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Plan Well, Retire Well

Saving and investing your money

What Does Your Tax Return Say About You?


Did you know that your tax return reveals a lot about what going on in your life? It's true. All of those tax documents you received in the mail tell a story. By now, you have received lots of forms marked "important tax information." Do you know what all these various forms are used for? Are you taking advantage of all of your potential credits and deductions available to you? Hopefully this blog can be used as a reference guide for your 2011 tax-filing season. Let's try to briefly walk down a typical 1040 form so this makes more sense to you.

FILING STATUS

Your filing status generally gives a sense of your marital status, although it some cases it can be deceiving. Filing statuses of single, head of household or qualifying widow(er) generally suggests that you are unmarried. For couples that are married and live in the same household, married filing a joint return is usually the best option. Married filing separately is normally reserved for couples who no longer live together or for those who have determined that it would be more advantageous to file separate from their spouse.

INCOME

This section outlines all the possible ways that you receive income whether its from work, savings and investments, a small business or real estate, sale of assets, unemployment, retirement or any other source such as jury duty, a settlement payment or gambling winnings. Some of the more popular tax forms are listed below.

1099 A or C – forgiveness (cancellation) of debt such as a mortgage or credit card

1099 B – reports sale of stock, mutual funds, etc

1099 G – reports payment from a local government such as a state tax refund or unemployment

1099 R – reports payments / distributions received from retirement sources such as an IRA, 401(k), pension plan, etc

1099 DIV - reports dividend income from stocks, mutual funds, etc

1099-INT - reports interest from savings account, CDs, and bonds as well as early withdrawal penalties

1099 MISC – reports income that doesn't fall under any of the previous categories. It includes rents, royalties, self-employment income, etc.

1099 SSA – reports income received from the social security administration. In some cases social security income is taxable so it should always be given to your tax professional

K1 – reports income / losses from a partnership

W2 – reports earnings from work

W2G – reports gambling winnings

ADJUSTMENTS (deductions)

Adjustments to income are deductions taken that can directly reduce taxable income. If you have the option of taking a deduction or a credit for a particular tax item, generally credits are more beneficial than deductions

1098 - reports mortgage interest paid and if applicable real estate taxes, hazard insurance and mortgage insurance premiums paid; generally used with Schedule A Itemized deductions, but may also be applicable to C (self-employment) or E (rental income)

1098-E – reports student loan interest paid during the year

1098-T – reports tuition payments billed as well as scholarships / grants received; generally reported on Education Credits, but may be used with Tuition and Fees deduction if appropriate

5498-SA – reports contributions made to health savings account (HSA)

CREDITS

Credits provide a dollar for dollar reduction in your income taxes. Credits can offer a lot of insight into where your dollars are going.

W2 – in addition to reporting earnings, the W2 also provides information in which the taxpayer can receive or reduce a tax credit

  • Earned Income Credits (EIC) payments received during the year reduce the amount of credit received at tax time
  • Dependent care benefits deducted from earnings on a pre-taxed basis reduce credit received at tax time and could potentially trigger an increase in taxable income, if not used
  • Contributions to retirement plans such as a 401(k), etc for which you want qualify for a retirement savers credit

1098-T – reports tuition payments billed as well as scholarships / grants received; generally reported on Education Credits form, but may be used with Tuition and Fees deduction if appropriate

OTHER STATEMENTS

Charitable donations – cash and non-cash receipts/ statements; charitable miles

Medical – insurance, co-payments / deductibles, medicine, glasses, medical miles; insurance paid directly to the insurer may be taken as a credit,

Automobile – maintenance bills, gas receipts, auto insurance, travel logs, parking, tolls, transportation (bus, Metra, etc.)

  • Taxes – state income taxes paid,
  • Travel – airfare, hotel, food, and entertainment
  • Credit statements – interest paid to the extent that it was directly related to business (deductible on schedule C or E)
  • Home repairs – energy efficient home repairs / replacements: windows, doors, insulation, roof, etc.
  • Job expenses – union dues, association fees, professional development, license / renewal, certification, job search, mileage to second job
  • Investment statement to deduct deductible contributions made to an IRA, maintenance and custodian fees
  • Legal and professional fees – tax preparation, attorney fees,
  • Moving expenses –relocation expenses related to moving for employment. Things such as travel, lodging, and storage can be claimed (minus expenses reimbursed by employer).
  • Theft / casualty losses – i.e. automobile accidents, fires, flooding, and losses due to damage or theft of property. The losses can be claimed only to the extent of the actual loss minus insurance reimbursement. IRS deductibility limits apply.

Gambling losses limited to the extent of winnings for the year. IRS may require proof of losses so keep stubs, receipts, etc.

As you can see, your tax return can tell a financial advisor a lot about you. It tells whether you have savings (1099 INT or DIV), have credit issues (1099 A or C), own a home or rental property with a mortgage (1098), if you or someone in your family is attending college (1098-T) and so much more. Time and space will not permit me to list every credit or deduction that you might be able to consider for this tax season. For a concise list, visit the IRS website or consult your tax professional. Until we talk again, many happy returns.



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