6 Financial Moves Your Tax Return May Be Telling You To Make

You might not think of your tax return as a fascinating read, but it contains clues to your financial health that you can use to make smarter decisions with your money. Especially if you owe taxes, tax time may not seem like the right time to be making money moves. But, in reality—now is the perfect time to dig in. Your financial advisor can help you find insights from your return and turn them into actionable strategies that get you closer to your financial goals. Here’s how.

Your tax return: a financial report card

Your tax return is not just a required filing; it’s annual financial snapshot. It shows where your money came from, where it went and what you might adjust for the future. For example, your W-2 lists your income and withholding decisions. Schedule A details what you spent on mortgage interest, charitable gifts, medical bills and other deductible expenses. Your 1099s record your income from investments, rental properties and other sources.

Taken together, these pieces of information create a remarkably clear picture of your finances. You see your habits, priorities and potential vulnerabilities. This makes tax season a great time to sit down with your financial advisor and review your financial plan.

Together, you and your advisor can discuss learnings from your tax return and what important money moves they could suggest. Regularly meeting with your financial advisor also gives you the opportunity to adjust your plan as life changes come your way. They can identify opportunities and blind spots along the way that you didn’t even know you had.

As you work through your tax return this year, look for these six key watch points that may be signaling to you that your plan could use some attention.

1. Your deductions: Are you maximizing the tax breaks available?

The standard deduction, which you can choose to claim if you opt not to itemize, was nearly doubled in 2018. That higher standard deduction is now permanent. Recent legislation has added several above-the-line deductions, which you can claim while also claiming the standard deduction—and limited some itemized deductions. Because of these changes, fewer taxpayers benefit from itemizing anymore.

However, itemizing may still be beneficial if you pay significant amounts in mortgage interest, charitable contributions, property taxes and/or medical expenses. Once you have your return, review your itemized deductions with your tax professional and your financial advisor. If your deductible expenses are close to the threshold where itemizing becomes beneficial, it might make sense to keep closer track of them in the coming year.

You could also consider concentrating your deductible expenses in alternating years—for example, making two years’ worth of charitable donations every other year—and switch between itemizing and taking the standard deduction from year to year. Your tax professional and your advisor can help you determine an approach that makes sense for you to minimize your tax impact and get the most from your money.

2. Your retirement and HSA contributions in your income statement: Are you saving enough for retirement?

You can look at your W-2 or 1099 income and your retirement account statements to determine whether you are saving efficiently and at a pace to meet your retirement goals. First, check whether you’re maximizing your contributions to any workplace retirement savings plan that you’re eligible for. If not, calculate how much you’re giving up in employer matching contributions and consider adjusting your plan to take better advantage of that savings boost.

You can also calculate how much you’re saving as a percentage of your income and compare it to your goals. There is no “magic number “of how much you should be saving—it really depends on the individual. But to replace 100 percent of your income in retirement a good savings rate could be anywhere from 8 to 15 percent of your income.[WA3] [WA4] Your own situation might call for a different figure based on when you started saving, when you plan to retire and how much you’ll need to support the retirement lifestyle you envision.

If there’s a gap between your savings goals and your savings reality, your financial advisor can help you get back on track.

3. Your reported income vs. your annual expenses: Do you have enough life insurance to cover your needs?

One of the most important insights you can gain from your tax return is how your income compares to your life insurance coverage. Looking at your reported income and expenses, would your family be financially secure if something happened to you?

Life insurance is about more than income replacement. It can provide financial protection that allows your family to continue working toward your financial goals even in your absence. Beyond the ongoing expenses of housing, food and utilities, think about long-term goals you determined together—like funding college tuition, retirement expenses and other long-term goals.

If you’ve grown your family and net worth since you first took out your policy, your tax return may make this gap visible. How much coverage you need really depends on your personal situation and your financial goals, so working with your financial advisor to find the right coverage for your needs is the best way to find the right fit.

4. Your withholdings: Are you missing out on growth potential?

Receiving a large tax refund might feel like a good thing, but it’s often a sign that you’ve effectively given the government an interest-free loan. The refund may represent money that you could have been putting to work all year, whether by earning returns or paying down debt.

But withhold too little and you may face a large tax bill and potentially costly penalties. The goal is to find the withholding sweet spot that keeps more of your money in your pocket throughout the year while meeting your tax obligation.

If you received a refund worth thousands of dollars, talk to a financial professional about adjusting your withholdings and figuring out where best to put those extra dollars in each paycheck to work harder toward your goals. (Your advisor can also help you decide what to do with your refund—putting it to work in ways that’ll help your savings goals and leaving some room for fun.)

5. Your debt repayment deductions: Is your debt getting in the way of reaching your goals?

If you deduct a lot of debt in the form of student loan interest, mortgage interest or other debt-related expenses, it may be worth exploring whether you could improve your debt management through refinancing or consolidation.

While interest rates are higher now than they were five or 10 years ago, your credit score may have improved since you first took out your loans. If you could lower the interest rate on your mortgage or student loans through refinancing, you may be able to pay off your debt sooner and save a large sum of money in the process.

If you’re paying high-interest credit card debt along with lower-interest loans, it might make sense to consolidate, simplifying your debt and hopefully landing a more favorable interest rate. Talk with your advisor about the possibility of refinancing or consolidating. They can help you evaluate your “good” and “bad” debt and its role in your financial plan—helping you find a path that gets you on track to meet your financial goals.

6. Investment gains on your reported income: Should you adjust your risk tolerance?

As you report interest, dividends and capital gains on your return, take a moment to consider your investment strategy. The capital gains listed on your return can reveal something important: whether you’re holding investments long enough. If you’re trading so frequently that you’re regularly triggering short-term capital gains taxes, you might consider adjusting your approach to take advantage of lower long-term rates. Your financial advisor can help you look at your goals, time horizon and risk tolerance and adjust your strategy to best balance all three.

Take action now

Your tax return contains valuable insights into where you stand financially, as well as clues to the changes you can make to grow your wealth and protect your future. It can be a great tool for discussing how to make your money work harder for you and your family.

Now is a great time to reach out to your financial advisor to talk about where you are and where you’d like to be. Resources like your tax return are a good starting point, but your advisor will also ask deep questions to get to the heart of what matters to you. Then, they’ll help you build and adjust a plan uniquely tailored to you to help you reach all of your goals—now and in the future.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.