In last month’s newsletter one of the articles contained questions that you should ask your CPA as you are getting your taxes done. Now that tax day has come and most of us have filed our taxes and it’s a good idea to look at your return carefully as it can yield a lot of intelligence about your household finances, including the state of your investments. With that knowledge, you might be able to make adjustments to reduce your tax bill in the years ahead.
Here are a few line items that you should look at before you stash away your 2012 return.
Line 8 of your 1040: Interest income – You can see the raw dollar amounts of your interest income on line 8. Line 8a shows taxable income and line 8b shows tax-exempt income, generally from municipal bonds. Most likely your interest income is depressed relative to years past, given that yields have generally sunk. If it isn’t, that could be a signal that you’re taking more risks with the fixed-income portion of your portfolio than you did in the past. Credit-sensitive bonds often boast higher yields than higher-quality credits, but they don’t offer the same diversification away from equities that high-quality bonds do.
Line 9 of your 1040: Dividend Income – Line 9a shows the total amount of ordinary dividends you received last year; those that count as qualified – meaning they are subject to the more favorable tax treatment are on line 9b. As with the taxable interest in line 8, take a hard look at any investments, such as REIT’s that are paying nonqualified dividends; those investments may be better housed in a tax sheltered account such as an IRA.
Line 13 of your 1040: After strong gains in 2012, more investors are probably showing a positive number here than in years past. If you see a big number on this line, make sure you’re paying due attention to proper tax management: limited trading, avoiding mutual funds that frequently make large capital gains payouts, and selling losing holdings to offset winning positions.
Line 25 of your 1040: Health Savings Account Deduction – Have you evaluated whether a health savings account, used in conjunction with a high-deductible health-care plan, is a good fit for you? For those who are relatively healthy and have cash on hand to cover-out-of-pocket expenses that might arise until they hit the maximum for the year, HSAs can serve as supplemental savings vehicles. You’ll enjoy tax benefits on your contributions, and the money in your HAS will roll over from one year to the next.
Form 6251 – This is the form to determine whether you own the Alternative Minimum Tax and if so, how much. On if you can see the specific line items that affect whether you are subject to the tax. Exercising incentive stock options is one of the key ways to bump yourself into the AMT zone. Those with a big share of their portfolios in municipal bonds should also keep an eye on line 12, which depicts your income distributions from private-activity bonds; these distributions are not subject to the regular tax, but they are subject to the AMT. Such investors may want to consider muni funds that explicitly avoid AMT-subject bonds.
What can you learn from your tax return
