What does your Tax Return Say About You and Your Financial Health?

What does your Tax Return Say About You and Your Financial Health?

I just recently discovered the new York Times Series titled, Financial Tuneup whereby author Ron Lieber attempts

To tackle the never-ending, ever-multiplying list of undone money tasks in your life, he came up with the idea of taking a fiscal health day — a single day to tuneup your personal finances, during business hours.

I haven’t had a chance to check out all of the parts, but one title got my attention right away.  It is titled, “Tax Return Holds Clue to the Health of Your Finances.”  The article takes a look at certain lines in your 1040 to determine what it says about you.

What does your 1040 Say about your Finances?

Every tax payer knows what a 1040 is – it is most people’s tax return and looks a little like this:

1040-1

So what does each line say about your financial health?

  • Look at Lines 8 and 9 of the 1040 for interest and dividends, and, if you have more than $1,500 of either, at the attached Schedule B. On the 1040, Line 13 will show net capital gains or losses, with the details of your trades on Schedule D.
  • If Schedule D showed only gains, take it as a warning sign, said Lyle K. Benson Jr., who heads his own firm, L. K. Benson & Company in Baltimore, adding, “Harvesting losses is an important part of good planning.” Often investors do not want to sell losers, feeling a stock will surely bounce back. But a capital loss could offset a capital gain, making the gain tax-free, and the money that was recognized in selling losers could be reinvested, perhaps more productively, he pointed out. Net losses of up to $3,000 can offset ordinary income with any excess carried forward to future years.

I don’t trade all that often so I am very unlikely to harvest losses.  What about you? Do you take advantage of this?

  • The income from wages and salaries reported on Line 7 of the 1040 is after the retirement contribution.
  • Self-employed people can set up several different types of tax-deferred retirement plans, including the Simplified Employee Pension, known as SEP, and Simple and qualified plans, such as solo 401(k) plans. And they can take a deduction for their contributions on Line 28 of the 1040.

I have my 401(k) going strong, but I am absolutely not putting in the maximum.  What does your Line 7 Say? or your Line 28?

    • Schedule A, which lists itemized deductions, gives rise to several planning issues. For people who are not liable for the alternative minimum tax, state income taxes are deductible. Some people are liable for taxes in two states because they maintain two homes, Mr. Benson said. With state taxes generally rising, people thinking of buying a second home or of eventually retiring to a different state may want to check the state and local tax rates first.
    • If you take a deduction for mortgage interest expense, consider the rate on your mortgage, he said. With today’s low interest rates, it may make sense to refinance, he added, though the rules are tricky and careful study is needed.

I leave my deductions up to my CPA, but I think they are optimized.

What I look for when I review a Client’s 1040?

Mr. Lieber does a Great Job! Whenever I review client’s 1040s I always look to see all income types.  Are they diversified  Is their business the only type of income? Do they have multiple retirement buckets?

Thoughts?

8 Responses to What does your Tax Return Say About You and Your Financial Health?

  1. Our firm always give our clients a 2-year comparison of their 1040. That might be worth looking at also. We use it to spot big fluctuations and look for trends from year to year.

    Harvesting losses is encouraged of course, but honestly with the way the market has been going the last few years most of our clients have huge loss carry forwards they may never use.

  2. Harvesting losses from stock sales has helped me on my tax returns the past two years. However, I was not claiming enough exceptions on my W-2 with my employer, and therefore, was getting way too big of a tax return as a consequence. I sure missed out on the time value of money with that interest free loan to the government!

    • I guess it matters how much the ‘loan’ was but I would rather give a small loan than owe money when I wasn’t expecting it.

      • The “loan” I was giving the government was something to the tune of $3500. I used the exemptions calculator offered by the IRS, and it recommended I change my exemptions from 0 to 6. So, I hope that this coming tax season, I will get a small refund.

Leave a reply


7 − 7 =