contract can be exchanged to a different life insurance or annuity contract without the exchange becoming taxable. Limitations may apply.
Early retirees (before age 59½) are allowed to take distributions from retirement plans and avoid the 10% additional tax. In order to do so, they must follow certain rules.
