What Can You Learn from Your Latest Tax Return?

What Can You Learn from Your Latest Tax Return?

With tax returns being filed right now, it’s time to sit back and take a look at what you might do differently for next year’s filing.  Here’s a list of nine opportunities you might want to take advantage of this year. It’s time to look at these possible opportunities now.

  1. How much interest you earned and where it came from? Could you have done better with no more risk?
      • Online banks tend to offer higher yields and are still FDIC insured. Your credit union might offer a higher rate and is insured too. Some examples are Marcus.com; Allybank.com; CitBank.com (not citi bank); and Synchronybank.com
  1. Tax efficiency of your interest and dividends
      • Some interest is not taxable like municipal bonds (muni bond funds) either both state and federal or maybe only federal if the fund includes bonds outside your home state.
      • Some dividends are federally taxed at a lower capital gain tax rate (15%/20%) if the dividends are “qualified” meaning from mostly US corporations and shares are held for a significant period of time. This tends to be confusing at tax time.
  1. Amount of retirement savings that reduced your income
      • Every dollar you put away lowers your taxes by 15 to maybe 45 cents depending on your combined federal and state tax brackets. It also features long term compounding without paying income tax until the time you take some of the money out of the account (called a distribution).
  1. Can you put more away pre-tax or after-tax (Roth IRA)?
      • Your tax return can show you that you did not achieve the maximum ($19.500 or $26,500 for age 50 and over) savings this past year. If you did some Roth 401k/Roth 403b contributions, you are counting on tax free withdrawals later on and even more compounding success.
      • Now is the time to make a resolution to put away more for retirement. Don’t wait for the New Year’s Resolution time period.
  1. Did student loan and mortgage interest deductions matter?
      • Did you see if the interest paid amount added to your deductions or is it time to just pay off the loan(s)? When you deduct the allowable interest above standard deduction levels it cuts your cost of borrowing.
  1. Did you get capital gains from one or more mutual funds in a taxable account?
      • One of the biggest complaints about mutual funds is having to pay capital gains tax when someone else sells their shares and the manager “sprinkles” capital gains to all shareholders. This causes much angst among buy and hold investors.
      • Exchange Traded Funds (ETFs) were invented to help eliminate having to pay taxes on mostly equity funds because they feature a capital gain or loss being recognized when you sell and not someone else like in a mutual fund situation.
  1. Were you able to take advantage of a Health Savings Account?
      • In certain situations, employers offer and will allow you to put away pre-tax money to pay medical expenses now or in the future in an account (H.S.A.) that you can choose what its invested in from a list offered by the vendor.
      • Some people use it like another double tax-free retirement savings account that in retirement has even more options on where you can spend this tax free money.
  1. Did you under or over withhold and were surprised at your refund or amount owed?
    • The form you use to change your withholding is called W4. The new form does not ask for exemptions anymore. It asks for dependents and extra amounts you want withheld
    • You can change this more than once a year if your earnings are increasing or decreasing from other sources.
  1. Did you move into a higher tax bracket by accident? Can you control it for next year?
      • Tax preparation software can help you estimate your tax bracket all year long. You don’t push the file button (that was already done) but see how much more or less you are earning and putting away for taxes.
      • Consider what items that create income on your tax return that you can delay (a bonus for example) or advance (create a capital gain with a sale).
Jim Ludwick
Jim Ludwick

Jim Ludwick is the founder of MainStreet Financial Planning. His varied education and life experiences have enabled him to apply his knowledge and experience into useful solutions for personal financial problems. His writing and broadcasting activities allow him to help many more than just individual clients. He loves a microphone.

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