Taxes Top Your February Financial To-Do List

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. Tax season is quickly approaching, and it's not too soon to start getting organized for tax time. Morningstar's director of personal finance, Christine Benz, is joining me to share what tax-related and other financial to-dos should be on your radar in February.

Christine, thank you for joining us today.

Benz: Susan, it's great to be here.

Dziubinski: Before we get into the particular jobs that investors should be tackling in February, let's take a step back and talk about this calendar that you've been--this month-by-month calendar you've been building for several years for investors about how to get some of these important financial tasks off their to-do lists.

Benz: The idea behind this calendar is that many people sort of have the, say, amorphous goal of getting their financial life in order. And the idea behind using the calendar is that by plotting them and sort of spreading them throughout the year, it's more manageable than having this long to-do list that's--it can be a little bit overwhelming. So, that was part of the idea. The other thing that I think is worth noting is that some of these tasks naturally lend themselves to certain times of year. So, at year-end, for example, a lot of us take a look around and see if there are any changes we can make to save on taxes. Pre-tax time, so in the February, March, early April period, a lot of us are thinking about actually preparing our tax returns. So, some times of the year naturally lend themselves to certain financial jobs.

Dziubinski: So, we're in February.

Benz: Right.

Dziubinski: And so, it is sort of tax time. And I know we--you know, I've started to receive information already, too; many of us have. What are some of the steps we should be taking now to make sure we're prepared?

Benz: Well, the key thing I think to think about whether you do your taxes on your own or whether you use a tax advisor, is just to make sure that you're collecting and organizing those statements as they come in. So, this would be your W-2 forms, your 1099 forms. If you're receiving the files, digitally, just get a good folder, mark 2019 taxes on your computer. If you're receiving paper, 1099s and W-2s, just make sure that you're catching them, so you're not having to play that game where you're having to retrieve all of those documents just before you start working on your tax return. So, I think that's kind of a best-practice to just set yourself up.

You may even keep a checklist from year to year of--and in some cases, tax advisors provide you with an organizer that kind of prompts you for various accounts, like, oh, I usually get a 1099 for this account or this one. And so, you can use that to help light the way as well.

Dziubinski: Now, you think it's also a good time to sort of take a look at--kind of look at those 1099s and examine those W-2s. What should we be looking for in those?

Benz: Right. I think a lot of us tend to get those documents in the door and think, oh, OK, bill, file. The good thing about taking a step back and actually reviewing what's on those forms is that it can provide intelligence about how you're managing your financial life. So, your W-2 that you receive from earnings from work can show you whether you're fully funding your 401(k), for example. It can show you whether you are saving more. If you got a raise last year, have you bumped up your contribution rate? It can show you if you're taking advantage of the Roth or the traditional 401(k)? Are you taking advantage of the health savings account if you have a high-deductible plan, and you have one on offer? So, you can glean some things from that W-2 that you receive.

With 1099s--and this is especially relevant, well certainly for some workers who are paid and receive tax reporting on their 1099s, but also for people with investments. If you're trying to tighten up your investment program, your 1099 can be a good way to actually think about doing so. So, a lot of us might have little savings accounts or little pools of savings scattered across multiple accounts. And we might find if we delve into them, that we're really not receiving a lot of income from them. That might be your call to tighten that up and consolidate those accounts, maybe qualify yourself for a higher yield than would be available if you only have a little bit of money at a lot of different firms.

You can also look at the tax efficiency of your holdings through your 1099. A lot of people pay attention to capital gains distribution season in December, but I think it gets more visceral when you see that 1099, you see how much capital gains distributions your funds have actually made. So, take a look at that as well. The good thing is that there are vehicles that nicely control for those capital gains distributions. They're called index funds, they're called ETFs. Look at whether you might make some changes to your portfolio to help make it more tax-efficient on a going forward basis.

Dziubinski: One of the financial jobs we talked about last month for January is investors revisiting their asset allocations. And I know that's something that is important in February too for those of us who may not have had a chance to take care of it, right?

Benz: Right. I mean, I continue to beat this drum mainly because we have enjoyed such a tremendous equity market. And I think this is particularly important for people who are getting close to retirement, looking at their enlarged balances that they've been able to achieve with the help of very large equity weightings. Well, as retirement draws close, you want to make sure that you have enough in safe assets to tide you through an equity market downturn, to prevent you from having to actually tap those equity assets if they should fall. So, take a look at your baseline asset allocation. Take a look at your portfolio Style Box exposure. My guess is a lot of portfolios, if they've been untouched, they're pretty growth-heavy. And take a look at that foreign versus U.S. split, because I just recently pulled together a compendium of different capital markets forecasts across major financial firms, and if there was one consensus and I guess in addition to most of them being kind of pessimistic about bonds' prospects, it's that foreign stocks are likely to have better returns over the next decade than U.S. So, see if you can't make some tweaks there as well.

Dziubinski: Well, thanks for giving us a to-do list for February. We appreciate it, Christine.

Benz: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski for Morningstar. Thanks for tuning in.