Unfortunately, we find that most tax preparers focus solely on filing your tax returns, instead of trying to utilize that information to help you plan and minimize taxes on your future returns. As part of what we do in preparing a Personal Financial Plan for clients, we take a close look at recent tax returns in order to determine how you might structure current investments so that they present less of a tax bite each April.
We think that saving clients several thousand dollars at tax time is just as good if not better than picking investments that will make money for them. Among the most important items we examine on clients’ tax returns are in lines 8a, 9a, 9b and 13. They cover, respectively, taxable interest, ordinary dividends, qualified dividends and capital gains or losses.
High levels of taxable interest are often easily addressed by shifting cash into municipal money market funds or even tax-free municipal bonds. It’s also important to know which investments generate qualified dividends so that they can be taxed (in general) at a far more favorable rate than ordinary dividends. Portfolio adjustments should be considered when dividends paid are skewed towards ordinary dividends.
Lastly, examining capital gains and losses can provide insight into how future losses could be most prudently harvested as well as provide guidance on how they can be most efficiently used; for example, a long-term loss against a short-term gain is a desirable investment objective.