David T. Mayes for Seacoast Online writes: During tax filing season, our attention tends to focus on accurately reporting income and finding as many tax-reducing deductions as possible. Once returns are filed, most of us breathe a sigh of relief and proceed to tuck our tax documents away without a second thought. Failure to perform a proper, post-filing review of your tax returns, however, can mean missing important details that can guide your financial plans for the coming year, and well into the future.
For financial planners, tax returns provide a wealth of information about an individual or couple's financial health, helping to pinpoint potential planning opportunities. Thorough review of tax returns can lead to discussions about everything from budgeting and cash flow to investment planning and management, and even estate planning. Below are a few items to look for on your own returns before you put away your files.
From a cash flow perspective, the first thing you want to evaluate is whether your withholding or estimated tax payments will be adequate to cover your tax liability for the coming year. If you received an unpleasant surprise at tax time this year and had to write a check to the IRS or the state, you will want to thoroughly review your expected income and deductions so these payments can be adjusted accordingly to avoid incurring any penalties and interest.
When evaluating your withholding, be sure to factor in major life events like changes in marital status, birth of a child, or a dependent graduating from college, all of which will impact your tax filing status and the number of tax-saving exemptions you can claim. Bonuses and exercise of stock options should also be accounted for. Your employer will withhold taxes on these income sources, but often at a lower rate than is needed to cover your ultimate tax liability. Employers generally withhold from these payments at a 25 percent rate, which may not fully cover your tax bill if your total income lands you in a higher tax bracket.
A change in your tax filing status, whether due to marriage, divorce or death of a spouse, is also a signal that other areas of your financial life need to be reviewed. These significant life events should trigger an evaluation of your insurance needs, particularly life, health and disability coverage, as well as a review of your will, trust and other estate planning documents. Beneficiary designations should also be updated to fit your new circumstances. Adding an exemption due to the birth of a child, adoption, or becoming a guardian brings budgeting for additional expenses and college savings to the forefront in any financial plan.
Expected income from interest, dividends and capital gains is another important area to review. Evaluating your overall portfolio and rebalancing with an eye toward reducing taxes is also a good strategy at this time of year. Look for any capital loss carryovers that can be used in 2013. If you will need cash from your investments, these losses will help reduce the amount of tax you pay on any gains realized in your portfolio. Evaluating your mutual fund holdings for potential capital gains distributions can also provide planning opportunities. Replacing actively-managed mutual funds with more tax-efficient investment vehicles, like index funds or exchange-traded funds, can help avoid this unanticipated income.
Finally, remember to plan for state income taxes. While interest rates are low, corporate dividend payments have been increasing. If your portfolio is positioned to capture these rising dividends, you may see an increase in your New Hampshire interest and dividends tax bill next year. Be sure your state estimated payments will be adequate to avoid penalties on your 2013 return.
Also, note that rental income and sales of rental property are subject to the New Hampshire business profits tax. Generally, rental income reported on personal tax returns falls short of the filing threshold for this tax to apply. However, when a rental property is sold for a substantial gain, this tax will come into play and the amount due can be significant (8.5 percent of the gain). Be sure to understand the filing requirement for this tax, and how the amount is calculated, before spending any of the property sale proceeds.
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