Now that tax season’s pretty much officially over, you’re probably happy to take your completed return and stuff it in your file cabinet along with all your long-forgotten paperwork from years past.
But if you’re smart, you’ll go back into your files and grab that return at some point in 2017 — better sooner than later — and give it a good going over. Because with a careful review, your return can become a map that can lead you and your financial professional to better ways to save and invest your money.
Tax planning is not the same as tax preparation. It’s the art of arranging your affairs in ways that keep your money in your pocket and your portfolio. That’s typically your financial professional’s job, and if he or she isn’t sitting down with you annually to review your return line item by line item, it could be a red flag.
The vast majority of people pay unnecessary taxes year after year. For some people, maybe it’s $1,000. For others, though, it might be $10,000, $20,000, $30,000 or more. And even before you meet with your financial professional, you can do some prospecting on your own. Here are some things to look for on your Form 1040:
Let’s start with line 8, taxable interest.
Take a look at the box on the right. If you have money showing up in there, ask yourself: Am I spending all of that? If the answer is no, you may have just identified where you’re being taxed on money earned and not spent. There may be investment strategies that could help you fix that in the future. Take CDs for example. In today’s low interest rate environment, after taxes and inflation, you are safely losing your money. Consider only keeping sufficient liquid savings in the bank, and transfer the balance to more tax-efficient vehicles, such as municipal bonds or fixed annuities.
Go down to the next line, line 9.
It’s where dividends are reported. Again, if there’s money in the box to the right, ask yourself if you’re spending all of it. If the answer is no, you may have found another place where some smart planning might be in order. If you’re not living off of the dividend income, one way to be more tax-efficient would be transition from dividend-paying stocks to growth stocks. Your tax liability would typically be taxed at a lower rate and would only be realized when you sell it.
Keep moving down to line 13, capital gains or losses.
Ask yourself the same two questions above. On the other hand, if you have a negative number there, it means you probably have some carryover losses from prior years. Consider what your plan should be to take advantage of that money this year. How do you intend to use those losses to be tax smart moving forward? For example, if you have sufficient carry-over losses, it may be more tax-efficient to have a portion of your income come from investment gains rather than things like dividends or interest as this would increase your ability to offset this income against prior losses.
Line 15, IRA distributions.
You’ve probably been putting money into these plans for years, and it’s growing tax-deferred. But when it comes out, depending on the type of IRA, that money could be taxable. Sometimes, people end up with too much money sitting there by the time they retire. Talk to your financial professional about doing an analysis to see what it will look like for you and how to remove the money in a tax-efficient manner.
If you’re retired, take a look at line 20.
The box on the right shows how much of your Social Security is taxable. A lot of people are blindsided by how high this amount can be. For most high-income retirees, 85% percent of their Social Security benefits are taxable. But there are things you can do to get some control over that number Assuming you are being tax-smart in the above areas, your tactics provide the added benefit of reducing the taxation on your Social Security benefits as well.
Finally, go over to schedule A, line 23.
That’s where you’ll find “Other Expenses – Investments.” Any investment costs you paid in 2016 (including adviser fees, custodial fees and safe deposit box rental costs) should show up in that box. If they’re not, you could be missing an important deduction. Keep in mind that fees paid to a broker are typically not deductible expense as these costs are considered sales commissions.
I could go on and on, but these are some of the things you can look at on your tax return and, if there are concerns or surprises, work toward a better result in the future. There are many more. So don’t put your copy of your return away and forget it when you get home from the tax preparer’s office this year. Use it as a tool to find more money!
Kim Franke-Folstad contributed to this article.
Chris Abts is president and founder of Cornerstone in Reno, Nevada. He holds a Series 65 securities registration and has earned the Certified Estate Planner (CEP) and Chartered Retirement Planning Counselor (CRPC) professional designations.
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