• Miranda · Filed Under Personal Finance, Taxes

5 Things You Can Learn from Your Tax Return


After you file your tax return with the IRS, and before you stick your copy in a box kept in the attic, take the time to look through the results, and learn what you can do to improve your financial situation. Your tax return says a lot about your finances. If you know what to look for, your tax return can help you identify areas where you could do better.

While your tax return offers insight into several aspects of your financial life, I’ve chosen five to focus on:

1. You Might Be Able to Shelter More of Your Investment Income

Look at Line 9 of your Form 1040. Line 9a is for ordinary dividends, and Line 9b is for qualified dividends. Do you have a high income listed there? If so, you might be paying too much in taxes. Think about what you do with your income. On the one hand, if you receive the dividends and spend the money, there might not be a whole lot you can do. On the other hand, if you mostly reinvest the dividends, you might consider moving your dividend portfolio to a tax-advantaged account. You can defer taxes on your dividend income, or watch your portfolio grow tax-free with a Roth account.

2. It Might Be Time to Accelerate Your Mortgage Payment

If you are taking the mortgage interest tax deduction, which is itemized on Schedule A, check to see if you are still getting a big benefit. One of the realities of a mortgage is that you pay more of your interest at the beginning of the loan, so your deduction is higher early on.

However, as you pay down the mortgage, more of your payment goes toward the principal. If your mortgage deduction is dwindling, and you reach the point where it doesn’t help much with itemizing, it might be time to tackle the mortgage (assuming your other debt is paid off) and be done with it.

3. Portfolio Diversity

Take a look at your Schedule B to see where your investment income is coming from. If it is clear that a large portion of your portfolio is in one investment, or if you are dangerously overweighted in one asset class, you might need to diversify your portfolio. Your Schedule B, and other information about your investments, can provide you with portfolio insights.

4. Possible Deductions and Credits for the Coming Year

Really look through your tax return. Look at the deductions and credits that are available. Could you have taken any of these tax breaks if you had known about them? As you look through your tax form, consider what you can do this coming year to reduce your tax liability. Even though tax laws change every year, it’s still possible to get a general idea of the tax breaks that could be available to you this year. Plan out how you will take advantage of these breaks, and keep the documentation in a safe place so you’ll be all set next tax season.

5. You Have Different Types of Income

Many of us think of income in terms of what comes home in the paycheck. However, if you look through your tax return, you realize that your gross income is very different from what you are actually taxed on. The IRS recognizes that you have gross income, adjusted gross income (and modified adjusted gross income from the AMT folks), and taxable income. Your taxable income is often thousands – or even tens of thousands – of dollars less than your gross income. Deductions that lower your income for tax purposes can help you reduce your tax liability. You pay income taxes on a portion of your income, and not the whole amount.

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