Sunday, May 1, 2016

Use your tax return to plan ahead

You’re safely past the April deadline to pay Uncle Sam his due, but don’t file away your tax return documents just yet. You can learn a lot from analyzing your returns.
The information you compiled to fill out your tax forms contains a wealth of clues to your current financial health, and may offer insights into changes you need to make this year. Here are some of the suggestions.
Give your retirement savings plan a reality check. Your tax return reveals how much money you put aside in tax-advantaged retirement plans such as 401(k) plans and IRAs last year. Are you contributing enough? One of the keys to a successful retirement is to take maximum advantage the benefits offered by these accounts: Tax-deferred contributions (or tax-free withdrawals with Roth plans), your employer’s matching contributions, and the dividends and interest your retirement accounts earn through steady growth. If your retirement accounts are stagnant, it’s time to reevaluate your contributions.
Evaluate the interest you are earning. It’s an unfortunate fact that interest-bearing bank accounts are currently paying very little, often less than 1 percent. If your return reflects little in earnings from bank accounts, it can pay to shop around for higher rates. Online banks, for instance, often pay higher interest rates. On the other hand, if you are earning lots of interests from low-rate accounts that can be a sign that you have too much of your money sitting in savings accounts. Consider moving some of those funds into higher-return investments, depending on your goals and your risk tolerance.
Weigh your investment mix. Look at the interest and dividends earned on your return: Are a high percentage generated by one security? If one security is providing more than 10 percent of the total, consider diversifying your portfolio. It’s risky to rely heavily on one company or industry, and many people have too much invested in their own company’s stock. Invest in a broader mix of assets, based on your age, financial goals and risk tolerance. As a side note, we are seeing a lot of 1099’s being generated by mutual funds these days. If you have money in taxable accounts, be sure to consider the tax implications of owning mutual funds. From a tax standpoint, better options are readily available.
Examine you charitable donations. Charitable giving can pay off if you itemize, since donations can add significantly to the amount you deduct from your taxable income. If your 2015 return shows little activity in this regard, be sure that you are including everything you are entitled to count as a charitable deduction, and consider giving more this year.
Review your withholding. If you are waiting for a large refund check in the mail this year, consider adjusting your withholding to lower the amount of your paycheck the government keeps during the year. Why let the government earn interest on your money when you could be doing so? It’s just as bad to owe a lot at year’s end: There is no reason to take a big financial hit when you could have been steadily paying the proper amount throughout the year.