It's June and by now, unless you've requested an extension, you've probably had enough time to recover from preparing your taxes in April. If you think tax planning won't become a factor until December or next April, think again. Last year's tax return can provide a wealth of information you can use to be smarter with your money this year. Your tax return is quite possibly one of the best financial planning tools out there because it forces you to distill the events of last year onto one package of information.
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It is a collection of your income sources, all your savings, all your retirement assets, all of your expenses, all of your deductions and your credits. It's also a collection of things you didn't accomplish because you couldn't claim a deduction or a credit. So take a few moments and review your return for things you might want to do differently.
Here are a few ideas:
Adjust Your Tax Withholding
Adjusting your tax withholding is a financial planning tip for those who received an exceptionally large tax return. The average tax refund was around three thousand bucks. That's absurdly high and if you were one of the many who overpaid by that much, consider adjusting your tax withholding so you keep more of it each month. Savings account rates may not be all that great these days but it's better than getting nothing.
Save for Retirement
If you have the opportunity to take advantage of a 401(k) or 403(b) retirement vehicle, use them. If you only save a little bit, consider saving more. As you probably remember from your return, you get to deduct those savings today and watch those assets grow tax free. You are only taxed on thos assets when you begin taking disbursements in retirement. Forty years of tax free investment gains can be very significant. Also, you may be eligible for the Retirement Savings Credit (a.k.a. Savers Credit), which is a tax credit you can receive if you make eligible contributions and earn less than a certain amount. This is especially juicy for folks who are saving in a Roth IRA, where contributions are normally not tax deductible, because it gives you a double dipping bonus.
Taking a Capital Loss/Wash Rule
This is something you need to watch for come December but it's important for you to think about it now - you're able to deduct capital losses, such as from the stock market, from your income for up to $3,000 per year. The excess is carried year after year and offset any gains. The wash rule stats that you can't buy or sell the same stock within a 31 day window or the loss cannot be claimed. So you can't sell a stock for a loss and then buy it the next day (likewise, you can't buy another chunk of the stock and sell the losing piece within thirty-one days). In most cases people use this strategy to sell and buy similar but not identical mutual funds near the end of the year. Maybe you took a bath on an S&P 500 Index fund, you'll want to sell it and buy a Total Stock Market fund, which isn't similar to the S&P 500 index fund. Talk to your accountant about the specifics of this rule before you execute it.
Total Itemized Deductions
A married couple could claim a $11,400 standard deduction in 2009, a single filer could claim $5,700 (the limits are the same for 2010), so take a look at your total itemized deductions if you itemized. Was it not much more than $11,400? If so, consider reducing your itemized deductions if you can. With the standard deduction, you get the $11,400 deduction no matter what. With itemizing, you'll have paid out at least $11,400 for something. If you're like most itemizers and have a mortgage, you'll have paid $11,400+ in interest... it's far better to pay off your mortgage (as much as you can anyway) so you get the standard deduction for free. It doesn't even matter what tax bracket you're in, it's still a win-win. Let those ideas be a springboard for you as you review your 2009 tax return because chances are you will find a lot of things that you can use to help you plan for a better 2010 return!
Jim Wang writes about money at his personal finance blog Bargaineering.com.