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Avoid Surprises at Tax Time

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar. Whether you've completed your 2009 taxes or you're still slogging through them, you may have run into some surprises and you might be wondering how to address them or avoid them in the future. Here to offer some tips is Morningstar's director of personal finance, Christine Benz. Christine, thanks for joining me.

Christine Benz: Jason, nice to be here.

Stipp: So I think probably the most unpleasant surprise that you run into when you're doing your taxes is that you find out that you owe a lot of money.

Benz: Right.

Stipp: If this has been my problem this year, what can I do to make sure that doesn't happen to me again in the future?

Benz: Well, the key thing is to make sure that you're taking advantage of all the deductions and credits that are available to you, and it's a changeable mix of items. So make sure that you're up to date on what's deductible and what you can take as a credit.

Right now, for example, there are lot of energy efficiency credits that you can take advantage of if you've made energy efficient upgrades to your home, for example. That's kind of a new category and that is actually a credit, so it's deductible directly from the tax burden that you owe.

So take a look and see whether there are any new items that you may be able to write off or take a credit for that you couldn't in the past.

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Stipp: Sure. Should I make some adjustments then to my withholding if I end up owing a lot? Is that one of the primary reasons that I might be off balance on that front?

Benz: It could be, so it's an opportunity to take a look at that W4 that you have on file with your employer to see whether you can adjust your withholdings. And sometimes if you aren't paying enough throughout the year, you may have to pay a quarterly estimated tax payment. And so in lieu of doing that you may be able to make withholding adjustments to avoid making those quarterly payments. So that's another thing to take a look at.

Stipp: OK. On the flipside, potentially a better surprise, I figure out that I have a big refund, does that something mean that I've done something wrong with my withholding again, or how should I think about it if I'm getting a lot more money back than I thought?

Benz: Well, it could very likely mean that you're withholding too much. So there again you want to look at that W4 form and think about adjusting your withholding. And the other key thing to keep in mind is that even though it's a nice windfall--you always hear it's a free loan to the IRS--it's not something you want to be doing. You should be pocketing that money on your own behalf.

I would say channel what is a positive development into a way to save for the future. Find out how much extra you were paying the IRS each month and plan to save that amount on your own, perhaps by having deductions automatically come out of your paycheck and move into a brokerage account or even your checking account.

Stipp: And a great way to get started would be to take that big refund right now and maybe put it to work?

Benz: Exactly. Yes.

Stipp: So a positive thing for you on the investment front. Any other trends that you can get by looking at your return from last year or this year and sort of seeing how you're doing? What can you get from your tax return?

Benz: It can be really helpful to take one return and compare it to the prior year's return. I think a lot of people sign that check and send off the return and then put it in the drawer and don't take a look at it. Compare--look at what your trends and earnings have been.

For a lot of people, unfortunately, it's not a positive scenario for 2009 versus '08, but see whether you can identify any trends in your earnings patterns and the interest you've been able to earn on your investments. One would hope that that's trending in a positive direction.

Also take a look at whether you're taking full advantage of any retirement plan contributions that you're eligible to make. So in 2009--as in 2010--you're eligible to do $16,500 if you're under age 50, and $22,000 to a 401(k) if you're over 50. And also IRA contribution, $5,000 for savers under 50 and $6,000 for those over 50. Make sure you're taking advantage of all of those.

Stipp: Seems like a good time to make sure that you're getting as much as you can out of those. Thanks for the tips, Christine.

Benz: Thanks, Jason.