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Creating a Structured Tax-Review Process

Systematically reviewing your clients' tax returns can uncover additional financial planning opportunities and build a stronger relationship with their CPAs.

Susan Chesson, MBA, CFP and Helen Modly, CFP, CPWA, 05/11/2017

It's often challenging to get current financial information from clients on a regular basis to update their financial plans. When it comes to tax returns, enforcement by taxation authorities ensures that all taxpayers file returns in a timely and accurate manner, and we can glean lots of information from these returns.

As wealth advisors, we have two challenges: to collect the tax returns and to analyze them in a way that adds value to our clients' financial situations.

On or about April 1 every year, my firm sends an email to all of our clients asking them to send us an electronic copy of their tax return via ShareFile, our secure online vault for exchanging documents. It is preferable to make the request prior to the filing deadline: At this time, the client is likely still actively communicating with his CPA and taxes are still top of mind. You can ask your clients to complete an authorization for their accountants to share their returns directly with you. This is convenient for the client, and provides you with an opportunity to establish direct contact with the client's CPA. It opens the door for developing relationships--and with the client's permission, engaging in tax planning and strategizing with their CPA on an ongoing basis. 

Preparing to Review the Returns
Before starting the review, tag the returns according to specific characteristics. Note the client's tax rate, filing status, and ages of dependent children. Did the client recently undergo or anticipate going through a transition such as marriage, divorce, or retirement? Is he older or younger than 70 1/2? Is he charitably inclined? When will children graduate and no longer be dependents on their parents' tax returns?

Develop a Checklist or Scorecard for Each Demographic
Group your clients into buckets, and develop a checklist for each set. Here are some typical examples:

Clients with young adult children
For clients with teenage or young adult children who are earning an income, did the parents contribute money to a Roth IRA for their children up to the earned income amount? If the child is about to graduate from college and will no longer be a dependent on his parents' tax return, what is the child's expected tax bracket? If low, this is an opportunity to gift appreciated stock which they can sell with no long-term capital gains liability.

Still working
If you know your client's gross pay, check to see if he is contributing the maximum allowed to his employer-sponsored retirement plan. Did he recently turn 50 and become eligible for the catch-up contribution? Check his adjusted gross income to see if he is eligible to contribute directly to a Roth IRA. If their AGI is too high and they do not have an existing traditional IRA, a back-door Roth might be appropriate.

Retired, younger than 70 1/2
Prior to 70 1/2, should your client take withdrawals from tax deferred accounts to fill up a bracket or force income to enable them to take full advantage of their itemized deductions and personal exemptions? Does it make sense to do partial Roth conversions? We don't want to leave tax deductions unused on the return. Are tax-free bonds are still needed for the clients who have moved to a lower tax bracket, albeit a temporary situation if they have large retirement accounts? Are these clients making estimated tax payments? You can simplify their lives considerably by covering their expected tax liability through withholding from any IRA distributions. Be wary however, of taking large distributions from IRAs and excessively increasing AGI; this may push your client into paying a higher Medicare premium.

Susan Chesson is the Chief Investment Officer and a wealth advisor for Focus Wealth Management, Ltd., a fee-only registered investment advisor in Middleburg, Va. Ms. Chesson has extensive experience with institutional investing.

Helen Modly, CFP, CPWA, is President of Focus Wealth Management, Ltd., and a practicing wealth advisor. She is a member of NAPFA and Chair of the board for the National Capital Area chapter of FPA. She can be reached at info@focus-wealth.com.

The authors are freelance contributors to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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