Your Advisor Is Not Reviewing Your Tax Return - Really?

Every year I ask each of my clients to forward a copy of their recently completed tax returns. I know this is a pain, as these documents have sensitive information and they are often bulky. I’m sure some of my newer clients wonder why I ask them to go through all of the trouble.

I’m shocked at the high percentage of financial advisors who are ignoring the information available on their clients’ tax returns. I do not collect tax returns because I think they make good weekend reading. I do this because these often have vital information necessary to maximize client wealth.

There are three primary reasons I collect and review tax returns:

I look for potential errors. There are many cases where I know more about the client’s whole financial picture than the tax preparer knows. Their limited connection can lead to missed income items, incorrect deductions, or lost credits. I rarely find glaring errors, but there have been many tax seasons where I’ve found “issues” that have resulted in big tax savings or some reduction in audit risk for the client.
I gather information that helps me manage investments more effectively. I understand that most financial advisors focus only on investments and are not offering any tax planning services. However, it’s silly to focus only on potentially getting excess investment results if their clients will certainly give it back to the government in the form of excess taxes. Here are a few areas I track that can help maximize my clients’ after-tax investment returns:
- Tax bracket – Is the client in the lower 12% bracket or the higher 35% bracket? A client’s tax bracket helps determine whether taxable or tax-free bonds are best to use. Tax brackets are also something I consider when I’m deciding whether to place certain investments in an IRA or a taxable investment account.
- Taxable income – Clients with taxable income under certain thresholds do not pay taxes on realized capital gains. A surprising number of investors are missing out on tax-free rebalancing opportunities.
- Loss carryforwards – Some clients have accumulated losses that are available to offset future gains. An advisor is missing potential trade opportunities if they are unaware of this information.

I look for tax planning opportunities. Not all tax preparers conduct tax planning, but this is not something that should be ignored. Projecting taxes throughout the year can help in several ways:
- If the client is using the standard deduction (as opposed to itemizing), mortgages and charitable contributions are not receiving a federal tax break. This may make it wise to pay down/off a mortgage or delay/accelerate charitable gifts.
- Controlling taxable income can reduce taxes on Social Security benefits, reduce premiums on Medicare Part B, allow IRA contributions to be deductible, or make Roth IRA contributions an option.
- Taxable gains in some areas can be offset by selling assets with losses (“loss harvesting”). On the flip side, “gain harvesting” might make sense in some cases.
- Charitable giving opportunities can be maximized by gifting appreciated assets, using “double-up” strategies incorporating Donor Advised Funds, or taking advantage of Qualified Charitable Distribution opportunities.
- Roth conversions can allow a client to take advantage of an unusually low tax bracket.

I’m sorry for the “wonky” details, but the point I’m trying to make is that your tax return has good information, and (if used) it can lead to higher after-tax wealth. I’ll continue to pester my clients for their returns each year.

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