Using the Tax Return as a Financial Planning Tool

Sep 03, 2015
Pennsylvania CPA Journal

Whether you are a seasoned CPA or a new one, the opportunity to provide personal financial planning services is growing in our profession. One of the best jumping-off points for that is the individual tax return. When comparing prior-year returns to the current one, you will notice trends in income and deductions and begin to develop a plan for the future. The client may engage you for tax preparation, but you can open a dialogue to better understand their risk tolerance and financial goals before moving forward. 

When looking at the tax returns, notice the income trends; look at wages, interest, dividends, capital gains, and rental or pass-through income. Is the taxpayer saving money? Where are they investing? Do they have large amounts of interest income and not so much in dividends? Are their dividends mostly ordinary dividends or qualified dividends? Income can say something about their savings habits, risk tolerance, and experience with financial planning. Perhaps they need to learn more about the impact of their financial decisions on their tax return.

On a more sophisticated tax return, you may find capital gains and losses and passive income and loss carry-forwards. Taxpayers may enter ventures in rental real estate expecting to benefit from losses only to find that they cannot realize them because of income limitations. Rental or pass-through activities must be properly classified as passive or active. The improper classification can affect income taxation and loss offsets. Gains on sale may be subject to depreciation recapture and not all favored capital gain rates. Do the clients understand the implications of these activities?
Deductions on page one of the return for self-employed individuals offer significant planning opportunities. Retirement plan adoption and funding may be accomplished up until the due date of the tax return, including extensions. This affords the taxpayer the time to plan and save for the amount needed to fund a retirement account, contributing to tax savings and retirement funding, two important elements in financial planning. The health care deduction is often overlooked for the self-employed individual, but the requirements for the deduction must be understood.
Schedule A deductions need to be reviewed and considered too. If there are business or rental activities on the return, make sure the proper allocations for expenses relating to those entities have been made. Real estate taxes and mortgage interest applicable to a home office for a self-employed individual will reduce self-employment taxes. Is the mortgage interest unusually high? Inquire as to the rate. Charitable contributions of appreciated securities may offer more benefit than a donation of cash. Many taxpayers think in-kind contributions are capped at $500. On the contrary, if properly valued at more than $500, they can be reported on a Form 8283. Investment management fees are miscellaneous itemized deductions, but should not include fees relating to nontaxable income or directly withdrawn from a retirement account. Tax savings from financial planning around these opportunities will have an impact on clients’ ability to reach their goals. 

Reviewing a W-2 or pay stub will show how much the taxpayer is contributing to their retirement account, if they have a retirement account, if they have deferred compensation, or if there has been an exercise of stock options. You may also find if they have a flexible spending account or if they have life insurance through work.
The financial planning process is much more sophisticated than just reviewing a tax return, of course, but doing so provides a tremendous amount of insight and clues into the clients’ financial behavior. 
  • Review income and applicable tax rates.
  • Apply proper classifications of income.
  • Properly report deductions. 
  • Identify post-tax-year planning for eligible retirement contributions.
  • List financial planning opportunities to revisit.
These are just some of the examples of using the tax return and tax documents as tools in personal financial planning for your clients. If you are thinking of becoming a personal financial specialist (PFS) or certified financial planner (CFP), or adding personal financial planning to your menu of services, having a tax background and knowing how to break down the various parts of the tax return will assist you. You will have a better understanding of the client’s goals toward retirement savings and their tax costs and savings. 

Laurie A. Siebert, CPA, CFP, is an investment advisor representative of Valley National Advisers Inc. in Bethlehem, and securities are offered through Valley National Investments Inc., member FINRA, SIPC. She is a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at
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