Five Lessons From Your '09 Tax Return

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This story, by Jill Schlesinger, originally appeared on CBS' Moneywatch.com

Your 2009 taxes are done. Congratulations! But you're not done yet. (Sorry.) While you have all your 2009 tax forms and documents handy, this is the perfect time to analyze last year's finances and use those insights to lower your taxes in 2010 and beyond.

The sooner you get started, the more you can save. So, take a big breath and then take these five steps:

1. Avoid a Big Tax Refund

You think you love getting a tax refund. What's not to like about found money? But a refund is really just the return of a year-long, interest-free loan that you extended to your spendthrift Uncle Sam.

You can do much smarter things with that money, like putting it into a retirement planor a college savings fund. So if you will be receiving a 2009 refund of more than a few thousand dollars and you're an employee, adjust your withholding at work. If you're self-employed, lower your quarterly estimated tax paymentsaccordingly.

If your 2010 income will be less than $75,000 ($150,000 if you're married and will file jointly), be sure your tax withholding has been properly adjusted for the new Making Work Pay Tax Credityou're entitled to receive this year. This credit (up to $400 for singles and $800 for couples) should be reflected in the amount of taxes taken out of your paycheck. But you may need to submit a revised W-4, especially if you're holding down multiple jobs or you're married, since your employer wouldn't know about your extra work or your spouse's income.

2. Save More in Your Retirement Plan

If you are not maxing out your employer-sponsored, tax-deferred retirement plan, you're missing outon the single best opportunity to save on taxes.

I know that the idea of saving more may be difficult these days, as so many people are just getting back on their feet. But if you can squeeze just an extra 1 or 2 percent out of your paycheck and pour that cash into the plan, you'll reduce your taxable income and your 2010 tax bill.

Doing so might also bring your income under certain thresholds that will let you qualify for bigger tax breaks you'd otherwise miss - such as personal exemptions, itemized deductions, an Individual Retirement Account, the Child Tax Credit, the Child and Dependent Care Credit, and the Hope and Lifetime Learning Credits for college.

Here's an example, courtesy of Research401k.com: Say you're a single person earning $50,000 and in the 25 percent tax bracket. Without making a 401(k) contribution, you might owe $12,500 in taxes this year. By contributing $4,000 to the plan, however, you'd lower your taxable income to $46,000 and might owe $11,500 in taxes. Essentially, the government lends you $1,000 to invest for your future and you don't have to pay the loan back until you withdraw the money from the 401(k) in retirement.

3. Look into Muni Bonds and Funds

If you have money in interest-paying bank accounts, CDs, money market funds, or taxable bonds or bond funds, you could be adding to your tax liability. High-income taxpayers need to be especially concerned since their tax liability will rise as a result of the passage of health care reform.

You may want to consider moving some of those taxable savings and investments into tax-free municipal bond funds. I'm a fan of ones from Vanguard (VWITX), T. Rowe Price (PRTAX) and Fidelity (FLTMX).

After a stellar 2009, muni funds are not quite as good a deal as they were last year, compared with taxable investments. Still, if you are in a high tax bracket, muni funds could offer a better tax-exempt yield. To see how much more in your case, use this taxable-equivalent yield calculator. Just be aware that the sweet yields on munis come with some extra risk, since there's always a possibility that a few bond issuers won't make their payments. Historically, that risk is pretty slim, but it's not zero.

4. Lower Your Mutual Fund Taxes

As the equity and fixed income markets recover from the financial meltdown, be on the lookout for mutual fund taxable distributions. A distribution is one of the most aggravating features of a managed mutual fund: You are on the hook for capital gains on the fund's investments as well as the fund's tax liability. You may even be taxed on gains the fund incurred before you owned it!

One way to limit the damage before you invest is to ask the fund company if it will be making a distribution soon. If the answer is "yes," hold off buying until afterward.

Or you might invest in funds with low turnover ratios, such as index funds, since they'll be less likely to throw off taxable distributions. A turnover ratio below 10 percent is generally tax-efficient. (A fund's annual report will show its turnover rate.) Morningstar's Fund Screenertool can help you find low-turnover stock funds.

One class of mutual funds, tax-managed funds, is all about keeping your tax liability down. These funds do so by keeping turnover low and avoiding dividend-paying stocks. Some tax-managed funds own stocks; some own stocks and bonds. Morningstar and Yahoo! Finance's Mutual Funds Centercan help you find them.

5. Keep Better Tax Records

Organizing your tax recordsmight not only lower your tax liability, it could help you get rid of the tax-filing headachesooner. Create a file called "Taxes 2010" and throughout the year toss into it business receipts; bank, brokerage, and mutual fund statements; W-2s; 1099s; property tax bills; and mortgage interest statements. And keep track of your purchase price, commission, and sales price for any investment transactions in 2010. You'll thank yourself in April 2011.


More on MoneyWatch:

Last-Minute Tax-Filing Strategies
How to File for an Extension
What if You Can't Pay the IRS?
Tax Tip: Do This One Thing First
Save Time Filing Your Taxes
Lower Your Taxes in 2010
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