By Natalie Hayes Schmook, MBA, CFP, CVA, Hayes Wealth Advisors
For most of America taxes were due by May 1, so hopefully you are filed or on extension. While tax returns are not fun they are a great source of information for financial decision making. Since it’s fresh on everyone’s mind here are some things you should review annually on your returns:
- Your AGI and taxable income. On your tax return we look at income “above the line”- the taxable amount and “below the line” – after itemized or your standard deduction. Adjusted gross income is the above the line number and it’s what the IRS uses to determine if you qualify for things like contributing directly to a Roth, Medicare premiums and more. It’s worth noting your AGI for when it comes up and how close you fall to certain phase outs like QBI (Qualified Business Income) for practice owners.
Taxable income is exactly as stated- it’s what you actually pay taxes on. Eyeballing the difference in those two numbers is helpful to understanding how simple or complex your tax situation is.
- Your tax rate. For planning purposes you should look at 2 tax rates- your marginal rate, which is your top tax bracket and your effective tax rate, which is the average tax you pay for your income. To determine your marginal tax rate, find your filing status and then where your AGI falls. Ideally do this BEFORE filing because if you are $10,000 away from falling in a lower bracket it’s worth coordinating with your accountant to see if you can eek out a few more deductions.
Your effective tax rate is a great decision making tool for deciding if your should contribute to a retirement plan on a pre-tax or Roth basis, how impactful deductibility of line items like interest are and perspective on how that painful amount you pay annually really stacks up.
As long as we’re required to pay taxes and file returns to stay on the good side of the law, it’s worth making sense of those pages. Take a few minutes and see what you can learn from your tax returns!
HOW TO HANDLE A TURBULENT STOCK MARKET
If you’re like me and keep a few ticker symbols on the homepage of your iPhone you might have noticed watching the stock market these days is a bit like watching a ping pong match. I’ve been in finance since 2006 and the only times I can recall the news having such a whiplash effect on the markets was in 2008/2009 (I don’t miss those days) and during Covid.
It’s easy as an investor to worry about what your 401k looks like in markets like this one and how everything that’s going on may impact your retirement. As someone who’s been working in investment management for close to 20 years, my best advice in times like these is this: don’t look!
The worst investment strategy is to buy high (when everything feels great like it did up until February) and sell low (when everything feels uncertain). There’s a joke in this industry that sociopaths make the best investors because they don’t have the normal fight or flight triggers most of us do. That being said, studies have shown again and again that the best investment strategy long term has historically been just to stick with it and not try to time the market.
Now that you know what NOT to do (sell or stop investing) here’s something you SHOULD do: understand your portfolio. Every 6 months when I meet with clients we look at the downside risk of their accounts so they understand what to expect in bad market conditions. We have sophisticated software for this but here’s a rundown of what most major indices have done.
Looking at this if you are 100% in the S&P 500, your average annual return over the last 10 years has been 11.7%. By March of 2020 (using that average return) your account would have grown to roughly $173,900, then slid to $114,800 with the Covid pullback. That’s scary! But investors who pulled out missed some of the greatest returns of this decade.
A better approach is to know what your downside risk looks like so when (not if) a market pullback happens you are emotionally prepared. Happy investing and hang in there!
This article was written April 18th 2025 and all return figures are as of that date. Past performance is not an indication of future results and this information is not meant to serve as advice.
