What you can learn from your tax return

Another tax filing season has come to an end. You might have used an online service like TurboTax, enlisted the aid of a tax professional, or, as some of us still do, used paper and pencil and good old-fashioned arithmetic.

So, where is your 2009 tax information right now? Has it made its way to the basement to reside with returns from previous years? Did you store it on a secure data server? While keeping your old tax records organized is admirable, learning from them is even better. That’s why I encourage you to take another look at your 2009 return to see what might be gleaned from it—and maybe start making decisions that could benefit you in 2010.

Let’s take an obvious one. It’s not a bad time to examine your energy bills and see if something can be done to reduce both your carbon footprint and your taxes. Were you able to use the maximum $1,500 federal energy credit this year? Would this be a good time to make your home more energy-efficient by replacing windows or making other upgrades that qualify? Should you go even further, as I am, and install a geothermal heating system, which qualifies for a separate 30% federal tax credit? Federal stimulus funding is providing additional dollars for state energy rebates on top of the federal credit, so you might want to check out available sources for your state.

How about charitable giving? Ask yourself whether your giving is at the right level, and whether it’s targeted to the causes you consider important. If you contributed to Haitian earthquake relief, there was a tax credit provision for 2009 if your cash contribution was made after January 11, 2010, and before March 1, 2010 (though that deadline might be extended).

Your capital gains picture is set out right in front of you on your return. It may be worth your time to examine your gain/loss position to determine your available loss carryovers, as well as the potential for qualified dividends: their current preferred rate will soon expire. While you’re considering your investments, take a moment to think about your asset allocation. Does it make sense? Is it time to rebalance?

Why not use this opportunity to take a close look at your banking relationships and your use of credit cards? Did you keep a lot of cash in non-interest-bearing accounts or have a surprising amount of nondeductible credit card interest?

Has your mortgage interest deduction reduced to the point that an accelerated payment plan might make sense now? It may not, but you might want to consider it along with another issue: if your adjusted taxable income is high enough to be subject to the alternative minimum tax (AMT), think about speaking with a tax professional about choices that might improve your picture. Appropriate tax planning right now may allow you to make the tax system—including something as maligned as the AMT—work for you instead of against you.

If your state tax burden seems high, you might want to think about retiring elsewhere. Try vacationing in states with lower tax rates to scout out locations for a potential move. Before you book the trip, compare state tax rates using resources like the one published by the Tax Foundation (excludes estate/inheritance taxes).

There’s a wealth of data on your return and in the supporting documents. Once you’ve filed, look at your return as less of a dreaded tax form and more of a helpful planning tool!

Notes:

• Consider consulting a tax advisor for guidance on your individual situation.
• Links to TaxFoundation.org and other websites mentioned in this post will open new browser windows. Except where noted, Vanguard accepts no responsibility for content on third-party sites.