Radio: Checklist for Reviewing Your Tax Return

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Tax planning is very different than tax return preparation. The goal of tax preparation is to minimize your tax owed this year. The goal of tax planning is to maximize your after-tax net worth by minimizing your taxes owed over your lifetime.

Both are important, but it matters where your priorities are.

Deferred compensation, contributions to traditional retirement accounts, and holding on to your investment gains are staples of tax-preparation-driven thinking. These short term strategies reduce this year’s tax burden sometimes costing you more money in your lifetime taxes owed.

In contrast, tax planning suggests contributing to your Roth IRA, intentionally realizing capital gains each year, and doing large Roth conversions. These strategies increase this year’s tax burden while often also increasing your ultimate after tax net worth.

However, we recommend that you create your tax plan while you are preparing your taxes by doing at least a simple tax review.

On Tuesday, March 12, 2019, David John Marotta appeared on Radio 1070 WINA’s Schilling Show to discuss how to do your own tax review.

Listen to the audio here:

At the start of the conversion, David and Rob talk about tax preparation, selecting a tax preparer, and the difficulty of complying with the IRS’s tax code.

At just after the 8 minute mark, they turn their attention to the practicalities of doing your own tax review by talking about capital gains. As David says,”Any time you buy an investment for a certain price and then sell it at a higher price, even if all of those gains are inflation, they will tax you on the capital gains.” There are multiple ways available to avoid the tax, but none are beneficial to the economy.

There are three capital gains brackets — 0%, 15%, and 20% — but the brackets are a bit more confusing than normal brackets because your ordinary income fills up the brackets while only qualified income that sits on top is taxed at one of the rates. You can determine which bracket you are in by utilizing the Qualified Dividends and Capital Gains Worksheet.

At just before the 14 minute mark, they turn to retirement accounts by talking about Roth conversions. David describes Roth accounts as being “the friction-less vacuum that you learned about in high school.” The value of getting assets into the a Roth account is tremendous.

If you are looking to do a conversion, you might benefit from reading “Two Simple But Effective Conversion Target Calculations” or, for a more complex discussion of creating a conversion target, “Our Customized Roth Conversion Recommendations.”

Around 16 minutes, Rob asks, “Who should pursue a Traditional IRA?” If you are interested in this, you might enjoy reading “Should I Fund a Roth or a Traditional Account?

Just after that conversation, David talks about IRA funding and working children. If you are interested in this, you might enjoy reading “How to Open a Roth for Your Child” or “Do Children Need To File A Tax Return To Fund Their Roth IRA?

At 19:30 minutes, they talk about how to evaluate your standard of living using your tax return. As David says, “If you try to list all of the things you spend money on, you might get half of them, and yet knowing what your standard of living is is critical to retirement planning.”

As they discuss, one simple way to calculate an estimate of your standard of living from your tax return is to take your reported income (what came in) and subtract your net contributions to your accounts (what you saved, or spent if negative). To get after-tax standard of living, you can then also subtract all taxes paid.

If you are interested in implementing the automatic millionaire that they talked about, you might enjoy reading “The Complete Guide to Automating Your Savings.”

For a fun take on the topic of standard of living, you might enjoy reading “What We Can Learn From The Millionaire Lifestyle of Astrid Leong.”

Photo by Yleidis Maldonado on Unsplash

Follow Megan Russell:

Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.