Here are ten possible indicators that might improve your personal situation:
1. A large tax due and little or no tax withholding – You may not be managing your tax liabilities during the year. Are there other debts that you’re not managing?
2. No retirement contribution to be found – Check box 12 on your W-2. Codes D, E, F, G, and S & H indicate retirement plan contributions. If not now, when will you save for retirement?
3. A large miscellaneous itemized tax deduction – Don’t think that you’re paying an investment management fee? Buried in the year-end investment statement is the investment management fee for your taxable brokerage accounts. Are you getting your money’s worth?
4. A large (unused) itemized medical deduction for health insurance premium – Health insurance premiums are deductible for individuals, but they must exceed 7.5% of your Adjusted Gross Income. If they don’t, you don’t’ get the benefit of the deduction. If you’re self-employed, they could be written off through your business.
5. A large (unused) itemized medical deduction for medical expenses and you’re a self-employed business owner – By establishing a medical cost reimbursement plan for you and your employees, you could avoid the 7.5% limit.
6. A high income and a small dependent care credit – You may have missed an opportunity to reduce your taxable income. If your employer offers a dependent care savings account, it may be more advantageous than using after-tax dollars and getting your credit reduced due to your level of income.
7. Maximum retirement contributions but no non-deductible IRA contributions – You may have missed an opportunity to defer investment income. Depending on your tax bracket, and how long you will hold the investment, you may want to make non-deductible IRA contributions to defer tax on investment returns. Be careful to keep these contributions separate from your before-tax contributions and/or report the non-deductible contribution to the IRS.
8. High mortgage interest rate deduction – This might indicate a high tolerance for leverage or a high net worth. A peek at the Schedule B (Interest and Dividend Income) and the Schedule D (Gains and Losses for the sale of assets) will probably answer the question. An excessive mortgage payment may prevent you from saving for retirement.
9. High property tax deduction – This might indicate a need to have your property reassessed by the county if you’re savvy about local property values.
10. High income and no interest and dividend income – This might indicate an inability to save, manage cash flow or debt.
Of course, these indicators are very subjective, and a more detailed analysis is required to confirm a problem, or an opportunity to make your hard earned money earn more over time.
Unsure about your personal finances, schedule a complimentary appointment with an independent fee-only financial planner to learn more about your personal finances.
A visit with a financial planner is not a substitute for advice from your tax advisor.