Making Your Tax Return Pay Dividends

If you’re a typical American, you may spend as much as 21 hours filling out your tax return – even longer if you bought or sold investments or own a business.¹ While gathering documents to calculate your taxes can be time-consuming and perhaps frustrating, it can be an opportunity to gain a better picture of your financial situation.

Preparing your tax return usually involves tracking down documents such as investment and retirement account statements, accounting for any gains and losses, and gathering receipts for gifts made to charity. Compiling this information puts you in a great position to analyze your portfolio, check your progress toward financial goals, and evaluate your tax liability.

Fine-Tune Your Portfolio

With your account statements in front of you, tax time provides an opportunity to review your portfolio. One thing to consider is whether your investments are performing as you expected. A word of caution – determining whether you are satisfied with your portfolio’s performance involves more than simply looking at your beginning and ending balance. You should consider how each investment performed in regard to its objective, to the current market climate, and relative to similar investments. Investment performance should be viewed in light of your specific goals and risk tolerance.

A key determinant of your portfolio’s performance is asset allocation. In fact, 91.5% of the overall performance of your portfolio can come from your allocation of assets rather than from the performance of a single investment.² Market fluctuations may cause your portfolio to become out of balance. Rebalancing your portfolio back to its original mix can help ensure that your portfolio stays in line with your goals. You should note that rebalancing may result in taxes due on the transaction.

Check Your Progress

After reviewing your financial documents, you may find that you are not on track to reach your goals or that your goals have changed. You may have married, had a child, or started a business since you last reviewed your finances. Depending on your situation, you may want to adjust your goals, level of saving, or asset allocation.

Temper Your Tax Liability

Once you have completed your tax return, you will have a clear picture of your current tax liability. If you believe you are paying too much, there are steps you can take to help manage your taxes.

It’s helpful to understand how income taxes work. Once you do, you can take advantage of existing tax incentives. You may qualify for certain tax deductions or tax credits that may help offset your tax liability.

While few people look forward to tax season, it may be an ideal time to review your personal finances and make any needed adjustments. The next time you sit down to fill out your tax return, be sure to take advantage of this opportunity.

1) Los Angeles Times, February 21, 2005. Figure is based on filling out a Form 1040 with interest and itemized deductions.
2) Brinson, Singer, and Beebower, “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May–June 1991

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