5 Things Your Tax Return Can Tell You About Your Retirement

5 Things Your Tax Return Can Tell You About Your Retirement

The 2020 tax-filing deadline has come and gone, but that doesn’t mean we should forget about our taxes until next year. In fact, your tax return can now serve as a retirement scorecard or stat sheet, providing you with a glimpse of where you’re scoring points or missing the mark financially. Now is the time to focus in on wealth management tax services that can help you next year.

With Tax Year 2019 in the books, here are 5 things that your tax return can reveal about your retirement.

1. If You’re Eligible to Contribute to a Retirement Account

If you have taxable income, contributing to a retirement account can harness many benefits. These useful accounts can supercharge your savings and provide you with tax advantages. Depending on the account type and your financial situation, you’re likely eligible to contribute.

Am I Eligible?

If you have earned income and are under the age of 70-½, you can contribute to either a Roth IRA or a Traditional IRA. A firm like Montgomery Taylor Wealth Management, which specializes in retirement planning tax services, can help you decide. Determining your income level and preferred tax treatment are the primary determinants of which account is best for you.

For example, if you’re single and make more than $139,000, your Roth IRA max contribution is reduced, but not for Traditional IRAs. On the other hand, if your income level is less than $139,000, and you’d prefer to pay the taxes now and not when you are in or near retirement, a Roth IRA may be the better option.

The good news is, most retirement vehicles offer a strong benefit to your financial future. Therefore, if you’re eligible for an IRA, 401(k) with your employer, or a retirement plan for your business, you can use this favorable tax-treatment to your advantage. All you need is earned income.


Looking for someone to help with your retirement planning and tax services? Contact Montgomery Taylor Wealth Management and get the conversation started.


2. If You’re Saving Enough for Retirement

Being eligible for a retirement account doesn’t mean much if you don’t make contributions. Your tax return also reveals if you’re saving enough for retirement each year. When you contribute to your retirement, your financial benefit is three-fold: Your savings accumulate from consistent deposits, you can utilize a future tax benefit, and you can potentially multiply your savings further through investment returns.

Pre-Tax Retirement Accounts

Pre-tax retirement accounts are named as such because they give you the opportunity to postpone your tax liability to a later date, when you are likely in a lower tax bracket. If you are under the age of 70-½, you can make a deposit up to $6,000 ($7,000 if you’re over 50) into an IRA, and deduct every dollar you’ve contributed into the account from your income on your tax return.

This annual contribution limit (and potential deduction) increases even more if you have a 401(k) at work or if you’re self-employed, ranging from $19,500 to more than $50,000 respectively.

After-Tax Retirement Accounts

After-tax accounts, such as a Roth IRA, let you pay taxes now. By covering the taxes now while you’re working and possibly a higher-earner than when you’re in or near retirement, you can grow your investments and potentially withdraw them tax-deferred if you are over the age 59-½ and owned the account for at least five years.

If your tax return includes contributions to a retirement account of any kind, you’re on the right track. Do your best to maximize your retirement savings and investments by reaching the annual contribution limit if you can.

3. If You’re Spending Too Much

Your tax return can also give you an idea of how efficient your spending is.

When you file, how many of your expenses are tax-deductible? If you are constantly keeping up with the next big thing or are buying expensive items such as cars, boats, new phones and the like, you may be missing out on useful tax expenses, or under-contributing to your retirement accounts.

Double-Check Common Deductions

Potential deductions like mortgage interest, medical expenses that are higher than 7.5 percent of your income, or even the costs associated with caring for a child (or other dependent) can go a long way on your taxes. Some items may require itemizing on your tax return, so be sure to work closely with your financial advisor and CPA to confirm eligibility and maximize your savings.

Deductions for Business Owners

If you own a profitable business, there is a long-list of expenses that are tax-deductible. Business expenses, ranging from office supplies and overhead to labor costs and retirement account contributions for your employees, may be tax-deductible. Effective spending for your business can recycle a number of expenses into benefits on your income statement.

Your deductions have the potential to add up to tens of thousands of dollars in future savings. If you can, work to save and spend more efficiently to capitalize on deductible expenses.

4. If You’re Giving to Charity Correctly

Donating money to a charity to help those in need is a great thing. But it’s important to cross your Ts and dot your Is to ensure that your giving is a qualified charitable donation. Here are some important factors to double-check.

Confirm that the Charity is Official

Calling an organization with a good cause a “charity” is not enough. Be sure to verify that the organization you’re making donations to can be found on the IRS’ official list of tax-exempt organizations. If an organization is not on the list, your donations are probably not tax-deductible.

Keep Proof of Donations

Poor recordkeeping can disqualify you from certain deductions at tax time. Do your best to keep a record of your charitable giving.

If you made a cash donation, hold on to a bank statement, voided check or any kind of receipt showing the amount of the donation. For donations of cash or property that exceeds $250, keep a written acknowledgement from the charity that provides a timestamp and date confirmation.

Don’t Exceed the Limit

You may not know this, but there are limits to how much you can donate in a particular tax year. If you surpass this limit, your return may not be accurate and may cause delays or extra costs.

Generally, you can deduct cash donations up to 60 percent of your Adjusted Gross Income (AGI). Hard property and securities like stocks and bonds (held for more than a year) can be deducted as well. If you anticipate that you’ll exceed these limits, you can carry the donations forward to the next tax year, for a maximum of five years.

Keep in mind that these limits do not apply to qualified contributions from retirement accounts, which potentially allow for 100 percent deductibility. A financial advisor who specializes in retirement planning tax services can be a big help here.

5. If You’re Supplementing Your Income Effectively

Generating extra income may increase your tax liability, but it often beats other alternatives when supplementing your cash flow, such as taking Social Security too soon or making an early withdrawal from a retirement account. A second job, freelance gig or home-based business can offer you the chance to widen your income stream without the common hazards of credit debt or using retirement benefits too soon.

For example, making a withdrawal from a pre-tax retirement account like an IRA or 401(k) can cost you a 10 percent penalty, in addition to taxes and potential fees. What’s more, taking Social Security benefits before your official full retirement age eliminates future Social Security payments.

If you need another source of income, try to exhaust all of your available options first.

Working part-time or launching a side business allows you to earn additional income and potentially qualify for many new deductions as a business owner or contribute to special retirement accounts made for self-employed individuals.

Start Your Taxes Early and Reap the Benefits

The tax code is constantly changing, but that doesn’t mean it can’t work in your favor. Use your return to create a checklist, so you can take action to increase your tax benefits or reduce your tax liabilities early on.

As you get closer to the new year, think about your financial activities for the year and discuss your plans with your financial advisor and tax advisor to decide on the most effective strategy. This can involve switching between pre-tax and after-tax contributions to your retirement account, strategically donating to charity before Jan. 1, identifying qualified business expenses as well as other strategies.

Get a head start on your taxes by working with your CPA before the end of the year, and turn the pain of tax season into your financial advantage. Remember, one mistake or misstep in your tax filing can make you liable for hundreds or even thousands of dollars.

Tax in Santa Rosa can be complicated. At Montgomery Taylor Wealth Management, we specialize in retirement planning and wealth management tax services. We take our roles very seriously – earlier this year, I became the only Sonoma County wealth advisor to join the California Society of CPAs (CalCPA) Personal Financial Planning Committee to promote the personal financial planning core service at the state level and enable California CPAs to provide crucial services to their clients. (For more about this role, read our announcement here.)

If you’re looking for a full-service financial advisory firm that can help you with retirement planning, wealth management and tax services, contact us to see how we can help.

Montgomery Taylor Realistic Financial Planning