Spend Time to Review Your Tax Return

Most of us would like an answer to this question: Am I on the royal highway toward realizing my long-term financial goals building up savings for the children’s education and for retirement.

Your tax return can provide clues for answering that question. So, before filing away a copy of your 2009 return, spend some time reviewing it. Even if you want professional advice, review the return first. For the tax return the topics to consider and the questions to ask are,

INVESTMENTS
If you have more than $1,500 of either, at the attached Schedule B, it 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. “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. Net losses of up to $3,000 can offset ordinary income with any excess carried forward to future years.

Many tax professionals expect tax rates to rise, and if they do, harvesting losses can become even more valuable. President Obama has proposed raising the rate on long-term gains those held more than a year to 20 percent for most taxpayers, and under present law the top rate for ordinary income next year is to rise to the 2001 top of 39.6 percent.

A nonprofit that encourages teaching personal finance to students, warned against two extremes. Short-term gains are taxed as ordinary income, not at lower capital gains rates, so frequent trading can result in a high tax bill. But if Schedule B shows dividends but there is no Schedule D, you may not be re-balancing your portfolio to keep the right mix of stocks and bonds to meet your long-term goals within your personal risk tolerance.

RETIREMENT SAVINGS
“You always want to put away as much as you can on a tax-deferred basis.” If you are an employee, look at your Form W-2 to see if you have made the maximum contribution to a 401(k), 403(b) or other employer-sponsored plan. The income from wages and salaries reported 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. People whose retirement accounts have eroded in recent years may want to generate some self-employment income and contribute as much as possible to one of these plans to rebuild retirement savings.

People whose employers do not sponsor retirement plans or whose income is below certain limits can put $5,000, or $6,000 if age 50 or older, into a deductible I.R.A. To encourage lower-paid workers to save for retirement, Congress has authorized a tax credit, which offsets taxes dollar for dollar, of up to $1,000 for single filers or $2,000 for married filers.

DEDUCTIONS
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. 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, though the rules are tricky and careful study is needed.

Many people write checks to favorite charities and claim a tax deduction. But the tax savings can be far larger if they give appreciated securities, which are deductible at market value with no capital gains tax due. Affluent people may “discover the enjoyment of lifetime charitable giving,” as distinct from bequests. If so, they may want to set up charitable trusts, donor-advised funds or private foundations for tax-efficient giving.

SELF-EMPLOYMENT
If you are filing Schedule C as a sole practitioner, ask your adviser if you would be better off with a limited liability company. Other tax-saving moves for self-employed people, include hiring family members to do legitimate work. That will shift income to them and may make them eligible for retirement and health plans.