5 Ways to Use a Tax Return as a Financial Planning Tool

Slideshow May 04, 2021 at 03:14 PM Share & Print

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Fifty-five percent of American taxpayers say they have used the information collected and entered on their annual tax return to create or make changes to their financial plan, and 27% do so annually, according to survey findings released Tuesday by the American Institute of CPAs.

The survey also found that 23% of American taxpayers do not have a financial plan, according to the survey of 2028 adults conducted in October by The Harris Poll.

For those who took tax time as a wake-up call to seek professional advice — or perhaps got a referral from their CPA — the tax return they just filed can serve as a valuable map of their financial situation.

See the gallery above for five ways that tax return can guide the development of a comprehensive financial plan, as recommended by the AICPA’s National CPA Financial Literacy Commission.

Michael S. Fischer

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1. Who counts on the client for support?

Start with the client's filing status (head of household, married filing joint return, etc.) and their dependents. Have there been recent changes, such as birth or adoption of a child or a student graduating college and starting work? Health and life insurance, education planning, or estate planning may need to be addressed with the client.

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2. Is their withholding aligned with the taxes they owe?

Withholdings have undergone several changes over the past couple of years, and nearly half of Americans have no idea when they last updated their withholding. Use the client's tax return to see how much was withheld from their pay during the year and whether they came close to the taxes they owed.

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3. Where is their money coming from?

The tax return provides an overview of the client's sources of income — from wages, earnings from saving and investments, Social Security and other retirement plans to lottery ticket winnings and jury duty. Consider how much of the income is recurring and how much is one-time or sporadic. Understanding this is key to mapping out an appropriate level of spending.

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4. Where are they on the road to retirement?

A tax return can give good information on progress toward a financially secure retirement and highlight opportunities to enhance it. For example, you can show the client how tax-deductible contributions to an IRA or pre-tax 401(k) deductions reduced taxable income and how they may be able to increase the contributions going forward. Clients nearing retirement can think about how they’ll transition from health insurance at work to post-retirement insurance, including Medicare and its related options when they qualify. It’s also worthwhile to explore various strategies for starting Social Security benefits.

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5. Are their itemized deductions in line with their goals?

Taxpayers who itemize rather than take a standard deduction get a clear view of certain financial items, giving them an opportunity to consider significant changes in their financial situation. For example, if state and local taxes are gobbling up income, they might consider moving to a lower-tax area as part of retirement planning. High medical deductions may mean it’s time to examine their health insurance. Charitably inclined clients might want to increase their giving power by grouping contributions into years when they have enough deductions to itemize, rather than giving about the same amount every year.

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