Travis Russell

Travis Russell, CFP®

Travis employs many of the disciplines of success that he learned as a Division 1 hockey player – namely, persistence, practice, and a having passion for what you do – to his role as Principal and Client Advisor.

This article was originally published on August 7th, 2017, and updated due to recent changes in the tax code as of July 18th, 2018.

One of the first questions we tend to ask new clients is whether their former financial advisor ever requested a copy of their tax return. And the answer we usually get in response? No. After all, why would your financial advisor need to know anything about your taxes?

At Glassman Wealth, we understand that your tax return is an essential part of the advising process. In fact, if your financial advisor isn’t using your tax return to help build your investment portfolio, they won’t be able to optimize your tax situation and may miss out on planning opportunities.

There are three key reasons why your financial advisor can use the information on your tax return to your benefit.

Income and Capital Gains Taxes

Your financial advisor can look for income in your portfolio – whether that be qualified dividends, ordinary dividends, or tax free income – as a way to help understand what kinds of investments that should be in your investment portfolio. Every investment made needs to be purposeful and specific to the client’s situation.

Your advisor might be investing in tax-free municipal bonds for your portfolio. But if you are in a lower tax bracket, that might not make much sense compared to a taxable investment with potentially higher after-tax returns.

It is also critical for your advisor to know if you have any carry-forward losses reported on your tax return. If you do, that might enable you to make additional trades or rebalance your portfolio without paying capital gains tax.

Missed Opportunities

Many of our clients are either getting ready for retirement or they just retired. If someone has retired but they’re not yet 70.5 (the year in which they must start pulling from retirement accounts), they may be in a low tax bracket for a few years. This provides “trough years” to either pull from retirement accounts at lower tax rates or complete a roth IRA conversion. A roth conversion is a taxable event (but remember, at a lower tax rate during the trough years) but distributions later in life are tax-free.

Another area your advisor can help you explore relates to annual charitable contributions.  If you’re charitably inclined, your advisor should notice this in your tax return and identify strategies to complete the gifts in the most tax advantageous way. This may include using appreciated securities, or, if you’re over 70.5 and pulling from retirement assets, you can gift up to $100,000 from an IRA directly to a charity. If the gift is made from an IRA, you no longer receive the tax deduction but it reduces your potential taxable income.  All of these decisions should be discussed with your financial advisor and your tax accountant.

Your advisor can also help you minimize your tax exposure if you are collecting any self-employment income by opening a SEP IRA or an additional 401K that can help you save on taxes while also building up for your retirement.

Missed Deductions

A third benefit of sharing your tax return with your financial advisor is that they can help you find missed or overlooked deductions that your accountant might not have been aware of.

Most accountants take the consultative approach and work on tax planning for their clients. Others, unfortunately, just ask generic questions and may not dig deep enough to find additional deductions you should be taking advantage of – which is where your financial advisor can help. Below are a few commonly overlooked areas:

  • College savings in 529 accounts – these may be state tax deductions (up to a limit) depending on your state
  • Long-term care insurance premiums, dental expenses, and medical expenses may be deductible if they exceed 7.5% of your adjusted gross income.
  • Healthcare insurance premiums and a home office deduction for self-employed individuals.

Again, your tax accountant can only deduct what you make them aware of, and your financial advisor can be a trusted ally in ensuring that you get every deduction you are due.

In summary, these are three important areas of why it makes sense to share your tax return with your financial advisor. When you do that, your bottom line may benefit.