Individual tax returns are due by April 15 unless you file for an extension. Your individual Form 1040 contains many clues that will help you identify financial planning issues. Following are some pointers based on the line item on the tax form:
* 1040 LINE 6C: Dependents
Education Planning: If you have pre-college-age children, you should consider Coverdell Education Savings Account or Section 529 plans. Section 529 plans can be overloaded as much as $55,000/$110,000 (split gift) up front. This amount is exempt from gift tax because the gift is treated as made over five years and earnings are tax-free if used for qualified education expenses.
Basic Estate Planning: The estate planning team must include an estate attorney to draft a will, preferably with A/B trust structure. A current will is needed to make sure that the individual’s wishes as to disposition of assets and guardianship over minors are carried out. A durable power of attorney (POA) can also be extremely useful to ensure that the financial plan will be carried out even if one becomes permanently or temporarily disabled or incapacitated.
Life Insurance: Life insurance policies need to be reviewed for income replacement, debt liquidation, and college funding. Also, ownership and beneficiaries of life insurance policies need to be reviewed and updated. Long-term care and disability insurance needs need to be reviewed.
* 1040 LINES 7, 12, 17: Wages, Self-Employed, Business Owners
Salary Deferral Plans 401(k): If your employer provides these plans, you may want to make sure that you are deferring your salary to the maximum possible amount. Also, diversify your investments in retirement accounts based on an appropriate asset allocation formula.
Business owners should consider key-person insurance, disability insurance, buy-sell planning, and retirement plans such as SEP, or profit-sharing plans.
* 1040 LINE 8B: Dividend Income
If you have high dividend income, you may want to review appropriate asset class allocation (bonds, equity, domestic, international, real estate, and natural resources). If you have company stock options, you may want to consider tax-efficient exercise, exit, and diversification. If in a high tax bracket, consider state tax-exempt bonds by checking taxable equivalent yield calculation.
* 1040 LINE 25: IRA Deduction
Do you participate in IRAs? Contributions for the year 2004 can be made till April 15, 2005. If you are participating in an employer plan such as 401(k), you may still generally contribute to a Roth IRA or traditional IRA up to $3,000. This maximum will increase to $4,000 for year 2005. Contributions to Roth are never deductible but appreciation is free from taxation when the individual withdraws money from the account. If your child has earnings, consider investing them in a Roth account. Make sure you have proper beneficiaries and contingent beneficiaries on all retirement accounts.
In conclusion, consider overall assets protection by having adequate auto and umbrella insurance and use the tax-filing time to revisit your family’s insurance and retirement needs.
Parveen Maheshwari, C.P.A., has an office in Bur-lingame. (650) 340-1400. [email protected]