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FIRST-PERSON: Your mid-year financial checkup

DALLAS (BP)–Don’t wait until year’s end for your next checkup. Here are six personal finance tips for a midyear checkup:

1) Maximize retirement plan deferrals. Deferrals to your employer’s retirement plan reduce current federal income tax liability and enhance your retirement savings. If your employer offers a match, don’t pass up this benefit. The 2006 basic limit is $15,000 ($20,000 if you are age 50 or older).

2) Check your withholding. You may look forward to a refund in early 2007, but this is tantamount to an interest-free loan to the government. Alternatively, you don’t want to owe taxes when you file for the 2006 tax year. The Internet offers many calculators to help you determine if you are over or under withholding.

3) Review investments. Are your investments on track? Do you need to rebalance your portfolio? Many employers now provide free investment advice for retirement plan assets. Now may be a good time to consider consolidating your various investment holdings and check your beneficiary designations.

4) Use a cafeteria/flex plan. Have you filed any claims under your employer’s cafeteria plan? If not, gather your allowable expenses and submit them for reimbursement. If possible, invest the reimbursement.

5) Consider the impact of the Tax Prevention and Reconciliation Act. Signed into law on May 10, 2006, some highlights may be useful:

— Alternative Minimum Tax (“AMT”). A retroactive provision for 2006 may grant you relief from this tax. Some 15 million taxpayers should benefit from the higher AMT exemption amounts ($62,550 for married couples, filing jointly and $42,500 for single taxpayers).

— Dividend and capital gains rate cuts. The act extends the lower tax rate for qualified dividends and capital gains through 2011 which gives you an additional year for capital gains planning. Also before the act, capital assets did not include self-created musical works. The act allows the taxpayer the proceeds of such works as a sale or exchange of a capital asset.

— Kiddie tax. Current law imposes the parents’ tax rate on a child’s unearned income, if the child is not yet age 14, has net unearned income over $1,700, and if the parent can claim the child as a dependent. The act raises the age limit from “under 14” to “under 18.”

— Exclusion for foreign earned income and housing costs. There are three changes: a) starting in 2006, the income exclusion is indexed for inflation; b) the base amount to calculate the housing allowance exclusion is 16 percent of the amount of the foreign earned income exclusion limit; and c) reasonable housing amounts over the base limit may be excludable, up to a 30 percent maximum.

6) Prepare for open enrollment. Many employers hold open enrollment in the fall. Begin reviewing your choices, especially if you’ve had a family situation change. Research your options now to avoid last-minute choices.

And, certainly, talk with your tax or financial adviser about what’s right for you.
Sherre Stephens is a certified employee benefits specialist and director of executive and institutional benefit design for GuideStone Financial Resources of the Southern Baptist Convention.

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  • Sherre Stephens