Tax Time Is Tool Time Use Your Tax Form as Financial Planning Tool

Two topics people love to hate are income taxes and financial planning.

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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.

Courtesy of ARA Content

EDITOR'S NOTE: IHateFinancialPlanning.com (www.ihatefinancialplanning.com) is a Web site that has helped millions of people who have an aversion to planning make sense of their personal finances through fresh, easy-to-understand content and financial planning tools. Affiliated with ING's U.S. operations, the Web site has been featured in "PC World"
magazine, "The Washington Post"
and on CNBC.

The information in this article is not intended to provide specific legal, tax or other professional advice. Consult a professional regarding your individual situation.
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