Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jason Stipp | 03-09-2011 09:51 AM

What Your Tax Return Is Telling You

Your return can help you set a future plan for making 401(k) contributions, locating income-producing investments in your portfolio, minimizing capital gains taxes, and reducing your AMT exposure, says Morningstar's Christine Benz.

Jason Stipp: I am Jason Stipp for Morningstar.

It's Tax Relief Week on, and today we're talking about what you can learn from your tax return.

So whether you've already completed your return for 2010 or if you're still working on it, take a moment to look over that return, and you might learn some interesting things. Here with me to offer details is Morningstar's Christine Benz, director of personal finance. Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So this is an important document. I know that everyone has a sense of relief when they are done with it.

Benz: Absolutely.

Stipp: But it pays to take a few moments and review it again, because it can tell you some important things about how you're maintaining your tax liability.

Let's start with one of the most important things I think for a lot of people on their tax return: salary. What can you learn by checking the salary this year and comparing that to past returns?

Benz: Right. So as part of the tax preparation process, you'd usually have your hands on your W-2 Form. So you want to check your salary trend from year-to-year. Hopefully it's a positive trend, these days, but for many people they're still digging their way out of the recession. So just observe what's going on there.

Another thing I would pay attention to as part of the W-2 is look at your 401(k) contribution. So if you're eligible to make one, and eligible to max one out, make sure that you're doing so. So the contribution limits for 2010 were $16,500 for those under 50 and $22,000 for those over 50.

Stipp: So certainly if you are not hitting those limits, it will be a good idea to see if you can divert some more funds towards that. One thing we talked about before, of course, is you're paying a little bit less in some of the Social Security areas, so maybe you might be able to divert some of those savings from your paycheck into the 401(k) if you're not maxing out?

Benz: I think that's a great strategy, Jason, and I think it's also a valuable strategy to try to pace yourself throughout the year with those 401(k) contributions. So try to figure it out so that it's coming out in equal parts throughout the year. That way you can really take really maximum advantage of the smoothing effects that dollar cost averaging can give you.

Stipp: Another area that you might want to take a look at are the taxable investments that you have. What things can you learn about how you're being taxed on your securities, your stocks and your funds?

Benz: Right. So you would have two lines on the tax form, taxable interest as well as tax-free interest. Take a look at those lines. If you've got a lot of taxable income, it could be a red flag that you've got a problem with asset location.

Read Full Transcript
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article