Eileen AJ Connelly

Done with your tax return? Take a close look at it, and think about goals

By Eileen AJ Connelly
Associated Press / April 14, 2010

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When you’re done with your tax return, your first instinct may be to stash it in a drawer and put it out of your mind. That would be a mistake.

Think of it as a financial snapshot. By taking a close look now, you can use your return to help map out goals. Ultimately, you may be able to improve your financial standing and reduce what you owe come April 15, 2011. Five questions to consider:

Should you adjust your withholding?

The last number on your return will tell you whether to adjust the amount withheld from your pay. If you’re getting a fat refund, it’s smart to reduce withholding so you receive that money during the year. If you view a refund as forced savings, it makes more sense to keep your money, rather than wait for the government to send it back. You won’t earn much interest, given the current low-rate offers on savings, but you will have cash available for emergencies or for a vacation fund.

If you worry you’ll spend any cash within reach, open a new account and direct your employer to split off the extra money and deposit it there. If you can’t designate multiple accounts for your pay, set up automatic transfers from your primary account.

On the flip side, if you’re writing a big check each April, you might see that as an interest-free loan. But if you pay your tax bill with a credit card or other loan, you’re better off paying as you go.

Are you saving for retirement?

If your job offers a plan with an employer match, you benefit twice, because you’ll save on taxes and get those matching funds.

If you don’t have a plan at work, that makes an Individual Retirement Account or Roth IRA even more important. And don’t wait until later in life to start funding one — start early and the money has time to accumulate.

Did you itemize deductions?

Only about 35 percent of tax returns include itemized deductions. That means millions are missing out on tax savings. The most common deductions are for mortgage interest and property taxes, but even if you don’t own a home, you might be able to itemize if you keep careful records. Medical expenses, charitable contributions, and job-search costs may all be deductible. Set up a simple filing system so you don’t miss out next year.

Did you report taxable interest or dividends?

If so, you might want to convert that money into tax-free municipal bonds or transfer it to a Roth IRA to reduce what you owe, said Michael Eisenberg, a Los Angeles account.

Did you file your first joint return?

If you recently married or are a new parent, reassess your insurance needs and make sure you’ve updated your financial records. Is your spouse the beneficiary on your retirement plan and insurance policies? Do you need to get life insurance, or increase the amount?

It may also be time to write or update a will or create a broader estate plan.

Eileen AJ Connelly writes for the Associated Press.