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What Your Tax Return Reveals About Your Financial Health

Three insider tips that may help you plan for retirement.

Tax day has come and gone. You can put that return into a filing cabinet and forget about it, right? Well, it might be worth giving it another look before putting it away. A tax return can be a powerful tool in helping you see where you are financially—and where you're going.

"The personal income tax return is one of the best financial-health diagnostic tools available," says Jonathan Gassman, CEO and founder of the Gassman Financial Group and co-founder of G&G Planning Concepts Inc. in New York City. Not only can it help give you an overall view of your current financial picture, it can also be a good place to start when making or adjusting plans for the next chapter of your life.

Here are three important things you can glean from your tax return.

  1. What is my income now, and what might it be in the future?
    Your tax return shows your earned income, passive income (like dividends, interest, capital gains), business income (like a rental property), and retirement income (if you're already getting Social Security or retirement plan disbursements).

    "For pre-retirees, it gives them an opportunity to determine what type of income will disappear versus what new income they will start receiving in retirement," says Gassman. By showing how your current income is divided among the four buckets mentioned above, your tax return can help you begin to plan for the day when one of those buckets empties (like earned income) and another starts to fill up (like retirement income). This can help you make adjustments now to reach your financial retirement goals.
  2. Where does my money go?
    If you itemize instead of taking the standard deduction, Gassman suggests taking a hard look at 1040 Schedule A. Places to zoom in: deductions for medical expenses, real estate and mortgage interest, and charitable donations. These areas, says Gassman, highlight possible places to trim back, especially if you're coming up short of where you want to be financially in retirement.

    Of course there's not much you can do if you were hit with a major medical expense last year, but seeing that number might direct you toward rethinking your health insurance, in particular how much to plan to pay for health care–related costs in retirement.
  3. Can I save more money, tax free or otherwise?
    Look at line 32 of your tax return, says Gassman. That shows your IRA deduction. If you can, he recommends you put away as close to the limit of $5,500 as you can (or $6,500 if you're 50 or older).

    If you earn under $117,000 and are single or under $184,000 and are married, filing jointly, you can choose to put that money into a Roth IRA, but the limits are less than the $5,500 and $6,500 caps mentioned above. The IRS provides a chart with guidance.