Give Your Clients a Mid-Year Financial Check-Up

By Barbara O’Neill, Ph.D., CFP®, [email protected]

A financial check-up is as important as an annual physical with a doctor. Like a medical exam, a review of someone’s personal finances can identify steps to improve “financial fitness” and screen for potential problems.

While many people do a financial check-up at year-end or during income tax season, there is also another great time for a review: the mid-year point in July. Why? People can often estimate their expected annual income and they still have five months left to make adjustments to earnings, spending, saving, and/or tax withholding.

Personal Financial Managers (PFMs) can help military families conduct a mid-year financial check-up by reviewing the following seven financial planning topics:

Tax Credits- Of particular importance in 2021 is the Expanded Child Tax Credit (CTC), which has income limits. Working families will receive the full expanded credit if they earn an adjusted gross income (AGI) for the 2021 tax year up to 75,000 (single tax filers), $112,500 (head of household), and $150,000 (married couples filing jointly or mfj). Most military families will qualify. Another tax credit that is useful to project ahead is the Earned Income Tax Credit (EITC), which is based on family size and household income.
Tax Deductions– Like civilians, most military families will take the standard deduction, which is $12,550 (single tax filers), $18,800 (head of household), and $25,100 (mfj) in 2021. Only about 10% of taxpayers itemize deductions, typically those with large unreimbursed medical expenses, mortgage interest, and/or charitable donations or victims of declared natural disasters. Families on the “cusp” of itemizing may need assistance with projecting deductions and “bunching” them to exceed the standard deduction amount.
Tax Withholding– Taxpayers should aim to be $500 above or below what they will owe in 2021. Why? Big refunds can be held up by identity thieves and IRS processing delays and nobody wants to owe a large lump sum. The IRS Tax Withholding Estimator tool, combined with a “best projection” for income, credits, and deductions, can identify an approximate withholding amount and service members can adjust their income tax withholding using tools from Defense Finance and Accounting Service (DFAS). Another check against under-withholding penalties is the “safe harbor rule” to withhold 100% or 110% of the prior year’s taxes.
Budgeting and Cash Flow– Some military families may need to adjust their income and expenses this summer as COVID-19 restrictions ease. In other words, they need to prepare an updated budget. For example, spouses may be spending more money on gas commuting to work and there will be back-to-school expenses for children attending in-person classes. Budgeting apps or “paper and pencil worksheets” can help clients see where their money is going and reallocate dollars to high-priority spending categories.
Flexible Spending Accounts (FSAs)- Mid-year is a great time to review payroll deductions for FSAs; i.e., pre-tax savings accounts for qualified health and dependent care expenses. Military spouses may have them. COVID-19 makes a check-up even more important because fall school and work schedules may affect childcare needs. In addition, the IRS granted increased flexibility in 2021 to carry over unused FSA amounts.
Progress Reviews, Catch-Ups, and Set Asides– People should be halfway to their annual savings goals in July (e.g., $2,500 if saving $5,000). A mid-year review can confirm this. Special considerations in 2021 include replenishing emergency funds and retirement savings plans from which cash withdrawals were made and set aside money to repay arrearages on rent/mortgage and student loans as moratoriums. In addition, it is helpful to create a holiday savings/spending plan now for the December holidays.
Portfolio Status– The average U.S. stock fund was up almost 16% during the first six months of 2021. With large market swings like that, mid-year portfolio rebalancing is in order by selling over-weighted asset classes (e.g., stock) and/or putting new money in underweighted asset classes (e.g., fixed-income securities). Also, raises may take effect in July, making now a good time to increase retirement savings plan deductions.