30 Day Financial Transition Challenge Day 14: Tax Planning & Amended Returns

Welcome to Day Fourteen of the 30-Day Financial Transition Challenge. “Today’s article focuses on your tax situation.  Specifically, we’re going to look at tax planning opportunities and whether you might need to file an amended tax return.

Bottom Line Up Front (BLUF) 

Most people overlook the impact that taxes play in their financial lives.  With proper tax planning, you can take the right steps to ensure that:

  • Your tax liability isn’t any higher than it is supposed to be
  • Your future financial decisions are as tax-efficient as possible.

Why? 

In the military, you enjoy natural tax advantages not available in the civilian world.  Tax-free allowances can account for over 1/3 of your total compensation.  Additionally, deployments to combat zones allow for most, if not all, of your taxable income to be excluded for tax purposes.

While these tax advantages are certainly well deserved, it’s also natural to become overly dependent on them after a while.  Did you ever know that Sailor who kept re-enlisting for sea duty because he couldn’t afford to let go of his sea pay?  Or that soldier who kept volunteering for those combat zone duty assignments because he needed the money?

Finding ways to become more tax-efficient is one of the most powerful ways to increase your wealth over time.  Tax-efficiency should be one of the factors that you consider when putting your money to work.  You won’t solve all your tax problems today but at least you should know where you stand.  If you do, you can determine whether you can do tax planning on your own, or if you need to talk with a tax professional.

Goal 

Today, we’re going to do two things:

  • Look to see if there’s an opportunity to amend a previous year’s tax return
  • Look at tax planning opportunities for the future

Relevant articles

What you need

Your previous three years’ tax returns and any related documents.

How-to

  1. Amended returns: Locate the 3 most recent tax returns that you’ve filed.
  2. Do you see a tax professional? Not H&R Block, but a CPA or EA (enrolled agent)?   Or do you do your own taxes?  If you see a professional, did they do your previous three year’s tax returns?
  3. Do you already do tax planning with your tax professional?  If not, you should schedule an appointment to review your tax returns & tax planning opportunities.
  4. Amended return checklist of ‘quick items.’ These are changes in your personal situation, or other ‘events’ that might not have been accounted for when you filed your tax return.  For example, if you just had a first child, it might have completely slipped your mind to put that baby as a dependent on your tax return.  This checklist is just a snapshot of things you should look for as you scan your returns.
    • Do your tax returns reflect major life changes (new child, selling a house, change of address, change of jobs)?
    • Did you recently change tax preparers, or start doing your own?
    • Scan your return & supporting documents for math errors and transposed numbers.
    • Review your Schedule A (enclosed checklist)
    • What other tax schedules do you have (i.e. Schedule C, Schedule B)?
  5. If you find an opportunity, can you file on your own, or do you need to find a professional?
    • Professional: Most professionals will charge $500 or more to file an amended return, it might not be worth hiring one unless the potential refund is $1,000 or more.
    • DIY:  If you plan to do it yourself, you need to become very familiar with IRS forms.  The IRS does not accept electronically filed amended returns.  Hard copies only!
    • Is there an underpayment, and you owe the IRS? Find a professional regardless of the difference.
  6. Where do you stand regarding your current tax situation?
    • Start by looking at last year’s tax return.
    • What is your marginal tax bracket?
    • Do you think your income will be higher this year than last year?
    • What tax schedules do you have?
  7. What tax planning opportunities do you have?
    • Retirement account contributions (Day 13)
    • Student loans
    • Itemized deductions (Schedule A)
    • Business deductions (Schedule C or separate entity tax return)
    • Capital gains (Schedule D)
    • Real estate rental (Schedule E)

By the end of this checklist, you should have a good idea of how complex your tax situation is.  Unless you love taxes, this is an area you might want to consult with a tax professional on.

Conclusion

If you’re not a tax expert, today’s not the day to become one.  This checklist should just be a primer to help you determine if there’s more work to be done.  If there is more work, then you should definitely consult a tax professional or a financial planner.  Tax professionals can help you focus on complicated tax issues, while there are many financial planners who provide a ‘tax-focus’ while also helping in a variety of other financial issues.  Whatever your decision, identifying whether or not you need help with taxes is a solid first step.

To wrap up, today you’re going to:

  • Review your previous year tax returns
  • Determine if you might need to file an amended return, or have a professional review your return
  • Determine whether there are tax planning opportunities that you might need help with.

Tomorrow, we’ll discuss college planning.  Whether your college planning is for yourself, your spouse, or your children, it’s vital that you take time to evaluate your situation and determine where your college planning needs and goals fit in the overall picture.

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About Forrest Baumhover

I'm a career naval officer, and a fee-only financial planner. Half-way through my career, I discovered that I had a passion for financial planning, and have pursued this as my second career. My specialty is working with military professionals who are looking to separate or retire from the service, and who feel they need some professional guidance to make sure they're on track.
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One Response to 30 Day Financial Transition Challenge Day 14: Tax Planning & Amended Returns

  1. Pingback: 30 Day Financial Transition Challenge Day 13: After-Tax Investments

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