Financial Fitness

5 Lessons to Learn From Your Tax Return

Consider this your post-tax-season financial check-in.

by Michelle Crouch - April 16, 2018

You may be tempted to archive your completed 2017 federal tax return and try not to think about it, but you really should take a few minutes to look it over now that tax crunch time has passed. Why? Your return can provide valuable insight into your financial health and how to reduce your tax burden for 2018.

“Even with all of the changes under the new tax law, your return is still a great road map for getting financial information and for thinking about tax planning for the rest of this year,” says Michael Eisenberg, a CPA in Encino, California, who serves as a member of the American Institute of CPAs Consumer Financial Education Advocates.

Here are a few of the key pieces to look at, and what you can learn from them.

  • Form 1040, Line 74 or Line 78: A large bill or refund. If you wrote a big check to the IRS — or received a big check from the IRS — take the time to adjust your withholding by filling out a new W-4. “Think of it this way: Getting a refund is like going to a coffee shop and paying for a $5 cup of coffee with a $20 bill,” says Drew Miles, owner of Tax Saving Professionals in Vero Beach, Florida. “You don’t cheer when the barista gives you back $15 in change. That’s what your refund is — just the government giving you back your own money.”
  • Form 1040, Line 13: Capital gains. If your return shows you paid a lot of capital gains tax, it’s a wake-up call to talk with your advisor about how to offset any gains in 2018, Eisenberg says. Actively managed funds and taxable bond funds often pass on short-term capital gains to investors even if you hold on to them, so you may want to consider shifting money in taxable accounts to ETFs, index funds, or municipal bonds. Your advisor can help you identify capital losses that you can use to offset any gains.
  • Form 1040, Line 43: Taxable income. If you’re close to the threshold for a lower tax bracket (get a quick comparison of 2017 vs. 2018 tax brackets here), talk to your advisor about ways you can reduce your taxable income to lower your rate for 2018.Your taxable income is especially important this year if you own a pass-through business because of the “qualified business income deduction” that is part of the Tax Cuts and Jobs Act of 2017, Miles says. This lets you take a tax deduction of 20% of your income from partnerships, sole proprietorships, and other pass-through businesses. However, you are not eligible for the deduction if your taxable household income exceeds $415,000 (or $207,500 if you’re single). The deduction is such a significant benefit that it may justify a large charitable gift or contribution to a pretax retirement plan to get your income under $415,000, Miles says. 
  • Schedule A, Line 4: Medical expenses. Check to see if you were able to take a deduction for your medical expenses. Because the IRS allows you to deduct only those that exceed 7.5% of your gross income, most people don’t get the deduction. However, if you are a small-business owner, you can set up a health reimbursement arrangement plan that will allow you to reimburse yourself, tax-free, for all major medical expenses not covered by your health insurance plan, Miles says.Even if you don’t have a small business, consider opening a flexible spending account or a health savings account (HSA) through your employer. Both types of accounts are pretax savings accounts, so any medical expenses paid out of them are 100% deductions. Keep in mind that only certain health care policies allow you to add an HSA.
  • Form 1040, Lines 36 and 40: Your total tax deductions. The new tax law nearly doubles the standard deduction to $12,000 for singles and $24,000 for married couples who file jointly. One strategy you may want to consider in 2018 to take advantage of the change is called “bunching,” Eisenberg says. “You bunch all of your contributions into one year so that they total more than the standard deduction and then take the standard deduction the next year,” he says.

For most affluent Americans, the charitable contribution deduction (Schedule A, Lines 16 through 19) is the income deduction over which they have the most control. Setting up a donor-advised fund can make the bunching strategy easy to implement with your charitable contributions. You can make a one-time contribution that you could deduct this year, but then the fund could distribute the funds to the charities of your choice over several years.

Michelle Crouch writes about consumer finance, parenting, and more from her home in Charlotte, North Carolina. Her work has appeared in Reader's Digest, Parents magazine, and The New York Times.

Image by iStock

Additional Resources

Tax planning throughout the year can help you feel more confident for next tax season. Find the information and resources you need at the Wells Fargo Advisors Tax Center.

Learn more about the impact of the new tax law.

Wells Fargo Advisors and its affiliates do not provide legal or tax advice.