It’s that time of year when every CPA is breathing a well-earned sigh of relief and (hopefully) heading off for a relaxing getaway to detox from the insanity of tax season. But for smart financial advisors, this may be the perfect time to do just the opposite. If you’re looking for a great way to help save your high net worth (HNW) clients a bundle—and strengthen your relationships by doing so—get ready to roll up your sleeves and dig into the very thing most everyone else wants to forget at the moment: their 2016 tax returns.
For anyone who offers holistic planning, one of the greatest benefits you provide your clients is a path to tax efficiency. For your HNW clients, these efficiencies can add up to tens of thousands of dollars or more. But smart tax planning needs to start as early in the tax year as possible, not in the first week of December when most CPAs mail out their standard “year-end planners.” By that time, most of the cards have already been dealt, and aside from charitable contributions and throwing some last-minute dollars toward retirement accounts, there’s not much more to be done.
The solution? Offer your HNW clients a higher level of proactive planning by diving straight into this year’s Form 1040 and looking for ways to mitigate taxes. This quick list of what to look for can give you the clues you need to help build a better, more tax-efficient plan for your HNW clients—starting today:
Line 7 reveals much more that simple income. Is your client maxing out their 401(k) and taking advantage of a match? If they have multiple W-2s, have they changed jobs? Do they have assets that should be rolled over to an IRA? Does their employer offer an in-service withdrawal?
Lines 8a and 8b give you a quick snapshot of interest paid. Interest-bearing assets can be easy to liquidate into cash, and a tax-deferral may be a great benefit. If your client own bonds, check for maturity dates. Bonds that don’t mature for 25+ years can threaten liquidity at retirement, forcing the client to sell at the market price.
Line 9 and schedule B tell you everything you need to know about dividends received. Are there assets in your client’s portfolio that you aren’t managing? Is what you see aligned with their risk tolerance and financial goals? This line alone can be a great conversation starter!
Line 11 tells you if your client is paying alimony. The bigger questions are when did alimony begin, and (here’s the key) when does it end? Depending on the amount, that knowledge can have a significant impact on future income planning.
Line 12 tells you the trajectory of your client’s business. Does your client have the most appropriate retirement plan in place? SEPs, 401(k)s, and Defined Benefit Plans all have unique advantages. Do they have proper business insurance to protect their assets, their families, and their employees? Does it make sense to convert existing IRAs into a Roth IRA to drive down future taxable income?
Line 13 is a treasure trove of tax planning information. This single box tells you not only how much capital gains were made or lost, but also the level of non-qualified assets your client owns and, ultimately, just how tax efficient your client’s portfolio is—or isn’t. What can you do differently to improve efficiency of the total portfolio?
Line 15a is the total amount of IRA Distributions. which should be at 0 if your client is under 70½. If they are over 70½, have you explored ways to eliminate future RMDs? Does converting to a Roth IRA make sense? If IRAs are invested in risk-based investments, is it time to lower the risk?
The opportunities don’t stop there. Form 1040 also gives you important clues about everything from pensions and annuities, to rental properties and partnerships, to Social Security—all of which can have a huge impact on taxes. Lastly, look at who prepared your client’s taxes. If you’re not already in contact with the CPA, now is the time to introduce yourself and start working in concert. It can be a win-win for you both.
By sitting down with your HNW clients and reviewing Form 1040, you can help to uncover inefficiencies, explore opportunities, and ensure that their financial strategies are aligned with their needs, goals, and life stages. Not only are you likely to save your clients a bundle by the time next year’s tax season rolls around, but by taking proactive steps to increase overall tax-efficiency, you’ll also be building stronger, more trusted client relationships with some of your most valued clients. And that’s the best win of all.
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Disclosure: The information and opinions herein are for general information use only. The opinions reflect those of the writers but not necessarily those of New York Life Investment Management LLC (NYLIM). NYLIM does not guarantee their accuracy or completeness, nor does New York Life Investment Management LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are not intended as an offer or solicitation with respect to the purchase or sale of any security or as personalized investment advice. The information contained herein is general in nature and is provided solely for educational and informational purposes. New York Life does not provide legal, accounting or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting and tax advisors.