What you can learn from your tax return
No one enjoys the annual exercise of filing their income tax return. But you can turn it into an opportunity to save taxes in future years
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Full Transcript below:
00;00;00;00 - 00;00;24;09
Unknown
Welcome back to 30 Minute Money. It's the podcast that delivers action oriented, smart money ideas in bite sized pieces. I'm Scott Fitzgerald at ROC Vox Recording and Production in our Bushnell's Basin studio, and Steve Weshing from Focused Wealth Advisors joining me once again. Hey, once again, good to see us, Scott. Great to see you too. Glad to have you back.
00;00;24;09 - 00;00;47;18
Unknown
And to, rap about some taxes and some financial things. Going to be tax wrapping, tax wrapping. That's that's going to be an episode, right. So this one has actually, something that I've always wanted to learn more about. So hopefully this will help clear up some misunderstanding. I hope it does. That would be great. Well, you know and so what what we wanted to talk about today was what you can learn from your 1040.
00;00;47;18 - 00;01;13;25
Unknown
And, you know, the, the annual exercise of preparing taxes is, is a is a pain and it's a chore and nobody likes doing it. and but there but you know, if we have to do it and there is value that you can get from it. So, you know, I wanted to talk a little bit about about that today because, you know, there are things you can learn about how you can pay less tax by looking at that form that the government requires you to fill in every year.
00;01;13;28 - 00;01;40;07
Unknown
Yeah. And that's important to me. To pay less taxes is right. Everybody's goal with the universe. It is. And so, you know that you can gain valuable insights from going through it. So I wanted to just sort of, you know, now that we're getting to about the time when most people are going to have their, their tax returns filled out and ready to go while it's fresh in your hand, take a look at it and let's see if we can't find some clues on how you can save money on taxes later.
00;01;40;07 - 00;01;55;21
Unknown
So we'll just start, you know, we'll just start, right? right at the bottom of the form, actually, and take a look at your taxable income, which is what you end up having to pay tax on. And because one of the first things that you want to know is what bracket are you in and what bracket are you in?
00;01;55;21 - 00;02;14;20
Unknown
Is this determined by line 15 your taxable income. So you want to take a look at that. You know, if, if if you are in a relatively low bracket, if you're a married couple making less than about $85,000 or so, then you know, you're in the 12% bracket. And we might want to maximize that, because the 12% bracket going away in a couple of years.
00;02;14;20 - 00;02;35;05
Unknown
So whatever we can do, if we can do things today, that might cause a little bit of tax, but that will prevent you from paying money, paying tax on that money down the road. Well, we should look at that. So what's what bracket are you in and how far are you from the top of that bracket? That's a really important piece of information that a lot of people miss.
00;02;35;05 - 00;02;57;29
Unknown
And there there could be things that you could do this year. And if it causes you tax in a low bracket like 12%, okay, it does. But if that prevents you from having to pay tax at 22 or 20 4 or 32% later, it could be well worth it. So and that those tax brackets, those divisions, is there, a guide or some way to easily look and say, oh, we're at this.
00;02;57;29 - 00;03;21;22
Unknown
So we're clearly at this is like a list or something. Oh yeah. Just Google it. It's oh, okay. You know, you just put, you know, federal tax brackets 2024 and you'll get a whole bunch of sites that just list the whole table out. So okay. Go easy to find. So once once we've taken a look at at line 15 taxable income, let's go back up to the top and start pulling apart some of the things.
00;03;21;27 - 00;03;41;17
Unknown
So one of the things that that I recommend people look at that I always look at when I review tax returns for people is line two be which is taxable interest. if you're if you have things invested that are generating interest and you especially if you're in a relatively higher tax bracket, we should look at that. We should take we should address that.
00;03;41;20 - 00;04;08;23
Unknown
one of the most common things that I see, one of the most common mistakes that I see, is people not doing what we call strategic asset location, which is being sensitive to what kinds of investments you put in, which of your accounts and what I see. The most common mistake that I see is that either people will set up for themselves, but even if they go to an investment advisor or something like that, a lot of times you'll see, you know, they just take whatever the asset allocation is and they put the same allocation in every account.
