The Benefits of Reviewing Your Clients’ Tax Returns

Federal income tax returns are one of the most easily accessible and revealing road maps for determining your clients’ financial needs. Reviewing tax returns can provide you with a whole new level of insight into their individual financial situations which will, in turn, enhance your client relationships.

Reviewing tax returns gives you the chance to identify more opportunities to provide value to your clients. It also can reveal details they may have failed or forgotten to share with you when you completed the fact-finding process. Please keep in mind that you cannot give tax advice, though. That is their accountant’s or tax lawyer’s responsibility.

Most of your clients and prospects will fall into two categories;

  1. Those who have higher-than-anticipated tax liabilities
  2. Those who traditionally receive tax refunds

Whichever the case, all clients want to reduce their tax burden, both now and in the

“Financial planners can learn a great deal about their clients by looking at their tax returns,” explains Mark Cussen, a contributor to Investopedia. “Many additional planning opportunities can be found from these numbers, and planners who take the time to review their clients’ tax returns can often add value to the services that they provide.”

As part of your review, be sure to find out who did the return. Did the client complete it, or did an accountant? Do you know this accountant or CPA? Does he or she work with other clients of yours? Could this person become a center of influence for your practice?

What to Look for on a Client’s 1040 Tax Return

By reviewing clients’ tax returns and asking questions about specific areas, you can determine their level of knowledge and sophistication around their financial situations. Once you know where to look, with just a glance of a current return, you will be able to assess a client’s total earned income, various sources of income, business activity, tax liability, and marginal tax rate. A client’s 1040 tax form is a gold mine of information!

InvestmentNews reports that although advisors “do not always have a direct role in tax preparation, they can mine the 1040 for additional information and savings ideas and provide an additional service for clients.”

Here are some valuable details a tax-return review can reveal:

1. Age-related events
2. A change in filing status
3. Dependent-related issues
4. Employment status

What to Look for on Federal Tax Schedules A–E

Don’t limit your review to just 1040. You can gain a lot of additional insights into clients’ investments if you take the time to review Schedules A–E, too. In these schedules, you will find valuable information:

1. Itemized deductions
2. Interest and dividend income
3. Profit or loss from business
4. Capital gains or losses
5. Rental and royalty income

Yes, there are many excellent opportunities that will come up when you take the time to review your clients’ tax returns. Some will be quick and easy, such as recommending that they increase their 401(k) contributions. In other situations, it will take a little more thought and planning to develop an appropriate strategy. This is true of clients whose returns include details about tax-advantaged investing, tax-deferral programs, charitable strategies, insurance sales and estate taxes.

By getting into the habit of reviewing your clients’ tax returns each year, you will quickly be able to identify significant changes that have occurred and help them make

appropriate adjustments to their finances to fit their current situations. This review does not have to take a lot of a client’s time. Simply go over the return before your meeting so you can focus your client discussion on only the important issues.

This review might enable you to deepen your client relationships more than any strategy you’ve used.

For more detailed information on how to use the gold mine of information you can find in a client’s taxes, take a look at our white paper, Why Review a Client’s Tax Return.

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