• Michael DiBartolomeo

Why Does My Financial Advisor Need My Tax Returns?

Yearly tax returns benefit individuals financially, much more than the refund check they get in the mail. Tax forms can reveal a lot about people’s financial situations, which can help shape financial decisions for the coming year. And, with the aid of an experienced financial advisor, tax return information can become essential in increasing someone’s long-term wealth.


However, many people who work with a financial advisor rarely share their tax returns. They prefer to hire an accountant to help with filling out the returns and earn the highest refund possible. Yet, a financial advisor may look at tax returns from a different perspective and use them to assist in future planning. But what can a financial advisor do with the information provided by tax returns?


Income and Capital Gains Taxes

Income and Capital Gains Taxes


Financial advisors will look for any income in their client’s portfolio, such as ordinary dividends, qualified dividends, or tax-free income. Their goal is to better understand what kinds of investments should be in their clients’ holdings. That’s important because every investment made needs to be purposeful and tailored to the client’s situation.


For example, some advisors might want to invest in tax-free municipal bonds for their clients’ portfolios. But if their client is in a lower tax bracket, that investment might not be as profitable as a taxable investment with a higher after-tax return.


It’s also essential for an advisor to know if their client previously had any carry-forward losses reported on their returns. Why? Because that might enable the client to rebalance their portfolio or make additional trades without paying capital gains tax.


Missed Deductions


Another benefit of sharing tax returns with a financial advisor is that they can find overlooked deductions that an accountant wasn’t aware of.


To put it simply, most accountants will work hard on their clients’ tax planning. However, others stick to asking generic questions and don’t take the time to dig deeper in order to find additional deductions that the client could be taking advantage of. Some areas that accountants often overlook include:


● Long-term care insurance premiums, medical and dental expenses, most of which are deductible if they exceed 7.5% of a client’s gross income.

● College savings in 529 — these can be state tax deductions, depending on the regulations of a specific state.

● Healthcare insurance premiums and home office deductions for self-employed individuals.


Again, it’s important to remember that tax accountants can only deduct what their clients report. On the other hand, financial advisors will make sure that their clients get every deduction they are entitled to.


Qualified Charitable Distributions


Depending on a client’s retirement status and age, financial advisors can reduce their taxes on charitable contributions. More specifically, clients over the age of 70 ½, who are subject to required minimum distributions from their retirement accounts, are able to take advantage of qualified charitable distributions.


In other words, a Qualified Charitable Distribution (QCD) allows them to donate from an IRA to satisfy the RMD, meaning that up to $100,000 is excluded from their taxable income (Find out here if you can lose money in a Roth IRA). Therefore, for people who are aged 70 ½ and are required to take a minimum distribution and are charitable, the taxable amount and the IRS distributions should not be the same number on their tax form.


Younger clients could also create separate charitable donation accounts. That way, they can combine multiple years’ worth of donations into one year in order to maximize their deduction.


Social Security Benefits

Social Security Benefits


Unfortunately, some clients think that retirement is the same as applying for Social Security. As a result, even though they have more than enough money to last for the duration of their early retirement years, they still apply for the benefit. A better idea may be to delay collecting Social Security, as doing so will award credit which will boost expected lifetime benefits.


Simply put, for every year that someone delays Social Security benefits, the benefits can grow by up to 8%. So, if a client delays Social Security from age 67 to 70, their benefits will be up to 24% greater. Keep in mind that this credit only applies for years beyond full retirement age.


Fortunately, financial advisors can use tax returns to find out if a client is collecting Social Security. They will also compare the age and benefits with their plan to see if there are any discrepancies. If they are caught early on, an advisor can reverse the benefits and help clients take advantage of the credit.


Request the Help of a Financial Advisor Today


It’s easy to see why financial advisors would want to check their clients’ tax returns. For starters, they can use them to find any missed deductions that could benefit the client in the long run. Additionally, a good financial advisor will come up with an investment plan based on the information provided by tax returns.


Ultimately, requesting the help of a professional financial advising team, like the Kelley Financial Group, is essential when looking to invest money or take advantage of existing benefits. From budget analysis to retirement planning, this expert team can assist in making the right financial decisions–including whether or not to cancel a pension and get the money. And, with competitive prices based on personal needs, no client will feel like they have to spend a fortune for financial advice.

Disclosure: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax, legal, or investment related advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

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