7 Valuable Things You Can Learn From Your Tax Return

Your Mutual Funds May Be Inflating Your Tax Bill

If you ended up with a bigger tax bill—or smaller refund—than usual this year, check out the capital gains distributions from your mutual funds in any brokerage accounts. Thanks to last year’s strong stock market, some funds paid out big distributions. If those funds are in a taxable account (versus an individual retirement account or 401(k) plan), you paid taxes on them, even if you reinvested the money.

• What to do: Unless you have losses to offset your gains, dumping your tax-inefficient funds could trigger an even bigger bill next year. But you may want to direct future investments into funds that do a better job of keeping distributions in check. Index funds and exchange-traded funds are good choices for your taxable account.

It Could Be Time to Look for a New Bank Account

Your smallest source of income in 2014 was likely your bank. Were you disheartened to learn that the amount of interest you earned on your emergency savings account won’t pay for a gallon of milk? You’ve got lots of company. The average interest rate for a bank savings account is 0.09%. (Financial institutions aren’t even required to report interest payments of $10 or less to the IRS, although you’re still supposed to report it on your tax return.)

• What to do: Consider switching to an online savings account. Some are yielding interest of 1% or more. See our picks for the Best Deals in Online Banking.

Retirement Contributions Can Really Cut Your Tax Bill

One of the advantages of doing your own taxes (or carefully reviewing your professionally prepared return) is that you can see how much contributions to a tax-deferred retirement plan reduce your taxable income. You’ll have to pay taxes on the money when you take withdrawals, but hopefully you’ll be in a lower tax bracket by then.

• What to do: Increase your contributions. In 2015, you can stash up to $18,000 in a 401(k) or similar employer-provided plan, or $24,000 if you’re 50 or older.

A Health-Savings Account Can Help with Medical Deductions

Staring at a pile of health-care receipts that didn’t add up to enough—10% of your adjusted gross income, or 7.5% if you’re older than 65—to claim a deduction? If you have a high-deductible health insurance plan, funding an accompanying HSA will increase the amount of money you can shelter from the tax man. In 2015, you can contribute up to $3,350 for an individual or $6,650 for a family, plus an extra $1,000 if you’re 50 or older. The money grows tax-free, and you can take tax-free withdrawals for qualified medical expenses.

• What to do: You can open an HSA anywhere as long as you have an HSA-eligible health insurance policy. Many banks and brokerage firms offer HSAs; consulting firm Devenir offers an HSA search tool at HSASearch.com (opens in new tab). Most employers and insurers have relationships with specific HSA administrators. While you aren’t required to enroll in your employer’s plan, using it may streamline the claims-paying process, and it could be the only way to get an employer contribution.

It Pays to Be Generous

If you itemize, take a few moments to review how your charitable deductions lowered your tax bill (tax software makes this easy to do). While some deductible expenses, such as mortgage interest and property taxes, are out of your control, you do have a say in how much you contribute to charity. In 2012, the average taxpayer with adjusted gross income of between $50,000 and $100,000 deducted $2,990 in charitable contributions, according to IRS data (the average is only for taxpayers who were eligible to claim the deduction).

• What to do: Create a folder for receipts and other records of your charitable gifts throughout the year, suggests Jackie Perlman, principal tax analyst for H&R Block’s Tax Institute. Don’t overlook donations made through payroll deduction. Your out-of-pocket costs for good deeds may be deductible, too. For example, ingredients you purchase to make a casserole for a nonprofit’s soup kitchen are deductible, so save those receipts. You can also deduct 14 cents per mile, plus parking and tolls, if you drive for charity, so keep a log of your trips.

Forgoing Health Insurance Is Expensive

This year marked the first time taxpayers were penalized for going without health insurance, a key provision of the Affordable Care Act. Those who were ineligible for an exemption from the requirement were required to pay a penalty of $95 per person (with a family maximum of $285) or 1% of household income above the filing threshold, whichever is greater. For 2015, the penalty will jump to $325 per person (with a family maximum of $975) or 2% of household income, whichever is greater.

• What to do: The 2015 deadline for enrolling in one of the federal or state health care exchanges was February 15. However, if you have experienced a major life change, such as marriage or loss of other coverage, you may qualify for a special enrollment period. Go to www.healthcare.gov to see if you qualify.

You May Need to Adjust Your Withholding

If you ended up owing the IRS a lot of money, that’s a sign that you’re not having enough withheld from your paycheck. Since our tax system works on a pay-as-you-go basis, you could owe a penalty, too.

But a big refund is no reason to celebrate. When you have too much withheld, you’re giving the government an interest-free loan. You’re also making yourself vulnerable to tax refund fraud, a growing scourge perpetrated by crooks who file fraudulent returns and pocket the refunds. Victims often have to wait months to get their money from the IRS.

• What to do: You can thwart thieves and put more money in your paycheck by changing the number of allowances you claim on the W-4 on file with your employer. The more allowances you claim, the less tax is withheld. If your 2015 financial situation hasn’t changed much since 2014, consult Kiplinger’s Easy-to-Use Tax Withholding Calculator to estimate how many additional allowances you should claim.