As of 2006, a mere $1,153 (shipping included) would have bought you a copy of the IRS Code and Regulations from the US Government Printing Office. At that point, the document numbered an astounding 16,845 pages, more than seven times the size of the Holy Bible. Comparatively, the 1913 Tax Code was a mere 400 pages in length. No wonder Americans fail to minimize their tax bill year after year. It’s no surprise that taxpayers often leave money on the table at tax time.
While it’s unlikely you can reverse the effects of your current tax bill, a review of your tax return may prove profitable for the coming year. Why is that? IRS Form 1040 is one of the most important financial planning tools available. By reviewing your 1040, and discovering hidden money, you may convert unnecessary taxes into money to fund your retirement, payoff your home or meet other important financial goals.
So, where do you start? When looking at your 1040, there are a number of red flags that should be cause for concern. One of the most common questions concerns interest and dividend income. If you report significant interest and dividend income and are simply re-investing those earnings, a tax-free or tax-deferred investment vehicle might be worth consideration. Doing so would allow those funds to grow without the impact of current taxation.
Capital Gains is another area that presents opportunities. Through the 2010 tax year, many taxpayers will enjoy a 0% Capital Gains tax rate. Yes, you read that correct. If you have been holding onto highly appreciated assets just to avoid paying the Capital Gains tax, this may be your best opportunity to divest and move those assets into more stable investment vehicles. Recent passage of the Health Care reform bill also created new taxes on Capital Gains in the future, so… there may be no time like the present to cash in on Capital Gains!
If you are required to take Required Minimum Distributions (RMD’s) from your IRA’s or other retirement accounts, but are not spending that income, you might benefit from a strategy which seeks to expose those retirement funds to taxation now rather than later. The current environment of lower stock market valuations might make this strategy especially appealing to some.
The concepts mentioned above represent just a few of the many opportunities that may be present on your tax return. As with any financial decision, not all solutions are suitable for all investors. Before investing, always consult with your tax or legal professional to determine suitability for your specific circumstances.