How do I read my own tax return to plan for retirement?
Look at five places: the income lines to see what you actually live on, Schedule B to see where your investments are held and what they pay, the retirement income lines, your taxable income to find your marginal bracket, and the foreign tax credit and Schedule A to spot what is missing. A planner can see most of a retirement plan's problems in a 1040 in ten minutes. So can you.
Line 1 and your W-2: what you actually earn, and the codes nobody reads
Box 12 of your W-2 carries letter codes. D is your 401(k) deferral, and if it is small or missing, that is the first problem. C is group life insurance over $50,000, which ends when you retire. W is an HSA contribution. V is stock options exercised. Each code is a planning conversation.
Schedule B: your investments, where they live, and what they are costing you in tax
Interest and dividends list the institution and the amount. Large taxable interest in a high bracket means money that could be in municipal bonds or inside an IRA. Ordinary dividends far above qualified dividends means a portfolio that is tax-inefficient. And the list of payers is a map of every account you own, which is the first thing a planner needs.
The retirement income lines: what you are already drawing
IRA distributions, pensions, and Social Security each have their own line. If Social Security is showing up as taxable, the amount of your other income is what is driving it. If IRA distributions are large and you are under the required age, ask whether they are the right account to be drawing.
Taxable income: find your bracket, then look at the empty room above you
Your taxable income tells you your marginal rate. The distance between that number and the top of your current bracket is the room you have to withdraw or convert traditional IRA money at today's rate. That room is worth real money every year it goes unused.
What is missing: no foreign tax credit, no Schedule A, no Schedule D
No foreign tax credit usually means no international investments. No Schedule D means nothing was sold, which may mean no rebalancing. No Schedule A charitable deduction from someone who gives every Sunday means the giving is not being done in the most tax-efficient form, which after 70 and a half usually means qualified charitable distributions from the IRA.
What a planner sees in ten minutes
| Box 12 code D is $6,000 on a $150,000 salary | Saving 4 percent, far below the limit; retirement is underfunded |
| Schedule B shows $18,000 of taxable interest at a bank | Cash earning interest taxed at the top bracket; a placement problem |
| Qualified dividends are a third of ordinary dividends | Tax-inefficient funds in a taxable account |
| No foreign tax credit | No international diversification |
| Taxable income sits $40,000 below the top of the bracket | Room for a conversion this year |
None of this requires a CPA. It requires knowing which five places to look, and then asking what to do about each one.
Questions people ask next
- Should I send my tax return to my financial advisor?
- Yes. A planner who does not ask for it is planning blind. Most of the opportunities in a plan are visible only on the return.
- What is a qualified charitable distribution?
- After age 70 and a half, money sent directly from an IRA to a charity counts toward required distributions and is excluded from income. For people who give regularly and take the standard deduction, it is usually the best way to give.
- What if I use software and never see the forms?
- Download the PDF. The forms are all there. The five places above are on the first two pages of the 1040 and on Schedules B and A.
The question to ask yourself
How has your advisor worked with you to maximize what you keep after taxes?
If the honest answer is "I have not," the Retirement Reality Report will show you what to do about it in five minutes.
Start with the Retirement Reality Report