Thursday, April 7, 2016

Hate Doing Taxes? One Reason Why You Shouldn’t

FROM http://www.cheatsheet.com/


You don’t have to look far to find that many Americans hate doing taxes, for a number of reasons. We hate paying taxes. We hate organizing a year’s worth of financial activities. We hate having to hire a professional in order to understand the country’s bloated tax code. We even hate that the only two certainties in life appear to be death and taxes. However, the tax process has at least one redeeming quality.
Filing taxes can be a tedious task, but the annual check-in with Uncle Sam drives taxpayers to take a serious look at their own finances. A new survey from Charles Schwab finds 46% of investors focus on their overall wealth and financial situation when preparing taxes, while 47% believe tax planning and financial planning are one and the same. This makes sense considering your tax return is one of the best single documents detailing your financial situation.
Everything from income to individual retirement account contributions are listed on your tax return. If you itemize, Schedule A (Form 1040) shows you how much you’re spending on things like mortgage interest, mortgage insurance premium, real estate taxes, and state and local taxes.
“Active engagement in the investing process can make a big difference when it comes to achieving financial goals, and tax season provides an invaluable opportunity for people to think holistically about investing and financial planning,” says Joe Vietri, senior vice president and head of Charles Schwab’s retail branch network. “Tax season is a time of year when people have all their financial information top of mind, so it’s the ideal time to pay attention to broader financial goals and plot how you plan to get there.”
Taxes and inflation are two of the biggest obstacles that stand in the way of building wealth. Naturally, the less you pay in taxes, the easier it is to build wealth – just ask Mitt Romney. On an investment level, this can be seen in the following chart from BlackRock. Between 1926 and 2014, stocks have a compounded annual return of 10.1%. Though, once taxes and inflation are considered, stocks only have a return of 4.4%. Almost half of that decline is attributed to taxes.
Seeing how much money you’re handing over to Uncle Sam on an annual basis, either through reduced investment returns or the total tax listed on your tax return (line 47 on Form 1040), may be the motivation you need to sit down and do some financial planning. Creating a written financial plan is also a proven way to boost your confidence. Charles Schwab finds 41% of respondents with a financial plan feel “extremely confident” in preparing their taxes, compared to only 25% who don’t have a plan. Sixty-six percent working with an advisor believe they’re doing all they can to reduce the tax impact of saving and investing, compared to 48% without an advisor.
“Having a plan or getting advice has a positive impact on investors’ confidence, both in the short term on topics like annual tax planning, but also when it comes to longer term goals like saving for retirement,” says Vietri. “Even beyond the findings of this survey, we’ve definitely witnessed that our clients who have a financial plan or receive some form of professional advice feel more confident making financial decisions and more secure about reaching their goals.”
Reviewing your taxes may not be at the top of our list of things to do – after all, 35% of Americans would rather talk sex with the kids and 13% would prefer to spend a night in jail than prepare their taxes – but if you’re waiting for Uncle Sam to make your tax situation better, you’ll be disappointed.