Lyle Benson, Jr.

Expanding Your Financial Planning Practice Through Your Clients’ Tax Returns

How an individual’s tax return relates to personal financial planning opportunities.

February 28, 2011
by Lyle Benson, Jr., CPA, PFS

Many of us in the CPA Financial planning profession started from a tax background. We learned early on in our careers that our clients wanted services beyond the tax-focused planning that we offered. Working with your clients on their tax preparation and planning offers an excellent entry into personal financial planning. The tax return itself can be used as a roadmap to gain a better understanding of your clients’ personal financial situation. You can use their return to uncover opportunities for planning that the client (or their other advisors) may have overlooked. A tax return is a great starting point for understanding an individual’s cash-flow and income/expense situation. Used in conjunction with their personal balance sheet, it provides an excellent snapshot of their personal finances.

This article will walk through some of the major aspects of an individual’s tax return and how they relate to personal financial planning opportunities. We should add a caveat about making sure you are in compliance with the rules of Code Sec. 7216 and obtain any consent that is needed from your clients. View the checklist (PDF) to help prepare your clients tax returns.


This section of an individual’s return will give you the opportunity to understand their “family tree” better. You can learn the ages of the children and whether college planning is a consideration. You also might find that they are supporting elderly parents; this is a critical financial commitment that may need to be addressed.

Income Sources

Understanding the source of your clients’ income is critical to helping them with their cash-flow planning and with other aspects of their financial planning. Do they have income from W-2s or is it self-employment income? What are the opportunities for deferring income into qualified (and non-qualified) retirement plans? Are they maximizing these opportunities? If they are receiving Social Security benefits, are they using strategies to maximize those benefits? Should they consider a Roth IRA conversion? Alternatively, if they have already done a Roth conversion, does it still make sense or should they look at re-characterizing?

Interest and Dividends

You can learn a lot about an individual’s investment strategy from reviewing their Schedule B. What are the sources of taxable and tax exempt investment income? You may see clients with interest income from multiple banks, and you want to make sure they are protected under FDIC limits. If there is little investment income (relative to income levels), do they have a sufficient emergency cash fund? What does this say about their cash-flow situation? Do they have an overall investment strategy based on their risk tolerance and return objectives? You can also see how investment assets are titled for estate tax purposes. Do most of the assets seem to be in one spouse’s name? Is there too much concentration in a single (or small number) of stocks?

Capital Gains/Losses

You can gain further insight into their investment strategy with Schedule D. Do they have capital
loss carryovers, and how should this affect their investment strategy going forward? Is loss harvesting part of their overall financial planning? Is the trading activity excessive and what fees are they paying for asset management (or are they paying based on transactions)?

Retirement Plan Distributions

For clients who are in retirement and living off of their investment assets, one of the key concerns is if they have a sufficient asset base to meet their cash-flow needs. In other words, are they spending at a sustainable withdrawal rate? Where are they taking money from (retirement accounts, regular accounts, Roth IRAs) to meet cash-flow needs? This becomes an important question as individuals reach retirement age and begin taking distributions to cover
their cash-flow needs. If they are over 70 ½, are they taking the (required minimum distributions (RMDs) from their retirement accounts?

Other Income — Schedule E

This is another important area to help you understand your client better. Do they have income from partnerships, S Corporations, or limited liability companies (LLCs)? Is this passive income or active? Are there any issues related to limitations on deducting losses (passive activity losses, basis, at risk, etc.)? Investment partnership income may also be reported here and you will want to learn more about any hedge funds, venture capital or other alternative investments that they hold. How do these investments fit into their retirement strategy? If they own investment real estate, seeing the tax results will give you the opportunity to discuss how this fits into their overall planning. This is also the place where they would report any trust income. Understanding the purpose of the trust, what the underlying investments are and what they receive from the trust (income, principal, etc.) is critical for financial planning purposes.

Alternative Minimum Tax

If you are working with clients in the tax area, you already understand the importance of taking into account the alternative minimum tax (AMT). It can easily turn your traditional tax planning upside down. Do they have AMT credit carryovers and is there a plan for how they will be utilized in the most efficient way possible?

Tax Law Changes for 2011

The changes made by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312), enacted December 17, 2010, will be an important part of the income tax planning that you do for your clients over the next couple of years. With a two year continuation of the Bush-era tax cuts, we now have some short-term certainty in the tax planning area. However, the uncertainty beyond that window is undoubtedly on your clients’ minds.

Taxes are possibly your clients’ biggest expense and it is very possible that they will get bigger in the coming years. Making sure you manage this aspect of their personal financial planning is critical to helping them achieve their long term goals. Using their tax returns to better understand their personal financial situation and to raise relevant questions about their goals and planning is a natural step for advisors who want to help their clients further.

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Lyle K. Benson, Jr., CPA/PFS, CFP, is president and founder of Baltimore, MD-based L.K. Benson & Company, a CPA/financial planning firm, specializing in personal financial planning, tax and investment advisory services for high income individuals and families as well as corporate executives and entrepreneurial, closely held business owners and is a member of the CCH Financial and Estate Planning Advisory Board.