Without a doubt there is a wealth of information we already know about our clients’ financial status because we prepare their tax return. If we step back to see the forest instead of the trees there is much more the tax return is telling us about their overall financial well being and could lead to expanded services.
It is very important at the outset of this column to emphasize that all tax professionals who wish to offer services to their clients that are beyond tax compliance and tax planning, need to be familiar with Treasury Reg. Section 301.7216-2(n). These Regulations permit the tax return preparer to use their client list to send a newsletter to clients containing, “tax information and general business or economic information or analysis for educational purposes.” However, 7216 explicitly states that the client list may not be used to “solicit any service or product other than tax return preparation services.” You can find more information at www.pfp.aicpa.org.
You can use the tax return to identify personal financial planning needs of the client. It gives you an overall picture of clients’ financial situation and can uncover opportunities for planning that client should consider.
Items to consider include:
1. What is their ratio of investment income to their total income?
2. If they have a high level of income but little or no investment income, do they have a high level of debt or high level of consumption or a combination?
3. As you review their investment income, do they seem to have diversified investments?
4. Is there an appearance that the client’s assets may be low yield investments or at the opposite, concentrated in high-risk investments? Do they need assistance in defining their risk tolerance and/or assistance in understanding the principles of risk/reward?
5. Do they have a high cash balance in a limited number of financial institutions? Have they considered their balances in light of the FDIC insurance limits?
6. Have they established an emergency savings fund?
7. Are they maximizing their participation in a 401k or similar deferral plan?
8. Do they have an option to participate in a Flex Plan?
9. If they are self-employed, have they established a retirement plan? Is their plan structured to give them the maximum contribution possible?
10. If their primary investment and retirement is based on a closely held business, do they have a strategy for developing its value and have a succession plan to realize that value?
11. If they are self-employed, have they considered the opportunity to have dependents employed in the business?
12. Do they have children under age 18? Do they have plans to send them to college and if so, do they have a strategy for funding part or all of that cost?
13. Will they potentially have any financial responsibility for other family members whether that might be parents, siblings, adult children or grandchildren?
14. Is their spouse active in the business and if so, have they explored the compensation to the spouse including fringe benefits and retirement plans?
15. If they have an IRA, have they considered converting it to a Roth IRA? Have they considered funding the maximum non-deductible IRA in addition to their retirement plan funding?
16. Do they have items reflected on Schedule C, F or E that may be a drain on their overall cash flow and diminishing their liquidity? Have they considered the long-term benefit of the venture and how it may be contributing or hindering their financial goals?
17. If the client has been successful in the accumulation of assets and developing their net worth, do they need estate planning? Do they have plans to make significant charitable contributions during their lifetime or at their death?
18. Has the client considered their potential needs relative to life insurance whether it may be to provide income replacement or to provide cash to pay either estate taxes or fund a buyout of their closely held business?
19. If they are self-employed does their health insurance qualify to be deducted on page 1 of Form 1040?
20. Does the client qualify for a Health Savings Account? Have they considered using the HSA as an additional vehicle to accumulate tax deferred dollars for their retirement years?
21. Do they have disability insurance? Will it meet their needs?
22. Has the client given consideration to long-term care insurance and how to address the potential future medical expenses they may encounter?
23. How much is their annual mortgage interest expense? Do they have more than one mortgage? Do they have home equity loans or home equity line of credit? Do they need to evaluate their cash flow and consider a plan to reduce their overall debt?
24. Are they high-income taxpayers who are living paycheck to paycheck and putting their financial security on the back burner?
25. On Schedule E, what type of entities do they have? Do any of these give rise to concerns for unexpected liability?
26. On Schedule D, do they have a large volume of trading? Does their portfolio contain unrealized gains or losses?
This column and list is not an all inclusive list. For a more extensive list, refer to http://www.aicpa.org/InterestAreas/PersonalFinancialPlanning/Resources/TaxPlanning/DownloadableDocuments/AnalysisofaTaxReturnforPFP.pdf.
As indicated, this short column cannot give an in depth discussion of everything to consider when reviewing the Form 1040 and although the above referenced list gives more guidance, neither will replace a scheduled time to explore financial planning topics with your client. Clients both want and need to explore financial planning in more depth.