00;04;08;23 - 00;04;31;21
Unknown
So they've got this much stock and this much bond in their IRA and the same thing in their taxable account, the same thing in their Roth IRA. Well that doesn't make any sense. Because if you've got a whole bunch of bonds as a part of your allocation, you put that in a taxable account. All that's going to do is generate taxable income, take the bonds and put them in the tax deferred accounts, keep the taxable accounts for cash and stocks.
00;04;31;23 - 00;04;47;29
Unknown
So you know just anything that you've got the just generating a lot of interest. Put it in a deferred account put it in some kind of retirement account because that keeps it off your 1040. And when you pull the money out of a traditional IRA or a traditional 400 and K, you're going to pay tax on it like income anyway.
00;04;48;02 - 00;05;09;01
Unknown
So no harm. And having it generate lots of taxable income inside of that account because that's not going to be reportable this year. It's not going to change how it's taxable when it comes out. So that taxable interest line can be really can be really interesting. you might be able to if you have a lot of taxable in, you know, taxable interest, you might be able to convert that to dividends.
00;05;09;01 - 00;05;35;02
Unknown
For example. those are taxed like long term capital gains. They're taxed at a preferential rate. So if you're in a 22% income tax bracket and you can convert, you know, a CD into a dividend paying stocks or something like that, well, now you're going to get taxed at 15% instead of 22%. So you could do that. If you're in a high tax bracket, you could take taxable interest and you might be able to make a tax free interest.
00;05;35;02 - 00;05;54;17
Unknown
You could put money into a tax free mutual fund or a municipal bond or something like that. So it's still generating interest, but it's not interest that shows up on your 1040. So that's that's a great line to take a look at. I just mentioned dividend that would be down on line three. line three is your is your qualified dividends.
00;05;54;17 - 00;06;09;09
Unknown
You want to take a look at how much is there. You want to take a look at or are you get are you getting some some dividends that are not qualified and some are qualified because if they're not qualified you pay tax on it like income. If it's qualified, you pay tax on it like a capital gain.
00;06;09;10 - 00;06;31;02
Unknown
So it's better. And that's we're talking like stocks right. That stocks and mutual funds. Yeah stocks. And that's where you get qualified dividends from. Yeah. Exactly. So you know if if if a company shares its profit with its shareholders and distributes that that's a dividend. that's taxed at a better rate than interest at the bank pays you on your CD.
00;06;31;05 - 00;06;57;21
Unknown
So in general, if you have a taxable account, it's better to have dividends than, than interest. so that's, that's one thing that we can look at. Another thing you can look at his line for which is IRA distributions. if you took money out of an IRA last year, then you may want to ask why, you know, or is there someplace else you could get that money if it's pushing, especially if it's pushing you into a new tax bracket, you know, is there a better way to get that money?
00;06;57;21 - 00;07;18;22
Unknown
Is it does it make sense to take money out of the IRA, or are there other places you might be taking money from? And if it's maybe, you know, if you're retired and you're collecting Social Security, are those IRA distributions causing more of your Social Security to be taxable? So taking a look at how much you're pulling out of IRAs can be a really valuable piece of information when you're doing your analysis.
00;07;18;22 - 00;07;41;07
Unknown
And then of course on line seven you have capital gains that you have to report there. Again, that's like ordinary it like it's like qualified dividends taxed at a preferential rate. But sometimes, like with people who own mutual funds, you don't necessarily have control over how much how many capital gains you get in a year. It may be that they're distributing capital gains because of things they did in their portfolio.
00;07;41;10 - 00;08;04;26
Unknown
You might be better off owning something that you could just hold on to, not have any buys or sells, and therefore not have to report capital gains on your return. So I'm not saying that you want to, you know, your goal should be not to have any capital gains. That's not what I'm saying. But if you look at line seven and you see that, oh, there's a pretty substantial amount of money on that line there for capital gains, you may want to you may want to reconsider that.
