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Tax Time Is Tool Time
(ARA) - Two topics people love to hate are income taxes
and financial planning. It’s easier to avoid one more
than the other, thanks to the looming tax filing
deadline, but neither one should be ignored. But if you
combine the tasks, maybe both would be more palatable.
Consider using your Form 1040 as a financial planning
tool because it paints a clear picture of your financial
situation and might put more money in your pockets.
WITHHOLDING
The average federal income tax refund was about $2,000
in 2003, according to the Internal Revenue Service.
“Many taxpayers admit they see their refund as bonus
money, but it’s actually money they’ve earned and then
loaned to the government until tax time,” says Suzanne
Olson, editor and spokesperson for
IHateFinancialPlanning.com. Workers in this situation
can do some effortless financial planning by simply
changing their W-2 so that less money is withheld every
paycheck.
“It’s especially important this year to look at your
withholding, because the new tax law in 2003 reduced the
tax burden of virtually every taxpayer,” Olson says.
“Combine the shrinking tax brackets with breaks for
married couples, parents, investors and small
businesses, and it’s hard to find taxpayers who didn’t
benefit in some way.”
The Jobs and Growth Tax Relief Reconciliation Act of
2003 extended the 10-percent rate to cover the first
$7,000 of taxable income for individuals and $14,000 for
married couples. It also lowered the tax rates above 15
percent from 27 to 25, 30 to 28, 35 to 33 and 38.6 to 35
percent, a drop of two percentage points for each
bracket except the top one, which dropped 3.6 points.
“One money management tactic is to maximize your
take-home pay and minimize your tax refund,” Olson says.
“If you find yourself owing Uncle Sam, it may be wise to
increase your withholding to reduce the tax bite in
April.”
DEDUCTIONS
Homeowners know that mortgage interest payments are tax
deductible, but did you know that a home equity line of
credit may be too? If you're carrying credit card debt,
think about paying it off with a home equity loan. Then
you may be able to deduct the interest at tax time.
There are restrictions, so consult with a tax advisor to
make financial decisions based on your individual
circumstances. “Be careful not to ring up more credit
card bills, though, because you risk losing your home if
you're unable to make the loan payments,” Olson says.
TAX-DEFERRED INCOME
Contributing to a retirement savings account can be an
effective way to reduce your current taxable income
while building a nest egg for the future. With an
employer-sponsored retirement plan, such as the 401(k)
or 403(b), your income is reduced by your contributions
and the money has the chance to grow income tax-deferred
until you start withdrawing it. “Many employers match
employee contributions, so it’s passing up free money if
you don’t participate,” Olson says.
EXEMPTIONS
Another way to use your income tax return as a financial
planning tool is by comparing the number of exemptions
you claimed this year with the number from last year. If
that number changed, you may want to look at your life
insurance coverage and your will. If your family has
grown, you may need more coverage. If you have recently
been divorced or widowed, you may need to change
beneficiary designations.
“It’s too bad there isn’t a deadline for having a will
like there is for filing your income taxes because it’s
an essential legal document for most people,” Olson
says.
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