As a working individual, it’s very likely that your income and expenses will change as you age. And while having a sound financial plan is important to keep you on track for retirement, understanding tax implementations is also essential for your financial health. As you age and proceed with different jobs, your tax liabilities will change. Good financial planning enables you to be prepared for your taxes and take advantage of your tax opportunities at different stages in life.
First, let’s get a clear understanding of what financial planning is. In a nutshell, financial planning is using your money to achieve your personal goals. How can you leverage what you earn throughout your lifetime in order to make your future better?
Oftentimes, people are asked to address non-financial goals such as, “What will make you happiest now and in the future?” and “What are your personal and professional goals in the next 5, 10 or 20 years?”. Addressing how you want to live your life will ultimately determine your financial needs. Once you establish your goals, you can put a financial plan together. Keep in mind that financial planning is an ongoing task – adjustments need to be made as goals and priorities change.
This is where understanding taxes plays an important role in financial planning. As you go through life, your tax liabilities will be altered through income, assets and tax deductions and exemptions. Let’s take a closer look at each of these areas:
- Income Source – At a young age, your wages will be your primary income. Later, it may be a combination of your wages and investments. When you retire, you could be living primarily off of your investment income. Imagine this as a bell curve, with your adjusted gross income peaking in the middle of your adulthood and being lowest when you are younger and older. Tax-wise, you will likely be in a higher income bracket during those middle years.
- Personal Assets – Typically, people start to accumulate assets at a young age and lose them when they are older. Again, your asset base will be highest during middle adulthood, which will affect your tax strategy.
- Deductions and Exemptions – The same bell curve pattern for adjusted gross income follows for tax deductions and exemptions. At a younger age, people don’t typically have dependents to claim; the same suit follows around retirement age. The biggest tax benefits are found during those middle adulthood years when individuals have more expenses to deduct and higher exemptions to claim.
The important thing to remember is that, as life changes, so will your tax liabilities. No matter where you are at in life, consult with a tax expert when considering all aspects of your financial plan. Ferguson, Timar & Company can help you with all of your tax preparation and tax strategy needs. Contact us today to get started.