Small changes, big results

Doug Horn

Crunch time is nearing as the 15th -- no 18th -- nears. Due to a holiday in Washington D.C., the nation gets an extra three days to worry, fret, and strain over the completion of their 2010 personal tax return. If I had my way, I would rather see 364 holidays in Washington and open for business only one work day.

The opportunity to fund individual retirement accounts for 2010 also ends on the 18th. For many taxpayers, making a retirement contribution can provide significant tax savings. Many different items within the return impact the calculation of taxes due. By changing one number, one or more other amounts may change; thus, the final impact on the taxes due is more than you might expect.

As an example, I completed one of my client’s returns and provided the results to them. I suggested they move part of their investments into an IRA. Since the client was past the age of 50, they could add $6,000 to their IRA for 2010. By changing this one number on the return, the amount of his Social Security income that was previously subject to tax went down, thus reducing their taxable income as well. Since their adjusted gross income was now lower, the amount of their medical bills they could take as a deduction increased; again lowering their amount of taxable income. Finally, with his contribution to an IRA, they were able to take the retirement savings tax credit for both of them, since she was already contributing to her 401-k plan.

By adding one additional deduction and lowering their taxable income, they reduced the amount of taxable Social Security income, increased a deduction due to the change in the limit, and added another credit. Based upon their tax rate of 15 percent, he should have seen an increase in his refund by $900. (0.15 X $6,000= $900) Factoring in the other changes, their refund increased by $1,895 or 31.6 percent of the IRA contribution.

The preparation of the annual tax return is required and the information should be accurate. However and most importantly, it is also an opportunity to be creative within the limits of the law. Many preparers are great recorders of history and the returns are accurate. The first draft I completed for my client above was accurate based upon what occurred for them. By thinking outside the box, just a little bit in this case, we were able to move some money around and improve the refund significantly. It is not always about being accurate with what has occurred, but also knowing what may be beneficial and applicable for the client.

For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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