Originally created 04/12/98

Tax return can help with plans

NEW YORK -- Before banishing your 1997 tax return to the filing cabinet or a box in the attic, consider this important point: No other single document is likely to provide more insight into your financial condition.

Even after it's completed, take one more look at it "to use as a financial-planning tool," the Institute of Financial Planners in Denver advised recently.

A careful review can help with everything from short-term budgeting, to college savings, to long-term retirement planning. Most good financial advisers usually will insist on inspecting recent returns before making investment recommendations.

A key area to check out, according to financial advisers, is income. The three types listed on the return: taxable income, adjusted gross income and total income.

Taxable income -- found on line 38 on the standard 1040 form -- determines your marginal tax rate. A single person earning $20,000 a year, would be in the 15 percent bracket, the lowest. A married couple filing jointly falls into the 31 percent bracket if annual income reached $150,000. (The federal tax brackets are adjusted annually for inflation.)

Knowing your bracket is crucial for making investment decisions.

The financial planners' institute notes, for example, that interest and dividends listed on Schedule B of the 1040 are taxed at the marginal tax rate, but that certain capital gains, or the profits from the sale of investments, are taxed at a maximum of only 20 percent.

"If your tax bracket is above 20 percent ... it might be beneficial to shift some of that ordinary investment income on Schedule B into investments that produce the lower-taxed capital gains," the trade group said.

The tax bill also can be lowered by investing in tax-deferred vehicles, such as employer-sponsored 401(k) plans or Individual Retirement Accounts.

And those in the highest tax brackets may want to consider tax-free investments, such as municipal bonds, which pay no federal taxes on the interest they earn. However, it's important to calculate which is the better deal: tax-free municipal bonds, which carry lower rates, or the after tax-income of higher-yielding taxable bonds.

By the way, while you're studying Schedule B, take a look at all the investments listed. If there's more than a page or two of them, you may need to consolidate some of your accounts.

The adjusted gross income, or AGI, is also important.

For one thing, the Taxpayer Relief Act of 1997 relies on AGI for determining eligibility for various provisions.

Eligibility for opening up a new Roth IRA, for instance, phases out for individuals earning above $95,000 and couples above $150,000. Eligibility for the new Hope Scholarship Credit for college expenses begins phasing out at $80,000 for married couples filing jointly.

Total income -- line 22 on the 1040 -- represents all the income earned during the year from wages, investments, retirement distributions, etc.

The financial planner's group suggests comparing this with AGI. If the figures are the same, it warns, "you may not be taking advantage of some of the deductions you might be eligible to take." Those include tax-deductible IRAs; retirement plans for the self-employed, like Keoghs; or medical savings accounts.

Another area to check out is the bottom line, specifically whether you're due a tax refund or owe more taxes.

Nearly half of all American taxpayers haven't a clue whether they'll face a tax bill or a refund until they actually do their taxes, according to a recent survey conducted by Lutheran Brotherhood, a Minneapolis-based financial services company.

Those who are due big refunds likely miscalculated their W-4 employer withholding allowances or overpaid estimated taxes on income not subject to withholding, tax experts say.

"Getting a big refund really means that you provided a year long, interest-free loan to the U.S. Treasury," said Mark Luscomb, principal tax analyst for CCH Inc., a tax-information researcher based in Riverwoods, Ill.

"From a taxpayer's point of view ... the ideal situation is actually to owe the government something on April 15, but not owe enough to trigger a penalty for failure to pay estimated taxes."

The government starts assessing penalties if at least 90 percent of the total tax isn't paid by April 15.


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