When it comes to ideas for improving your finances, your latest tax return can be a gold mine.
Advisors meeting with a new or prospective client can use details on Form 1040 to spark discussions about much more than tax planning, Jeffrey Rattiner, a certified financial planner, told attendees at the FPA Be conference recently. Rattiner, who also holds a certified public accountant designation, is president of Rattiner’s Financial Planning Fast Track in Centennial, Colorado.
Consumers can easily do their own line-by-line review, too, to note changes that might warrant further review:
Lines 1-5 (Filing status)
Checking a different box for your filing status is a good reminder to review your estate plan, said Rattiner. Getting married or divorced means you’ll need to update your will and the beneficiaries for assets like life insurance and retirement plans.
Line 6c (Dependents)
As with filing status changes, any increase in the number of dependents is a good reason to update your estate plan, Rattiner said. Kids may also prompt you to reassess cash flow — not just for their new expenses but also college savings — and your insurance needs.
Line 7 (Wages, salaries, tips, etc.)
A review of the W-2s you’ll attach to your tax return can reveal if you’re making the most of workplace benefits, Melissa Labant, director of tax policy and advocacy for the American Institute of Certified Public Accountants, told CNBC. Workers may benefit from boosting pretax retirement contributions, for example, while families with children may be missing the opportunity to contribute to a pretax account for dependent care expenses,
Line 11 (Alimony)
“Alimony is considered earned income,” said Rattiner — you might think about using some of it to beef up retirement savings by contributing to an IRA.
Line 12 (Business income)
If your business has become more profitable, consider whether a sole proprietorship is still the best business structure, Rattiner said. Entrepreneurs who don’t want to incorporate may have different insurance needs. “An unincorporated business owner will be liable for everything and then some,” he said.
Line 13 (Capital gains)
An advisor can tell a lot about how you invest based on this number and the details on your Schedule D, said Labant. Figures that are too high or too low could warrant a conversation about whether you’re in the right investments and diversified enough for your age and risk profile. There may be missed opportunities to offset capital gains with capital losses, she said.
These areas can also serve as a red flag. “You can tell if someone is potentially churning your account,” she said, “if there is a lot of turnover without a noticeable financial benefit to the taxpayer.”
Line 17 (Rental real estate)
If you’re acquiring new properties, consider the best way to hold ownership. People often make the mistake of using one LLC to own several properties. “If one of those properties goes down unexpectedly, it could affect the financial health of the others,” Rattiner said.
Line 28 (Self-employed SEP, SIMPLE and more)
If you’re a Schedule C or F worker, a zero on line 28 may be a missed opportunity to boost retirement savings. “We might be able to set up something extra over and above” what a W-2 worker can do, Rattiner said.
Line 40 (Itemized deductions)
Analysis here might help determine if you need to make any moves tomaximize deductions. Bunching deductible expenses can help you alternate years of claiming the standard deduction and itemized deductions, potentially saving more — or if you’re subject to the alternative minimum tax, avoiding it every other year.
Trends in charitable giving, coupled with your investment behavior, might also yield planning opportunities. “You want to talk about the benefits of donating appreciated property instead of cash,” Labant said.