Using Clients’ 1040 Tax Returns to Uncover Planning Opportunities

Now that the dreaded tax-filing season is over for most Americans, financial advisors can use their clients’ tax returns to identify important planning opportunities and perhaps capture some additional investible assets.

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    Using Clients’ 1040 Tax Returns to Uncover Planning Opportunities

    Using Clients’ 1040 Tax Returns to Uncover Planning Opportunities

    Now that the dreaded tax-filing season is over for most Americans, financial advisors can use their clients’ tax returns to identify important planning opportunities and perhaps capture some additional investible assets.

    A Forensic Review of Form 1040

    Filing Status—Review the box checked under filing status. It may point out a change in marital status that your client never communicated to you. For instance, checking “married filing separately” may indicate a separation or pending divorce that can lead to discussions about important divorce planning issues.

    Wages and Salaries (Line 1)—Multiple W-2s will indicate a job change during 2021. If your client has multiple W-2s it may mean that there are retirement assets still sitting in a previous employer’s 401(k), which presents you a rollover opportunity.

    Dividends and Interest (Lines 2a/b and 3a/b)—Do the figures in these boxes match what the client has earned through the assets managed by you? Any discrepancy may mean that the client holds investments away from you. This is a perfect opportunity to start a conversation (Does the client have tax-exempt income? Does the client’s tax bracket and yield spread between tax-free and taxable bonds make tax-free a smart choice?).

    IRA Distributions (Line 4a)—If this field indicates IRA withdrawals not taken from any IRA held with you, it opens a door to discuss how that IRA may be invested and whether the client may benefit by transferring it to you. If the client is age 72 or older, you may want to discuss the planning benefits of a qualified charitable distribution, especially if they make meaningful charitable contributions (see Line 14 on Schedule A).

    Capital Gain or Loss (Line 7)—Do these numbers match the results of client assets held with you? Is a substantial share of gains attributed to capital gains held and reinvested in mutual funds? If yes, it may warrant a discussion about more tax-efficient alternatives to current fund holdings.

    Schedule 1-Part II (Lines 16 and 20)—These lines are used to claim retirement plan contributions, which may indicate IRAs or other plans held away from you. Use this to start a conversation about how these accounts are invested and whether contributions are being maximized.

    Schedule C—Given the “Great Resignation,” many Americans have changed careers and started their own businesses. If your client has started a new business, now’s the time to talk about liability protection and establishing a retirement plan.

    With quarterly investment reviews now being scheduled for clients, advisors may want to ask clients to bring in their 2021 tax returns to facilitate a more comprehensive and valuable financial and investment review.

    Please reference disclosures: https://blog.americanportfolios.com/disclosures/

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