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Tax Tarot
What Your Tax Returns Say About You
By Melissa Francis
So you've signed on the bottom line, slipped your tax return
into the mailbox, and a financial advisor is probably the
last person you have an interest in seeing. After all, April
15th is behind you, and you're finally free to forget about
tax matters for a whole year, right? Not according to many
experts, who say that post-deadline months are an ideal time
to take a hard look at last year's return and financial records
and to evaluate what these documents reveal about your financial
habits.
Financial advisor and former IRS agent David Stone uses this
time to make face-to-face appointments with his clients and
correct trouble spots he noticed while preparing their returns.
"This is my opportunity to yell at my clients about bad habits.
I'm brutally honest." At the top of his list this year: daytraders.
Of his dozen clients actively trading on their own, Stone
says only one person made money, coming out $1000 ahead, while
all of the others suffered significant losses. "I show them
their entire record for the year and then tell them to stop.
They aren't getting ahead. And it's costing them money beyond
their losses, both in fees to trade, and fees to me to prepare
more complicated tax returns."
Next he tackles those people who are living beyond their
means. How can you tell if your clothes habit is ruining your
chance to retire with a roof over your head? Stone first addresses
anyone who took money out of his or her IRA or pension fund.
Beyond the heavy penalties you'll pay, it's a good sign that
your spending may be out of control. Another major indicator:
credit card debt. If you are carrying old debt into the new
tax year, it's time to consolidate your bills into one lower
cost loan, and then cut up the cards, or switch to a debit
card that deducts the funds from your account immediately.
If you don't follow through and eliminate the credit card
use, you'll probably need another loan next year.
If you do suspect that you're spending too much, the first
step is to figure out where the money is going. Some advisors
suggest carrying a notebook with you and writing down every
dollar you take out of your wallet. Doing this for a month
could help you map out where to cut back, whether it's that
$3 cappuccino you have every morning, or your twice weekly
trips to mall to pick up just a "little something." Individually,
it may not seem like much, but seeing everything on paper,
or on home budgeting software, may show you how it all adds
up.
Once you've put your bad habits to rest, it's time to reinforce
the places where you can get ahead. Now that last year is over,
were you able to put away 10% of last year's earnings for
a rainy day or your retirement? In that arena, Stone says
the 401(k) is still king, especially when your employer matches
your investment. "I tell any client who didn't take advantage
of their company's 401(k) matching last year that they were
foolish. If the employer's match is 3%, setting aside that
money is like giving yourself a 3% raise." Also, check to
see if your company offers flexible spending accounts for
childcare or healthcare costs. This allows you to pay those
expenses with pre-tax dollars.
If you had additional money invested in a mutual fund, you
should now take a look at that fund's tax efficiency record.
How much of last year's gain was immediately earmarked for
the tax collector? A fund that buys and sells often may be
racking up capital gains liability with Uncle Sam, cutting
into overall profits. The percentage return a fund offers
as a mark of their track record is no indicator of that fund's
tax savvy. Ask fund managers for that information before you
hand over your money
Finally, as you close the door on last year, think about those
records and receipts you had a hard time locating in the final
hours of this year's tax crunch. If you pledge to change one
thing about your financial habits, keeping better records
and in a place where you're sure to find them at tax time
is an excellent way to start.
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