What Your Tax Return Is Secretly Telling You

Examining your tax return results in year-round tax planning that benefits your family and business.

Tax season officially ended on April 15th. Celebrate we did, and the office is admittedly quiet this week and last as our team regroups and reconnects with their (patient ) spouses and families that saw little of them over the past few months. So, what comes next? Exactly what do accountants do after tax season?

In some ways, we start all over again.

One of BGW’s core beliefs is that tax planning is a year-round event.  And, it’s in the most recent tax returns, both business and personal, that we find a myriad of planning opportunities that are often ignored — or at least not maximized. This is especially true if you’re a new client who hasn’t experienced our planning process.

Here’s what you should be looking at right now:

1.Your spouse and dependents.

Your tax return lists your spouse and dependents, their Social Security numbers, whether they live at home, and who else can claim them as a dependent. That’s great information to know for tax purposes, but it does nothing for long-term family planning.

This information is at the forefront of your tax return, so allow it to serve as a reminder to ask yourself the following questions that get at the heart of financial stability for your family:

  • First and foremost, are you well-insured for both life and disability? If something terrible happens, will there be sufficient resources available to care for your children and other dependents?
  • Does your spouse carry enough insurance? Even the stay-at-home parent should carry life insurance, as the surviving parent will have to pay for child care, transportation, and other expenses that will arise from the loss of the other parent. That extra money will also prevent the surviving parent from having to return to work immediately when they’re not emotionally ready.
  • Are all of your children healthy, or are there special needs that may require a more sophisticated estate plan?
  • What are your plans for your children’s education? Do you need to plan for private school tuitions — now or for college? If you want to pay for college, you’ll have to start saving the right amount now, and perhaps adjust your current cash flow to support that level of savings.
  • If you’re past the age of having young children at home, it’s time to reconsider estate plans and insurance needs. Life insurance often becomes unnecessary at this point, but long-term care insurance should be investigated. Assisted living and nursing care facilities are astronomically expensive, and it’s a cost you don’t want to pass on to your children.

People often ask us if it’s right to place their homes in their children’s names to protect the house when expensive professional care becomes necessary. That can be a huge mistake! We’ll cover why in another blog shortly, but basically, this strategy can create a huge income tax bill when the children finally do sell the home (the carry-over basis may be so low that it causes a huge income tax bill when the children finally do sell the home).

2.Lines and numbers

Moving on through the tax return, consider the following:

Schedule A

  • If you have a mortgage, what are the terms? Refinancing might be right if you’re your mortgage rate is higher than what you’re earning in your savings accounts. We emphasize the “might” here. Contact us for a true analysis of your situation.
  • What are your charitable contributions? Are you giving cash, or are you giving material like appreciated assets, charitable gift trust accounts, etc? Your answers may lead us to a discussion about establishing a private foundation or making a large pledge that you’ve been thinking about. With the rise in the standard deduction, nearly every taxpayer can benefit from a conversation on bunching deductions or gift trusts — especially in windfall years like deferred comp payouts or the sale of a business.


Schedule B

  • 1099s: In most cases, we find that investment or bank accounts are owned individually by each spouse or in joint name with rights of survivorship. For some clients, this is evidence that the estate plan is outdated, not comprehensive, or not being followed. Why? Because most people whose estates approach their local state exemption or the federal estate tax exemption should have trusts and be using these trusts during their lifetime. The use of trusts, while you are alive, can help with privacy, the speed of estate settlement, and avoid the complexities of probate, among other things. This becomes even more significant if there are complicated beneficiary arrangements or the possibility of a challenge from a disgruntled beneficiary.
  • Savings: How do you save, and what type of interest are you receiving? Have you made loans to family or friends and, if so, understand imputed interest or your obligation to claim the interest income on that loan?
  • Why have you chosen the investments that you have? Are you making tax-friendly and diversified investments?

Schedule C:

  • Liability. What type of insurance do you have for your sole proprietorship? Do you have coverage for a business in the home, driving a business vehicle, or business interruption insurance? Your existing homeowner’s insurance and vehicle insurance won’t cover your business equipment.
  • Succession. Just because the business is a sole proprietorship doesn’t mean that there aren’t stakeholders who would benefit from a well-thought-out succession plan. Whether it is your family, employees, clients, or suppliers, a smart succession plan should cover the business and its owner for temporary disability, permanent disability, or premature death.
  • Retirement contributions. Many clients aren’t aware that they can defer much of their income from Schedule C with a retirement plan.

There are a hundred or questions we could ask simply by investigating your tax return, questions that most CPAs ignore. We’re happy to get you started down the path of digging deeper and answering the questions that will secure your family’s and your business’ long-term financial security. Give us a call to get started.

 

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