You have just filed your 2015 Tax Return. Do you store it or analyze the results? Here are five areas you can look at before it goes in the storage cabinet. A footnote, just as a general rule, the IRS suggests you should be able to produce tax returns for the last 7 years in case of an audit.
You can start your 1040 review by looking at Line 8 of your return. Line 8a shows your taxable interest income. A large number here prompts a question like, should I have my taxable bonds and money markets in a tax deferred account vs. a taxable account? In a low interest rate environment, a deeper question may be, is my asset allocation incorrect for my lifetime financial goals? This is also a good time to look at Schedule B and see if it shows low levels of income from a lot of different accounts. If it does, see if you can consolidate them to establish more negotiating power with your bank or if the total qualifies you for a higher yielding option. Weigh out higher yields vs. the risk of the investment before making a decision.
Line 9: Ordinary Vs. Qualified Dividends – Qualified dividends are subject to more favorable tax treatment, take a look at your non-qualified dividend investments and evaluate if they should be held in a tax deferred account vs. a taxable one.
Looking at line 13; Capital Gains & Losses – Again, this is another opportunity to move investments that generate high capital gains (a single stock you sold or a mutual fund which distributes large capital gains) into a tax deferred account in 2016. Opting for ETFs or tax managed funds may be a better choice for your taxable account. Or this may be an opportunity to look for an investment firm that has an active tax free portfolio and has an eye to harvest losses to offset gains for clients before year end.
What about line 25 on Form 1040? Here you can deduct contributions to your Health Savings Account(HSA) if you have a high-deductible health care plan. What’s the value if you build the account balance? You can get a deduction against your income now and pull the funds tax free for qualified medical expenses, and at age 65 pay only income tax on any withdrawals not used for medical benefits. Another way of looking at this if you use the funds for medical expenses, is it acts like a Roth and if you draw for other expenses after age 65 it acts like an IRA. Unqualified withdrawals are hit with a 20% penalty along with taxes at your federal rate below age 65.
Schedule A, Lines 1-4 – Deductions for Medical and Dental Expenses – Those of us under age 65 have to clear a hurdle for these type of deductions. Our deductions must exceed 10% of our adjusted gross income or for 2016 if we are older than 65 the threshold is only 7.5% to get a deduction. However, a year of significant medical expenses along with insurance premiums you paid yourself may get you there. If you are living in a continuing care facility, do not forget to have your facility give you the % of your monthly fee that is considered a long term care medical expense. This medical cost can run between 30% to 40% of the monthly fee. If you are in a facility where you paid for your apartment, this % applies to the purchase price if the apartment cost is non-refundable at your facility. Beware you can file amended tax returns up to 3 years after the date you filed the return you are appealing. Capturing the apartment non-refundable cost deduction may be worth filing an amended return. Also on schedule A on line 23, are you paying a management fee on your investment accounts? These fees are deductible on taxable accounts.
These are a few areas you can review your return to identify possible opportunities to reduce your taxes in 2016. So before you put that 1040 in storage, give it a hard look.
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As a Financial Planner, Peter brings three decades of consumer product industry experience and a high level of customer service to the financial services business. After a successful 25 year sales career at Blistex, Inc., he was employed at Morgan Stanley as a Registered Marketing Associate and Financial Advisor from 2010 to 2013. Peter believes in diversified portfolio management to meet college savings goals, retirement lifestyle objectives, charitable giving goals, and estate planning objectives.
Peter is involved in his local community in Annapolis, MD. He has served on the Vestry and chaired six Stewardship Campaigns at St. Anne’s Church. He currently supports St. Anne’s as the Planned Giving Committee Chairman. He has been active in local Boy Scout units and also serves on the Board of the Trustees for the Chase Home in Historic Annapolis on the Endowment Committee.
Peter and his wife Molly live in Annapolis, MD and are “empty nesters”. Their son, Hunter, graduated from the University of Mary Washington in Fredericksburg, VA and their youngest son, McLean graduated from Belmont University in Nashville, TN. To email Pete: firstname.lastname@example.org