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How Your 2014 Tax Return Can Help You Plan for 2015
(Part I)

After meeting the 2014 deadline for personal income tax returns last month, did you toss your paperwork into a corner and forget it? 

Yep. I thought so. (Wink.) But before you stash your papers away, consider that a little time invested now can point to simple steps that can help you improve your financial picture over the next year.  

Use the questions below to determine what adjustments you may want to make for financial health in 2015. 

Did you get a large refund?

If you got a big check back from the IRS this year, consider whether you might be better off increasing your exemptions on Form W-4 in 2015. Doing this will give you extra money that can be used to meet living expenses, pay down debt or increase the dollars you put away in an investment or retirement account.  

The average federal tax refund is nearly $3,000, which equals about $250 per month you can put to better use.  

Did you owe too much – and end up paying penalties?

If so, it might be wise to change your withholding at work by submitting a new W-4 with fewer dependents.  

Even if you are married and claiming zero dependents, you can switch to the single rates. For most taxpayers, married with zero dependents is equivalent to single with 3 dependents. If you know how much extra you want withheld and prefer to leave the number of dependents the same, you can use Line 4 of Form W-4 to indicate the extra amount to be withheld each pay period. 

If you pay estimated taxes and expect this year to be similar to last, make sure your payments are a least equal to last year’s. 

What about your investment earnings?

Lines 8, 9 and 13 on Form 1040 give a snapshot of your current investment portfolio.  

Are your earnings small or nonexistent? A withholding change may help you build your nest egg. By increasing your exemptions on Form W-4 and depositing $50 per month into a savings account earning 1% interest, you will have $3,061 saved within 5 years.  

Did your investments create a tax burden? It might be wise to rebalance your investment portfolio. Long-term capital gains are taxed at a lower rate than interest, so switching to tax-efficient mutual funds could decrease your tax burden.  

Check to see if you have any losers that could be invested more wisely. You can offset your capital gains, plus $3,000 of other types of income, with stock losses each year. 

Did you deduct a business loss on Line 12? 

The mere fact that you lost money in 2014 is a negative factor in your overall financial picture. It could also be a negative factor in your tax picture.  

Improper deduction of losses from businesses that can be viewed as hobbies amounts to $30 billion in lost tax revenues each year, according to IRS estimates. With Congress and the IRS hot on reducing revenue losses, you should be aware that your business could be reclassified as a hobby.  

The IRS asks you to consider the following: 

Does the time and effort you put into your business show intention to turn a profit?

Do you depend on the income from your business?

Have you changed your methods of operation to improve profitability?

Do you have the knowledge to make your business successful?

Have you made a profit in the past?

Can you expect a profit in the future?

Visit the IRS Small Business and Self-Employed Tax Centerfor resources and information on this issue.  

I’ve got more questions for you to consider before you store your 2014 return. Stay tuned for part 2 – with helpful insights on charitable deductions, credits and deductions for IRAs, student loans, tuition and child care. In the meantime, if you need help with any aspect of your personal or business taxes, please contact us.

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