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Prospering in the New Year

Financial resolutions worth keeping in 2019.

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With a new year upon us, you may have drawn up some resolutions such as starting a workout routine, getting a new job, or setting aside money. 

The start of the year is always a good time to make changes, and with the new tax laws, now is a great time to take advantage of credits and/or deductions that you may be eligible for. That being said, before making any major financial moves, make sure that the tax laws will help, rather than hinder, your progress. 

In the waning days of 2017, President Trump signed a long-promised tax bill that included several major changes: a reduction in the top federal income tax rate, doubling of the standard deduction, changes to personal exemptions, elimination or reduction of many itemized deductions, and elimination of the “Please Amendment” limitation on deductions. 

In addition, the estate-tax exemption was increased to just under $11.2 million per taxpayer, with a 40 percent tax on transfers that exceed this amount. Likewise, the gift, estate, and generation-skipping tax exemptions increased from $5 million to $10 million per individual.  

While not all of these changes impact everyone, it’s important to be aware of where you could benefit. There are also ways to build up your retirement savings while taking advantage of tax deductions and/or deferrals, as well as tax-free income down the road. 

If your employer offers a retirement savings plan, you can benefit in several ways. For instance, if you’re a participant in a traditional 401(k) savings plan, you can defer your contribution in order to lower your taxable income.

Also, any growth in the account will be tax-deferred, meaning that you won’t have to pay tax on the gains until the time of withdrawal. This can allow your money to compound exponentially over time. 

You may also be able to contribute to a personal Individual Retirement Account (IRA). Traditional IRAs allow you to deduct some or all of your contribution. And, similar to a traditional 401(k), the money inside of a traditional IRA is allowed to grow tax-deferred.

With a Roth IRA, you won’t be able to deduct your contributions. But since this money goes into the account after you’ve paid the tax on it, the earnings and withdrawals from a Roth IRA are tax-free.  

If you haven’t yet made your IRA contribution for 2018, it’s still not too late. In fact, you have until the April 2019 tax filing date to do so. 

What you don’t spend is oftentimes just as important—if not more so—than what you save. A new year can be the perfect time to practice budgeting and making payments that you know you’ll have later on.

For instance, if you know that you’ll be purchasing a new car in the near future, start making “payments” now by setting aside a certain amount of money each month. By the end of the year, you’ll have a nice-sized down payment for the vehicle—which, in turn, can make your monthly payments lower. 

Putting funds away in an “attitude” money account is another great way to keep yourself on track financially, as well as to avoid credit-card expenses when you purchase something you want. 

For instance, a weekend getaway, a new outfit, or a new big-screen TV could set you back quite a bit financially. But if you have an “attitude” account, you can use those funds to make fun, non-essential purchases.   

It’s important to keep in mind that “attitude money” is separate from the funds you set aside for your rent or mortgage, car payment, and other regular living expenses. Likewise, these dollars aren’t the same as your emergency fund—an account you have for unexpected expenses like a leaky roof, a fender bender, or other potentially high-dollar, unanticipated needs. (Without an emergency fund, you could find yourself either dipping into your savings or using a credit card to pay for unexpected expenses—and neither of these is a very good option). 

Ideally, you should aim to contribute 10 percent of your income to your attitude account. While this can take some discipline, you’ll be happy you have this money when you’re easily able to pay for vacations and other items you want. 

Plus, you’ll likely discover that you can still pay your regular living expenses even without the amount that you’re contributing to your attitude fund. The new year is a great time to get started with your attitude fund if you haven’t done so already.

This article appears in the January 2019 edition of OutSmart magazine.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.

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