With tax season over, it can be an opportunity to reflect on personal finances and your overall tax situation. Most taxpayers forget about taxes until the next filing season, or at least until the end of the calendar year when decisions might be made around charitable gifting or other considerations. Focusing on tax planning year-around can help individuals find ways to improve their tax situation. A good way to begin is by reviewing the tax forms which were just filed.
Uncovering tax and retirement planning opportunities from the 1040 form
Tax-exempt and taxable interest (lines 2a, 2b)
This is helpful to determine if there are opportunities to reconsider your interest-generating investment accounts. For those in higher tax brackets, tax-exempt municipal bonds may provide an attractive tax-equivalent yield. Or, for those in higher-taxed states, remember that interest earned on direct US Treasury obligations (bills, notes, bonds, TIPS and savings bonds) is subject to federal income tax, but is generally exempt from state and local income taxes.
Qualified and ordinary dividends (lines 3a, 3b)
Is there an opportunity to take advantage of investments generating qualified dividends? These are taxed at a more preferential tax rate than ordinary income (20% marginal tax rate vs. 37%)*. Ordinary dividends are reported as ordinary income, subject to higher tax rates. In fact, for taxpayers in the lowest two marginal income tax brackets (10%, 12%), qualified dividend income is not taxed as long as household taxable income is less than $49,450 ($98,900 for couples filing a joint return).
IRA distributions (lines 4a,4b)
For those withdrawing funds from IRAs, there may be options to avoid taxes or penalties. For example, IRA owners over the age of 70 ½ can donate directly from their IRA tax-free (up to $111,000 per owner for 2026). This may be an attractive option for those subject to required minimum distributions who may not need the IRA funds to meet living expenses. Additionally, over the past few years, exceptions to the early 10% penalty on IRA withdrawals have been expanded. For example, beginning in 2024, anyone can take an emergency distribution of up to $1,000 annually without a penalty. The definition of an “emergency” is broad and can be self-reported. Make sure to understand these options to avoid owing a penalty.
Capital gain or loss (line 7a)
Like qualified dividends, long-term capital gains benefit from preferential tax treatment. This benefit does not extend to short-term capital gains from property or investments held a year or less. Being aware of holding periods before selling assets can yield tax savings. Lastly, there may be ways to defer recognition of a capital gain for tax purposes. For example, rolling a capital gain into a Qualified Opportunity Zone investment within 180 days of the sale.
Adjustments to income (line 10)
This includes items from Schedule 1 (Additional Income and Adjustments to Income) such as business income, rental real estate income, deductions for retirement plan contributions or Health Savings Accounts (HSAs) and student loan interest. There are a variety of planning opportunities here. For example, review retirement plan contributions to determine if adjustments should be made in terms of increasing salary deferral or re-thinking the type or mix of contributions (i.e., do Roth or traditional contributions make the most sense given the circumstances?). For business owners, is there an opportunity to take advantage of new tax rules allowing accelerated expensing on capital investments, which may reduce business income flowing through to the individual tax return? Lastly, if covered by a high-deductible health care insurance plan or a bronze or catastrophic plan on the Affordable Care Act (ACA) exchanges, are you maxing out the contribution into an HSA?
Adjusted gross income (AGI) (line 11)
AGI is a key determinant of many provisions in the tax code. These may include the ability to deduct a Traditional IRA contribution or contribute to a Roth IRA, as well as, phase-out thresholds of popular deductions. AGI also dictates the amount of Medicare Part B premiums paid in retirement. Having a sense of your AGI can help drive important tax planning decisions. For example, beginning in 2026, those claiming itemized charitable deductions will face a new threshold (0.5% of adjusted gross income) before a deduction can be applied against taxable income. There may be strategies to reduce AGI, such as increasing pre-tax retirement plan contributions.
Standard or itemized deduction (line 12e)
The decision on whether to claim the standard deduction or itemize deductions is an essential feature of prudent tax planning. As a result of the new tax law, those in higher-taxed states may be more apt to itemize deductions given the increase in the cap on deducting state and local taxes (SALT) from $10,000 to $40,000. However, once household income exceeds roughly $500,000, the amount of his cap is gradually reduced. Once income exceeds roughly $600,000, the taxpayer will be limited to deducting just $10,000 in SALT. Another planning consideration is around charitable giving. Does it make sense to “bunch” several years’ worth of donations into one tax year to itemize deductions? Ideally, a taxpayer would time this during a year where taxable income may be higher.
Qualified business income deduction (line 13a)
This deduction allows certain pass-through business owners (sole proprietors, partnerships, most LLCs and S-corps) to generally deduct 20% of net business income from their individual tax return. There may be planning opportunities available to maximize this deduction. See: Maximizing the QBI deduction: Key strategies for business owners. Note that the QBI deduction can be utilized regardless of whether a taxpayer itemizes deductions on their return. Given the complexity surrounding this provision, it is important to work with a qualified tax professional.
Taxable income (line 15)
In addition to adjusted gross income, this is the most relevant figure on the taxpayer’s return since it determines their marginal income tax bracket. See: 2026 Tax rates, schedules and contribution limits. Knowing your marginal tax bracket is at the core of sound tax planning since it answers key questions, including:
- What is the tax cost of adding additional income?
- What are the tax savings of reducing income?
- How much “room” do I have before I creep into the next tax bracket?
One’s tax bracket will drive many important tax planning decisions, such as whether a Roth IRA conversion makes sense, or whether accelerating deductions (if possible) before the end of the year makes sense.
Federal income tax withheld (line 25)
After a tax return has been filed, it’s a good time to review withholding to make sure that you avoid the risk of potential penalties due to under-withholding. Or, for those receiving a large refund, an adjustment may be desirable to avoid essentially providing the federal government with an interest-free loan.
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