Thursday, March 25, 2010

A Financial Report Card, Right in Your Tax Return

In today’s tough economic climate most Americans are confused about their finances, and it can be difficult to determine where you stand financially. However, as New York Times author Jan Rosen explains, your tax return can offer several clues to help assess your finances. Check out a snippet of her piece below.

MOST of us would like an answer to this question: Am I on the royal highway toward realizing my long-term financial goals — building up savings for the children’s education and for retirement, for example — or am I bumping along a back road that ends far short of my goals?

Your tax return can provide clues for answering that question. So, before filing away a copy of your 2009 return, spend some time reviewing it. Even if you want professional advice, you should still review the return first. “The client who gets the best advice is often the one who raises the best questions,” said Sidney Kess, a New York tax lawyer and certified public accountant. He and two other accountants who specialize in personal finance offered pointers for going through the return, the topics to consider and the questions to ask.

INVESTMENTS. Look at Lines 8 and 9 of the 1040 for interest and dividends, and, if you have more than $1,500 of either, look at the attached Schedule B. Line 13 will show net capital gains or losses with the details of your trades reflected on Schedule D.

If Schedule D showed only gains, take it as a warning sign, said Lyle K. Benson Jr., who heads his own firm, L. K. Benson & Company in Baltimore, adding, “Harvesting losses is an important part of good planning.” Often investors do not want to sell losers, feeling a stock will surely bounce back. But a capital loss could offset a capital gain, making the gain tax-free, and the money that was recognized in selling losers could be reinvested, perhaps more productively, he pointed out. Net losses of up to $3,000 can offset ordinary income with any excess carried forward to future years.

Many tax professionals expect tax rates to rise, and if they do, harvesting losses can become even more valuable. President Obama has proposed raising the rate on long-term gains — those held more than a year — to 20 percent for most taxpayers, and under present law the top rate for ordinary income next year is to rise to the 2001 top of 39.6 percent.

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