Don't Put Away Your Tax Return Just Yet
April is gone and your taxes are filed. Most people want to
forget about their taxes when this is the time to reflect on your
decisions of last year and make changes if necessary. Get you tax
return back out and you can learn a lot. Almost everyone has room
for improvement but they don't take the time at the right time of
year to make changes to lower next years tax bill.
Look at your total income and deduct the amount you paid in taxes.
Also deduct what you paid to Social Security and Medicare and any
money you might have saved last year. The number you are looking
at is what you spent last year. This number is where you start to
plan for your retirement .
Do you know your marginal income-tax rate? Most of you do but if
not, look at the instructions on your 1040 form. This percentage
is what was used to do your taxes and many times if you look at
your income, you may have been very close to a smaller percentage.
Opportunity to save money for next year needs to start here. By
making a few small changes, you could be in a lower tax bracket
and this is money in your pocket.
You may take the standard deduction because your itemized
deductions are too small or your income is too high. You may give
to charity and have mortgage interest that is not doing you any
good. You may want to bunch those contributions in years when you
will itemize. You might want to make a charitable contribution
with appreciated stock. There are many ways to plan next year's
tax return and your financial professional needs your help now and
not next December.
Let us look at Schedule B for a moment. If you are in the 28% or
higher income tax bracket, and you reported a lot a taxable
interest, it is time to look at your bond portfolio. A lot of
people in high tax brackets have too much in taxable bonds. Maybe
municipal bonds are the way to go this year and get tax-exempt
interest. By looking at your portfolio and your tax return, you
should be able to tell if you are investing too conservatively or
maybe you are over aggressive. Is all your interest in
certificates of deposit? You may be too conservative. If all you
have is dividends from your employer's stock, maybe you are not
diversified enough.
Schedule D is a real eye opener for a lot of people. Looking at an
entire year is usually surprising when people look at the amount
of trading they did last year. A lot of people are getting losses
to offset against their income, but the fact is they are losing
money. When investors realize stock market gains, they often sell
within a year. This means those gains are taxed as income rather
than at the lower long-term capital-gains rate. If you are in a
high tax bracket, this could mean the difference between paying at
39.6% and paying at 20%. You can get a real picture of your
trading by looking at your total proceeds from selling securities.
If these sales are stocks and stock funds, you can estimate your
portfolio turnover by dividing this number by the amount you have
invested in stocks in your taxable account.
If you are selling more than 25% of your stock portfolio each
year, you might want to slow down on trading or at least do some
buying and selling in your retirement account where you won't have
to pay taxes on each year's gains. If you own high trading stock
funds that make big capital-gains distributions each year, you may
want to shift these funds into your retirement account where they
won't hurt you at tax time. If you look at an entire year, you may
see mistakes and need to change the way you do things this year.
Reflect back on any major decisions you made that were not tax
efficient. Ask yourself why you made those decisions and decide if
you will have those situations again this year. Make a list of
everything you did last year that could be changed now and talk to
your CPA.
You cannot predict the stock market. You can predict things in
your life such as a child close to college. Lay out personal
changes you will make this year like a move or deciding to work at
home. If you change jobs, retirement options change. Investing
money in a vacation home or taking in an elderly parent will
change your tax return. Again, most people think a decision here
and decision there really will not make a difference but it might
place you in a different tax bracket. Timing is the key. Keep an
ongoing chart of any changes you make that can affect your taxes
and keep the chart current. Planning a marriage or divorce is a
change. IRA's, Roth IRA's, Keogh plans, stock options, becoming
self employed and the list goes on and this list needs to be
evaluated as the changes occur. Selling your home at the right
time can make a huge difference as can understanding the meaning
of "diversification" and "asset-allocation."
Make a personal financial calendar and forward this to your
financial professional. Drop a note to your CPA when you plan to
make a move that will change your taxes before you make the
move. Your life is not always flexible but getting advice before
you do something will help your CPA help you. Did you move because
you wanted to or did you move because your job required you to
relocate? There are several things here that make a difference in
your taxes and help is only there for you if you make the
information available to your CPA. One of the most effective
things you can do to help yourself is keep your file complete with
dates of changes and reasons you made changes and
this information is overlooked as important by so many taxpayers.
Tax laws change and so do your financial goals as you get closer
to retirement so look at your tax return now and learn what you
can from it and don't be one of the "I wish I had…"
taxpayers. Be a "I am glad I did…" taxpayer this time
next year.
