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Trust the Process, Part 3: Annual Tax Return Review

This third post in our ongoing series detailing our internal processes covers our process for the annual review of client’s tax returns, which incorporates the be-all and end-all for all standardization and consistency aficionados: a checklist! 

When we review tax returns, our goal is not to double-check anyone’s math or redo the return. Instead, we’re looking to make sure that our clients are shielding as much of their income from taxes as is appropriate, both now and going forward.

To do so, we ask ourselves many questions as we pore over the pages of a tax return, such as: 

  1. Do we know where all the income numbers came from? If we see income from a new or unknown source, that’s a clue that we may need to add something to a client’s net worth statement or ask about a previously unknown asset. 
  2. Do the numbers make sense, given what we know about our clients? Our clients work with fantastic CPAs. But CPAs can only do their magic with the information they are given. Given the intimate knowledge we have about our clients’ financial situations, we can sometimes spot things that aren’t quite right and provide some additional insight to a CPA to make sure everything gets filed correctly. 
  3. Are there planning opportunities for the upcoming year? If we see that a client didn’t make a maximum contribution to a Health Savings Account, or if they had self-employed income that could partially be sheltered using a certain type of retirement plan, we can make sure that happens in the current year. 

While returns share a lot of similarities, each return is unique. And with close to 150 client households, approaching the task of reviewing a tax review in an ad hoc fashion is a recipe for overlooking something. Accordingly, we’ve systematized what WFA team members should look for on a return by creating a checklist. 

We’ve refined the checklist over time so that anyone who reviews a client tax return knows exactly what to look for and where to look, starting with the first page of form 1040 of the federal return and going all the way to the last page of the state return. We also update the checklist every year to consider changes in things like retirement plan contribution limits, marginal rate brackets, and allowable deductions. Because most of the good stuff is often buried in supporting schedules or statements, the checklist has schedule-specific prompts, reminders and questions. 

The actual process starts when we receive a client’s tax return and scan it into their electronic file. That action prompts our Financial Planning Associates to review the return and enter some key pieces of information into our Client Relationship Management (CRM) software and onto an Excel template, which we use later to report back to the client. 

Specifically, we enter items like Adjusted Gross Income, Taxable Income, and Income Taxes Federal/State marginal brackets into the CRM. This way, we can easily get a sense of a client’s tax situation when we make investment decisions, decide to take capital gains, or consider strategies like Roth conversions. 

Next, our Senior Financial Planners take a more thorough look at the return, armed with the Woodward Financial Advisors Tax Review checklist. 

The final step in the process is for our Lead Advisors for each client to review the findings of the Senior Financial Planner, and then report the results back to the client. 

So far this year, our reviews have yielded some great results for clients, including:

  • One client’s return was missing Form 8606, which reports non-deductible IRA contributions and calculates how much of any IRA withdrawal or Roth conversion is subject to income taxes
  • We’ve seen several returns that showed that clients made significant gifts to a single charity using cash. We can recommend that these clients use appreciated stock or Qualified Charitable Distributions from IRAs (where appropriate) for better tax efficiency.
  • Investment custodians do not report Qualified Charitable Distributions on Form 1099-R. We’ve alerted CPAs when clients made such distributions, so that they weren’t accidentally taxed on those distributions. 
  • One client’s return was missing a receipt for a gift that we knew they’d made but apparently hadn’t reported to their CPA. By including the gift receipt and filing an amended return, the client reduced their tax bill by over $1,500
  • We suggested that a client household with two self-employed individuals start contributing to a SEP-IRA and a solo 401(k). This will result in a tax savings of $20,000 for 2017. 
  • One client neglected to report the deduction they enjoyed for a portion of our advisory fees, which reduced their tax bill by over $1,000
  • One client had income stemming from a retirement plan distribution that was missing from their return, so we alerted their CPA. 

While this can be a time-intensive process, it’s incredibly valuable. And by using the checklist, we make sure that we’re thorough and consistent in what we look for, and that each client receives the appropriate high level of care. If you would like to see if Woodward Financial Advisors can help with your tax situation, please let us know