A investor’s tax return has a trove of information about their financial life. By looking at your tax return, your financial advisor can gain a better understanding of your entire financial situation.
Important tax return questions
- Sources of income:
- How do you earn income? Wages/salary (W2) or contracting (1099)?
- Do you have a lot of capital gains, dividends, or interest?
- Any tax-free interest from municipal bonds?
- Have you claimed Social Security benefits?
- Are you taking retirement plan distributions or doing Roth IRA conversions? Did you do a qualified charitable distribution?
- Is your business profitable?
- Adjustments:
- Do you contribute to a 401k plan, IRA, or health savings account?
- Does your income disqualify you for stimulus payments, health insurance subsidies, or other benefits?
- Deductions:
- Are you supporting a student or going back to school?
- Have you incurred large medical or dental expenses?
- Do you have significant state/local income or property tax bills?
- Is there a large amount of mortgage interest expense?
- Do you give to charities? If so, how?
- Do you contribute to a 529 account?
Each of these questions can lead to productive planning conversations and improve communication between your financial advisor and tax advisor.
It’s important that your financial advisor has a good understanding of the ins and outs of your tax return. And as with most things in life, your tax situation evolves from year to year so your financial advisor should review your return every year and continue to have ongoing conversations with you. That’s the best way to stay on top of opportunities and to keep an eye out for potential threats down the road. If your advisor only looks at your tax return once or twice at the beginning of the relationship, then they could miss a chance to help.
Not a replacement for your CPA
One last thing to note is that your financial advisor is not trying to replace or second guess your CPA. Tax preparation is a highly technical process that most financial advisors aren’t qualified to handle. But acting as a second set of eyes can enable your financial advisor to help identify items that may not be top of mind for a tax preparer.