00;08;04;28 - 00;08;38;19
Unknown
Now, on the other hand, up to a certain level, you don't have to pay tax on capital gains. So if you are in the 12% tax bracket, for example, and you're not at the top of the 12% tax bracket, then you can realize some capital gains and not have to pay tax on it. So you might look at that, for example, toward the end of the year, if you look at this year and and you say, oh, well, I'm in the 12% tax bracket and I've got a bunch of stocks in my portfolio, but I'm not reporting any capital gains.
00;08;38;22 - 00;09;05;17
Unknown
When we get to the end of the year, you might choose, you know, maybe I should sell off some of this stuff, because if I sell it, I don't have to pay tax on it until up until I crossed that line into the 15% capital gains bracket. And then finally, if you are retired and you are collecting Social Security, you want to take a look at line six, six A is how much Social Security you received, and six B is how much of it is taxable.
00;09;05;19 - 00;09;25;19
Unknown
And if, if six B is very close to six A, then you might want to take a look at things that you can do higher up on that form. Because if you can drop it some, you know, you may be able to make less. You're not going to change the amount of Social Security you got, but you can have an influence over how much of that is actually taxable.
00;09;25;21 - 00;09;42;15
Unknown
So if you, if you're paying if you're paying tax on a lot of your Social Security, well, you may want to take a look at some of the other things, because a little tweak here or there may make less of that taxable, you know, when when when somebody comes in and talks to us and says, hey, you know what?
00;09;42;21 - 00;09;58;17
Unknown
What do you what what can you do for me? Yeah, the tax return is one of those things. We look and we pull it all apart. We look at all kinds of things. But these are just a few things that anybody can look at and, you know, at least see whether there's a flag that would tell them whether or not they should be paying more attention to it.
00;09;58;19 - 00;10;15;20
Unknown
And, you know, from, from, from my perspective, that's that's one positive thing that you can get out of this annual exercise of having to prepare a tax return is all the information you can get out of it, so that maybe in future years you can pay less.
00;10;15;22 - 00;10;50;14
Unknown
Your retirement is at risk. Not from the stock market, not from inflation. Taxes are putting your retirement at risk. I'm certified financial planner Steve and I specialize in helping people create low tax retirements. Unmanaged taxes can take 30, 40, or even 50% of your retirement income. Learn how to defend yourself against excess taxation. Our complimentary webinar will cover all the principles you need to know to protect your money for you and your family, and keep it away from the government.
00;10;50;16 - 00;11;12;00
Unknown
This free webinar will cover how taxes are different in retirement. The taxes you pay in retirement that you don't have to pay during your working life. How to move tax savings into a tax free environment. The widow's tax, the Secure act, the Secure act 2.0 and what they mean to you. The webinar is free, but you have to register to save your spot.
00;11;12;00 - 00;11;41;11
Unknown
So go to Focused Wealth advisors.com/webinars and find out more. And sign up right there. Even if you're not planning to retire for the next 5 or 10 years, this information will be critical for you. The longer you have to put the strategies into effect, the more you can accomplish. That's focused wealth advisors.com/webinars to find out more and to sign up today.
00;11;41;13 - 00;12;03;28
Unknown
Lots to learn from the tax return. See that word tax wrap that tax rate tax wrap. And you've been thinking about I haven't heard a word you said all episode. So what's your 30 minute action item? 30 minute action item. What did you learn from your 1040 form? There you go. And that's, that's another interesting episode from Steve Wershing at Focused Wealth Advisors.
00;12;04;02 - 00;12;43;21
Unknown
Scott Fitzgerald from ROC Vox recording and production. This has been 30 minute money. You can find us on all the podcast platforms, make sure you like and rate and review and share, and you can get Ahold of Steve at Focus Wealth Advisors by clicking on the link for his calendar and schedule your appointment today. Thanks for watching and listening to 30 Minute Money.