Why do we do this?
Tax planning is a valuable element of our service offering that fits in with our comprehensive financial planning approach. Taxes, income, and investments are all interconnected. Our objective is to integrate these elements and develop recommendations specific to each client's individual circumstances. A current tax return serves as our starting point.

But tax returns are backward looking. Are they really that useful for future planning?
Absolutely! Even though it's not the only data that we use, a current return provides us with a good baseline of a client's income sources and deductions. We know that some tax items will stay roughly the same and others may change, so we start with the latest return and then layer on other tax planning information.

What are some examples of "other" tax planning information?
Throughout the year, (particularly in the first two quarters) we talk to clients to get an idea of changes that might impact their tax planning. Some examples include:

* Projection of current year income for full time and/or part time work
* A sizable bonus in cash or stock
* A plan to retire or move to a Continuing Care Retirement Community (CCRC) in the current year
* Election to claim Social Security Benefits
* Commencement of IRA required minimum distributions
* Plan to make a sizable charitable gift
* An increase in rental income or deductions from a rental property

You mentioned that you start preliminary tax planning in the first half of the year. How does your planning evolve in the second half of the year?
Our clients' income pictures tend to become a lot clearer then, both in terms of earned income and income generated by their investment accounts. With that information, we coordinate with our clients' CPAs to refine our initial projections and implement our recommendations.

What are some specific items you look for during your tax return review and planning process?
We look for items that might have deviated from a regular pattern, in addition to some key items that may have been omitted or captured incorrectly:
* If a client paid their management fee from a taxable account, was it shown as a deduction?
* Were all known charitable contributions captured on the return?
* Were all 401k rollovers correctly coded as being non-taxable?
* Did the client miss a chance to take an available tax credit?
* Is an amended return necessary because of errors or omissions?


Okay, so you've reviewed the client's return for missing or mischaracterized items. What other tax planning are you doing and what are the benefits to clients?
For clients who are still working - particularly high income earners - we will encourage them to reduce taxable income by deferring salary into traditional workplace retirement plans like 401k, 403b and 457 accounts. The marginal rate system (shown below) taxes higher "buckets" of income at higher rates. If clients will be in lower brackets during retirement, it makes sense to defer taxes on contributions now and pay the taxes upon distribution from those retirement accounts, when the tax rates will probably be lower.

We may also suggest that charitably inclined clients make larger gifts in higher income years, to reap a more valuable deduction (due to their higher marginal bracket). 

The reverse might be true for clients facing low income years. In those cases, we may look to strategically "fill up" the 10% and/or 15% tax bracket to take advantage of low rates. For example, if a client has retired and hasn't yet claimed Social Security benefits, we might consider taking an early IRA distribution or performing a Roth conversion and locking in a low tax rate on those dollars. Additionally, we may harvest realized gains for clients whose taxable income lands them in the 15% tax bracket, as capital gains are taxed at 0% at the federal level for those folks.

Summary
Regardless of each client's tax situation, there's probably one or more tax strategies available to reduce their tax bill. After reviewing hundreds of returns, we're well versed in the terminology and intricacies of tax returns. Our thorough tax return review process helps us better understand our client's overall financial picture and allows us to implement specific tax planning strategies that are consistent with their other financial planning goals.