THE SAVINGS GAME

Filing taxes should be an occasion for looking at your goals, too

By Humberto Cruz | July 7, 2006

Most of us, mercifully, have recovered from the mind-numbing task of filing our federal income tax returns.

Now, I'm going to commit what seems like the ultimate act of mental cruelty by asking you to dig out the return and take another look.

But I want you to look at it in a more cheerful light -- not as a dreaded government-imposed chore but as a roadmap for achieving your dreams.

Reviewing your finances once a year is a useful exercise financial advisers often recommend. Many people do it at the beginning of the year. I prefer to do it at tax-filing time, because much of the information I need is right there, on the tax return.

Most Americans look at tax preparation as an isolated task, according to a recent study by the Hartford Financial Services Group. Of 1,103 taxpayers surveyed, two-thirds didn't know the tax forms could provide a record of their savings strategies.

``Many of us view tax preparation as drudgery and merely a look at our financial past," said John Diehl, a certified financial planner with The Hartford. ``In reality, similar to the way a medical chart helps us diagnose our physical health, our 1040 tax form can provide clues on where we are financially, and where we might go in the future."

For example, line 32 inquires about deductions for individual retirement accounts. We should be contributing as much as possible to tax-deferred retirement vehicles such as IRAs and 401(k) and 403(b) plans, Diehl said. (While the deadline for IRA 2005 contributions has passed, why not make a 2006 contribution now, rather than wait until the April 16, 2007, deadline?)

If you're already retired, lines 15, 16, and 20 will show any income received from IRAs, pensions and annuities, and Social Security benefits. Analyzing the numbers with the help of a professional, if needed, will help you determine whether you're taking income the most tax-efficient way.

Still working and raising a family? Line 6c asks about children and dependents. If you have a bunch, you can claim more exemptions and credits. But a high number also means college costs can sneak up on you, Diehl said, and you should consider tax-advantaged college-savings vehicles, such as 529 plans or Coverdell savings accounts.

Just about every line can help you pinpoint areas to examine and sharpen your financial plan, Diehl said. Here are a few my wife, Georgina, and I regularly look at, while comparing our latest return with the previous one:

Line 12, business income (or loss). As self-employed writers, this is where we report our net income. (If you work for an employer, you would look at line 7 for your wages, salaries, and tips.) Even if it means paying more taxes, we want the number to grow during our working years. We managed a small increase last year, even as we cut back a bit on our writing, thanks to more publications running our stories and columns.

Line 13, capital gain or loss. The main point is not so much whether our investments went up or down last year. The point is that line 13 was sufficient to report our capital gains because all of them came from mutual fund distributions and not from any direct sale of securities, which would have required us to fill out a separate Schedule D. Not having to mess with Schedule D is just reward for our strategy of holding high-quality investments for the long term rather than chasing the hot stock or fund.

Line 28, for self-employed qualified plans. Our entry reminds us we were able to cut our taxes substantially by contributing -- and thus deducting from our taxable income -- more than half our combined work income to our self-employed 410(k) plans. If you work for somebody else, you can cut your taxes and taxable income by contributing to a regular 401(k) or similar plan. While such contribution won't show up directly on your tax return, it will reduce dollar for dollar the amount on line 7.

Humberto Cruz is a columnist for the South Florida Sun-Sentinel.

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