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.