It’s the final stretch of the tax filing season, but before storing away your tax return, take a moment to go over it. Studying your tax return will help you plan for the future. It can help you determine the best use of your money, what investments to make, and whether or not to make portfolio changes. A CNN article, Learn From Your Tax Return, offers tips in what to look for in using your 1040 for financial planning.
Colorado Springs financial planner Allan Roth says that if you have more than $1,000 in taxable interest (on Line 8a) or more than $1,000 in “unqualified” dividends (line 9a minus line 9b), it is a sign that you might want to relocate some holdings into tax-deferred accounts. As is, you might be paying more taxes than you need to on certain assets.
People often keep their fixed-income holdings outside their IRAs and 401(k)s, but tax-wise, that doesn't make sense. Interest from CDs and bonds is taxed at your ordinary income rate, and the same is true for dividends earned on REITs.
So you're better off sheltering these highly taxed investments in tax-advantaged accounts (with the exception of the dough you plan to tap in the short term or have earmarked for emergencies).
As for how to invest taxable money, consider a stock index fund that covers the total U.S. or international markets. Such funds don't trade holdings frequently, so they don't generate many capital gains. While they may pay qualified dividends, those will be taxed by the feds at only 15% for now. And the yields tend to be low. So even with President Obama's proposal to shift dividends to a 20% rate for couples making more than $250,000, a stock index fund would still make sense.
Read more of the article here.