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. At the end of this year, 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 wrap up the previous tax 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.