Financial planning is a process of determining whether and how an individual can meet life goals through the proper management of financial resources. It gathers adequate reliable information financial situation; to determine goals and objectives, time horizon, and risk tolerance; to analyze the foregoing information in an objective manner, and to develop recommendations based upon a thorough analysis and in the interest of disinterested advice.
In the business context, this is termed as financial forecasting – an annual projection of company’s income and expenses; to estimate the cash needed, strategies on how to raise funds either through loan application or issuance of company’s shares of stock. In personal financial planning, it focuses on risk management, estates, college fund or retirement. It involves budget to organize finances and includes steps for spending and saving in the future.
Financial planning is not really all about money. Traditionally, the financial matter must be approached based on rational decision making. Some people do not behave rationally when it comes to finances, they lack a sense of control. Tax planning is one of the key elements of a comprehensive financial plan. The end goal is to maximize the after-tax wealth. Financial planners will incorporate tax-saving strategies available to optimize tax efficiency.
Tax-deferred. This refers to investments which income taxes and capital gains taxes are paid in future dates rather than on the date it was incurred. It will help prevent cash outflows in the future for tax payments and it shall be retained in the account and earn a return unhindered. When investors moved to a higher tax bracket, tax-deferred investment will become more advantageous. In the present tax laws, tax-free income options are limited and paying taxes at lower income rates is a very desirable planning strategy. The common types of tax-deferred investments are individual retirement accounts (IRA) and deferred annuities.
IRA has several types:
Family Gifting. Shifting income to lower-income family members can lower the overall tax burden because more household level income is tax-free due to standard deductions and lower marginal tax rates. Other family members with earned income can contribute to IRAs and other retirement plans, which can offset of the earned income.
US Congress expanded the “kiddie tax” restrictions, it limits the tax benefits received by transferring the income producing properties of the parents to children. The ‘Kiddie Tax’ which is levied on unearned, if earned by children below 19 years old and college students below 24. The first $1,000 is offset by a $1,000 standard deduction, and the next $1,000 will be taxed at the child’s tax rate. All of the child’s unearned income in excess of $2,000 is taxed at the parent’s tax rate.
Annual Gift exclusion is an approach to reduce taxes:
If given to the spouse, not subject to gift tax unless the spouse is a foreigner. If given to minor children also not subject to gift tax because all payments are considered as under the obligation of the parents. But if children are aged not less than 18 years old, gift tax shall apply. Gifts that involve educational and medical expenses are not subject to gift tax and considered as a good estate planning strategies for family members.
Portfolio Management. It refers to the art and science of selecting right investment tools and making decisions about mixed investments and policies; assets allocation and balancing risk against performance. It is a key skill required for effective investment management. Holding investment assets in a brokerage account allows financial planners to engage in tax-loss harvesting and bond swapping and to enjoy lower capital gains rates. Investment portfolios held in tax-advantaged accounts do not enjoy the same tax benefits because the tax rules governing the account override the tax nature of the tax assets held in an account. Rather, assets held in a tax-advantaged account received a different set of tax benefits.
Financial planning will provide guidance especially for family, even single people needed it. This entails good investment and maximization of the hard-earned money for the future and emergency purposes.
