Financial Planning Using Your Tax Return

It’s no secret that taxes can play a large role in your ability to retire early and stay financially independent.  But are you fully utilizing the available deductions, credits, and other tax planning strategies available to you?

Here are some financial planning considerations you can look into using on your own tax return:

• If you’re married, have you done an analysis on Married Filing Jointly vs. Married Filing Separately? This can be especially important if one of you has federal student loans and is trying to qualify for the public student loan forgiveness program (PSLF).

• Are you fully maximizing contributions to qualified accounts? These include an employer or solo 401(k), 403(b), 457, SEP, Simple IRA, traditional IRA, Roth IRA and/or Health Savings Account (HSA).  If not, should you?

• Do you have tax-exempt interest reported on line 2a of your Form 1040? If so, are you properly reporting the portion subject to taxation on your state tax return (if applicable)?  And is the tax-free interest earned higher than a comparable taxable bond position net of taxes?

• Do you have taxable interest reported on line 2b? If this is coming from your savings account / cash reserve, have you checked to make sure you are earning a competitive interest rate, such as with online banks?

• If you’re trying to implement the “Backdoor Roth IRA” strategy, are any of your IRA distributions taxed on line 4b of your Form 1040? If so, are you able to roll any traditional IRA accounts without after-tax contributions (basis) into an existing 401(k) plan to avoid the pro-rata rule?

• How much capital gains (or losses) are reported on line 7 of your Form 1040? If you have high capital gains, was this by design?  Could your mutual funds and/or ETF holdings be more tax efficient?  Are you able to realize any long-term capital gains at a 0% federal tax rate?  Are you properly carrying over any capital loss carryforward to next year’s tax return?  And/or could you use these capital losses to bring your taxable accounts back to their desired asset allocation?

• Are you temporarily in a low income tax year where it makes sense to accelerate income? If so, converting part of your IRAs, realizing long-term capital gains and/or switching your pre-tax contributions to post-tax (Roth) contributions to your retirement accounts may be beneficial.

• For your charitable giving (Schedule A if your itemize your deductions):
  • Are you giving cash? If so, do you have appreciated stocks or other securities you could gift instead?
  • If you’re temporarily in a high income tax year, have you considered gifting to a donor advised fund (DAF) and then using the fund to make charitable contributions in future years?
  • If you’re close to itemizing deductions, should you use a DAF for “charitable lumping” where you make a gift to the DAF to cover your charitable gifting over the next number of years, thereby potentially allowing you to itemize deductions this year and actually getting the tax benefit from your philanthropy?

• Did you report any mortgage interest on line 8 of Schedule A? If so, have you considered your refinancing options given current rates?  Or should you consider paying off your mortgage using your bond (or some stock) positions?

• If you file a Schedule C or have other business pass-through income:
  • Are you properly reporting your qualified business income (QBI) 20% deduction on line 13 of Form 1040?
  • Did you defer any of your self-employment tax liability to 2021 and 2022? If so, look at line 31 of your Form 1040 and/or Schedule 3, line 12e and make sure your payments are made timely.
  • Do you have a small business capitalization policy on file to allow you to deduct smaller fixed-asset purchases instead of depreciating them?

• If you’re considering a new electric or plug-in hybrid car purchase, are you able to fully utilize the available tax credit? If not, are you able to accelerate income so that the credit is not lost?

• If you have children, have you looked at the impact of the revised child tax credits?

• Did you properly report your recovery rebate credit on line 30 of Form 1040? And was there any change in your income in 2021 that may make you eligible for the 2021 credit that you should take into consideration?

• Do you have any upcoming large payouts or liquidity events you should be planning for? These may include the sale of a business, IPOs, RSUs, ISOs, NQSOs, or other bonuses.

While this is certainly not an exhaustive list, it will hopefully give you some planning opportunities to consider to make your own tax situation more efficient.  And as always, feel free to reach out to learn how we may be able to help review your own tax situation and utilize the resources available to you.