Broker Check

Tax Tip: Review Client Tax Returns

| March 22, 2017

The new administration promises to move the concept of tax reform from potential to reality. But even though future tax policy is not locked in now, and with the 2016 tax season upon us, the time is excellent for independent financial advisors to meet with clients and review their individual tax situations. IRS form 1040 and schedules related to the return may provide valuable insight about their financial condition. The practice can reveal opportunities that can help the client – and also create new business opportunities for the financial advisor.

The tax return review can be interactive and include some probing questions. For example, a review of the front page of form 1040 could provide these kinds of queries:

  • Do dependent children have education savings accounts?
  • If the client has tax exempt interest, is the taxable-equivalent yield competitive?
  • If the client owns a business, do they have a retirement plan, business insurance coverage or a succession plan?
  • Does the client have a roll-able retirement plan from a previous employer?
  • Is the client taking required minimum distributions from an IRA?
    • Can the IRA be transferred?
    • Is the client spending or reinvesting the distribution?
    • If the client doesn’t contribute to an IRA, why not?
    • Do they qualify for a Roth IRA?

A similar review of Itemized Deductions on Schedule A, Interest and Ordinary Dividends on Schedule B, Profit or Loss from Business on Schedule C, and Income Supplemental Income and Loss on Schedule E can provide a deeper understanding. The review can also provide an opportunity to remind clients to stay focused on their long-term objectives as you help them develop an asset allocation strategy.

Retirement Plans: Often-Overlooked Tax Saving Opportunities
The review may reveal clients have missed opportunities that can simultaneously increase their savings potential and decrease their income tax liability. For example, those over 50 who are contributing to IRA’s or Qualified Plans can make “catch up” contributions – which are contributions allowed to be made above the normal limits. The 2016 limit for catch-up contribution thresholds are:

  • $6,000 for participants in 403(b), 457(b) and most 401(k) plans.
  • $3,000 for SIMPLE 401(k) and IRA participants
  • $1,000 for traditional or Roth IRA

Catch-up contributions to an IRA need to be made by the due date of the tax return (not including extensions). Additional details are on the IRS website at HTTPS://WWW.IRS.GOV/RETIREMENT-PLANS/PLAN-PARTICIPANT-EMPLOYEE/RETIREMENT-TOPICS-CATCH-UP-CONTRIBUTIONS

In addition, the IRS allows retirement savers to claim a percentage of their contributions to qualified retirement plans using the Retirement Savings Contributions Credit, also known as the Saver’s credit. Rollover contributions aren’t eligible for the Saver’s Credit. There are income restrictions. But some estimates indicate that just a fraction of the nearly 30 million taxpayers who may be eligible are taking advantage it. Check out the details at HTTPS://WWW.IRS.GOV/RETIREMENT-PLANS/PLAN-PARTICIPANT-EMPLOYEE/RETIREMENT-SAVINGS-CONTRIBUTIONS-SAVERS-CREDIT

Tax Implications for High-Income Investors
Investment advisors can also remind clients about changes in the federal tax code that specifically affect high-income taxpayers. This includes the tax efficiency of different investments in taxable accounts. For example, there is a Medicare surtax of 3.8 percent on net investment income. The tax affects taxpayers with modified adjusted gross income more than $200,000 for single individuals and $250,000 for married couples. The appeal of some investments may change depending on whether the client is subject to this additional tax.

Here are some additional areas to discuss with your clients during a client tax return review:

    • Schedule A: State sales tax deductions permanent in 2015. Taxpayers who itemize can choose between deducting state income taxes or state sales taxes they paid. In a state with no income tax, the sales tax write-off is clearly the way to go. But those with an option should consider their options using HTTPS://WWW.IRS.GOV/INDIVIDUALS/SALES-TAX-DEDUCTION-CALCULATOR
      • Purchasers of a vehicle, boat or airplane may add the sales tax they paid to the amount shown in the IRS table for their state.
    • Schedule D: Investors sometimes forget to include reinvested dividends in the cost of stock or mutual funds when recording a sale.
      • Forgetting to include reinvested dividends in the cost basis results in double taxation of the dividends; once in the year when they were paid/immediately reinvested and later when they are included in the proceeds of the sale. HTTPS://WWW.IRS.GOV/PUBLICATIONS/P17/CH08.HTML
    • Lifetime Learning Credit: This credit is available for taxpayers, their spouse or their dependents for up to $2,000 a year, based on 20 percent of up to $10,000 spent for post-high-school courses, that lead to new or improved job skills. Classes taken at a vocational school or community college, even by retirees, can count.

This communication is designed to provide accurate, authoritative information. Cutter & Company, Inc. is not engaged in rendering legal, accounting or tax advice. If legal, accounting or tax assistance is required, the services of a competent professional should be sought.

First Clearing is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.