By the time the clock strikes 12 tonight, another tax season
will be over. Some will be able to put the agony past them
entirely, while others will resign themselves to
filing for an extension
and taking up the battle again within the next few months.
But whether you expect a refund or wrote the IRS a check, and
regardless of whether you filed months ago or just got around to
doing it today, your tax return can give you a valuable glimpse
into your finances and what you can do to improve them. Let's
take a look at three lessons that your tax return is begging to
1. Not all income is created equal.
When a dollar goes into your bank account, you don't really care
where it comes from. You can spend it just as easily whether you
got it from your paycheck, your investments, or found it on the
But to the IRS, it makes a huge difference where you got your
income. On the earnings side, if you're an employee, then you
just pay your ordinary tax rate on your wages, and you're done.
But if you're self-employed, then you get to tack on extra
self-employment taxes that can run as high as 15.3%.
With investment income, the rules are even more varied.
Interest income gets an ordinary-rate hit, unless you invest in
municipal bonds, which are tax-free. Some dividends get favorable
tax treatment, while others don't, and some capital gains get
taxed at a lower rate, while others get charged at ordinary
Keeping it all straight can be tough, especially when
rules change all the time
. But unless you know the tax impact of your investments, you
won't accurately assess your true returns -- and that could lead
you to make mistakes with your investing.
2. Where'd all your investment income go?
If you rely on your investments to make ends meet, then you'll
probably notice a disturbing trend: Your interest income has
probably just about evaporated. With interest rates near all-time
lows, it's gotten increasingly hard in recent years to squeeze
income from bonds, bank CDs, and other traditional fixed-income
) latest quarterly results show,
low short-term rates have helped boost banks'
-- and should continue to do so as long as the yield curve
remains relatively steep.
Many investors have moved into dividend stocks to try to make
up for the income shortfall, and so you may have seen your
dividend income go up. Blue-chip stocks have boosted their
dividend payouts substantially -- so much, in fact, that many of
them have dividend yields that exceed the yields on their bonds.
among the stocks in the Dow Jones Industrials
) , and
) all have dividend yields that are more than 2 percentage points
higher than their 10-year bond yields. That likely reflects the
froth in the bond market more than it does the risk involved in
owning shares versus bonds.
In this environment, going with dividend stocks over bonds may
seem like a no-brainer. But just remember that stocks carry risks
that bonds don't -- and an abrupt fall in the stock market could
leave you saddled with losses you can ill afford to suffer.
3. The more you keep off your tax return, the better.
I'm not advocating cheating on your taxes. But if you have
retirement accounts, then you have a potentially major source of
income that you can legitimately shelter from tax.
I'm a huge fan of IRAs, 401(k) plans, and other methods of
getting tax deferrals. They definitely help you save on taxes,
but even more important is the simplicity they bring to tax
preparation. Not only do you not have to worry about income your
retirement account assets generate, but you can also buy and sell
at will without worrying about the tax consequences of capital
gains and losses. That's a benefit that too few people take
advantage of -- yet it can make a world of difference to your
long-term financial success.
Barring a last-minute IRA contribution, it's too late to change
anything that will show up on your 2011 tax return. But going
forward, be aware of the impact that your investment strategies
have on your taxes -- and try to make the most of your tax-saving
Beyond taxes, another aspect of successful retirement
planning is making the right investments. The Motley Fool's
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Fool contributor Dan Caplinger got his taxes in the mail
yesterday. He doesn't own shares of the companies mentioned in
this article. The Motley Fool owns shares of Wells Fargo and
Citigroup and has created a covered strangle position in Wells
Fargo. Motley Fool newsletter services have recommended buying
shares of Wells Fargo. Try any of our Foolish newsletter services
free for 30 days. We Fools may not all hold the same opinions,
but we all believe that considering a diverse range of insights
makes us better investors. The Fool's disclosure policy is never
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