As tax season comes to a close, many taxpayers breathe a sigh of relief, file away their documents, and move on. But according to Nik Aamlid, CFP®, CAP®, CKA®, Wealth Advisor at Pinnacle Wealth, that’s a mistake! Your tax return isn’t just a formality; it’s a powerful financial tool that can provide valuable insights and help you make informed financial decisions for the future.
If you’ve never done much with your 1040 post-filing, this tax documents checklist will guide you through what you should be doing—and why.
Why a Tax Documents Checklist Matters
“You get your tax return back, there’s really one document amongst the big pile to focus on,” says Nik. He’s referring to the 1040 form. This document summarizes your entire tax situation, and it holds critical details that can directly influence your financial health.
Nik cautions that even though most people rely on tax preparers or software, mistakes happen. “We’ve seen errors like wrong Social Security numbers or missing dependents. And with fewer people meeting with tax preparers in person these days, the checks and balances aren’t as strong. That’s why reviewing your 1040 is more important than ever.”
Beyond catching simple errors, a tax documents checklist can uncover opportunities to save, refine your planning, and provide insights that go far beyond taxes.
What to Check on Your 1040
Once you have your 1040 in hand, here are some of the key sections Nik highlights for review:
Basic Information
First things first: Make sure your Social Security number, name, address, and all dependents are all listed correctly. Errors here can lead to big headaches and missing out on child tax credits.
Financial Planning Insights
Any tax documents checklist would typically recommend looking over certain sections of your 1040 to better understand your financial situation and optimize your tax strategy. These include the following:
- Adjusted Gross Income (AGI): Your AGI (found on line 11) determines your eligibility for financial tools like IRAs or certain credits. Knowing this number helps you understand which strategies are accessible to you.
- Standard vs. Itemized Deductions: Nik points out, “Everyone gets a standard deduction. But if you’ve made charitable contributions or have significant deductibles, there might be a better opportunity to itemize your deductions.” Proper planning, like grouping gift donations into one year (gift bunching), can maximize tax benefits.
- Taxable Income: Understanding your taxable income is crucial for exploring ways to lower it. Nik mentions retirement account contributions or even re-evaluating your nonqualified investment portfolio if it’s kicking off taxable gains.
- Taxes Paid and Withheld: Cross-check lines 25 and 26 for taxes withheld from your paycheck or estimated payments. Nik stresses, “If your preparer misses these, you might pay taxes twice.”
- Refunds vs. Owed Taxes (Lines 34 & 37): Whether you expect a refund or owe taxes, Nik advises using this information as a jumping-off point for better planning. “If you’re consistently overpaying and getting a big refund, you’re giving the IRS an interest-free loan. That money could be working for you in a high-yield savings account.”
Turn Your Tax Return Into a Financial Planning Tool
A tax documents checklist isn’t just about compliance; it can inform almost every aspect of your financial planning. Here are three ways to help turn your tax return into a valuable financial tool.
Tax Refunds and Withholdings
Having a strategy for your refund or tax payment can be game-changing. Nik says, “If you consistently owe taxes, it’s not a bad thing. It means you’re controlling your money longer. But it means you could use a tax bucket, like a high-yield savings account, so it’s not stressful when tax season rolls around.”
Identifying Missed Opportunities
Missed deductions or credits can cost you unnecessarily. Regularly reviewing your 1040 with a tax documents checklist and a financial advisor helps ensure these opportunities don’t slip through the cracks. For example:
- Are you losing out on deductions because you’re taking the standard deduction when itemizing could save more?
- Have you maximized your qualified business income (QBI) deduction as a business owner?
Retirement Planning Decisions
Your tax return can reveal whether you’re eligible for specific retirement accounts, like a Roth IRA, or whether your contributions need adjustment. “Having your financial advisor review this can prevent mistakes, like ineligible contributions, and open up conversations about alternatives like backdoor Roth IRAs,” advises Nik.
Create Better Habits for the Year Ahead
One of the most critical steps after tax season is setting yourself up for success in the upcoming year. “Don’t just file your tax return away and forget about it,” says Nik. Instead, stay on top of tax planning throughout the year with these professional tips:
- Organize Your Financial Documents: Keep all receipts and records related to deductible expenses in one place, like a dedicated file folder or spreadsheet.
- Monitor Your Income and Expenses: If you experience changes in your income, such as a big raise or a lucrative side hustle, account for how it might affect your tax situation.
- Regular Professional Reviews: Nik emphasizes the importance of periodic check-ins with financial advisors who can adjust your tax strategies as needed.
“Taxes shouldn’t be a surprise,” Nik adds. “You should feel confident about what’s coming and know you’re prepared for it.”
Learn How to Use Your 1040 Effectively
It can feel overwhelming to know where to start, but you don’t have to do it alone. Reviewing a tax documents checklist alongside a trusted financial professional helps ensure that all your bases are covered.
If you’re ready to learn how to help make your taxes work for you, contact Pinnacle Wealth today. Our team of financial advisors can help you uncover missed opportunities, optimize your financial strategies, and take control of your financial future.
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