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Your Tax Return May Not Be Perfect


August 23, 2017

Written by Stacie Rhodes

How do you know your tax return is accurate? How do you know if you are taking advantage of tax saving opportunities? What if you could have saved more in your retirement account and paid less in taxes? What happens if there was a mistake on your return?

You don’t know what you don’t know

If any of these questions have plagued you during the stressful tax season, take comfort in knowing that you are not alone. Your tax return may not be perfect. Mistakes are inevitable – especially with taxes! According to the 2016 IRS Data Book, a reported 7.9 million correspondence cases related to amended tax returns were closed. Amended returns are filed when there is a change in a taxpayer’s filing status, income, deductions, or credits. However, rather than filing a second Form 1040, Form 1040X (Amended U.S. Individual Income Tax Return) can be filed up to three years from the original filing date while the first tax form will continue to be treated as the taxpayer’s original return.

But how would you catch an error if you personally completed the return to the best of your knowledge or trusted a CPA professional to do so?

Perhaps one of the scariest truths is captured in the following simplistic expression: “you don’t know what you don’t know.” If you are reading this blog, you are probably more financially literate than the average American. But recent studies indicate a decreasing rate of financial literacy in the United States with an increasing rate of complexity of the tax code.

You may not know what you need to know

In a 2015 survey conducted by FINRA, only 37% of the 27,564 American participants passed the five question financial literacy test despite nearly half (48%) of the respondents reporting they had no difficulty covering monthly expenses and 31% of participants indicating satisfaction with their personal finances. Even further, the unemployment rate is at the lowest point it has been in the past 10 years (4.3%), with economists forecasting interests rates to increase and wage acceleration around 3 percent by the end of 2017. In essence, the decreasing rate of financial literacy compounded with an increase in household income provided by employment opportunities supports the need for effective tax planning – despite its complexity.

Again, this is not to say that you are among the ones considered financially illiterate. Actually, we would assume the opposite. However, given the complexity of the tax code, even the more literate taxpayers could benefit from a trusted advisor looking over their completed return – for a myriad of reasons.

Your advisor should know more than you know

At HSC Wealth Advisors, we believe comprehensive wealth managers should not only develop long-term approaches to manage income for tax efficiency but should also partner with the client to closely review returns for tax effectiveness. Effective tax planning cannot simply be a forecast of what is expected, but must also be an analysis of what occurred. The emphasis is on the word effective. Without both a foresight and hindsight analysis, the effectiveness of tax planning efforts are impaired.

We consider the tax return a benchmark in providing honest feedback in the following three areas:

  • Evaluation of the effectiveness of suggested strategies implemented in the previous year
  • Facilitation of current year changes and/or tax savings opportunities
  • Consideration of potential errors on the tax return

Following the April 15 deadline, we asked all of our clients to submit a copy of their 2016 tax return. Upon receipt, each return underwent a detailed review using a proprietary comprehensive checklist. The process was deliberate, and the findings were enlightening. Below are a few highlights from each of the above categories.

In regards to the effectiveness of suggested strategies, we found that tax loss/gain harvesting efforts in 2016 provided significant tax benefits for several clients. Further, conversions from a traditional to a ROTH IRA were successfully completed by many individuals, with minimal to no tax liability on the conversion. Finally, tax penalties that would have been assessed for the underpayment of quarterly taxes were avoided by proactively projecting the current year tax liability and any needed immediate changes to federal and state tax withholding.

Further, this process revealed several potential tax saving opportunities in the current year that included the following: utilizing Health Savings Accounts, contributing additional funds to IRA accounts, maximizing premium tax credits, and implementing self-employment retirement plans. However, even if there are no current year opportunities, performing this type of analysis has allowed us to confirm our understanding of the client’s situation. It has generated more focused collaborative discussions on future tax scenarios given specific lifestyle dynamics.

Additionally, this process unearthed a few errors that were subsequently amended by clients, such as excluding traditional IRA contributions made by a spouse. Omitting a portion of the total contributed reduced the adjustment to ordinary income thereby increasing taxable income and the calculated tax liability. We also found accidental exclusions from itemized deductions, such as tax preparation fees, advisor fees paid by taxable retirement accounts, and premiums for long-term care insurance. These types of errors reduced our client’s tax refund!

In truth, this honest evaluation revealed internal process improvement opportunities to our estimation and projection strategy that we feel is invaluable to our growth as a firm. We hope to pass on vital information to our clients as our knowledge and understanding of tax savings opportunities continues to grow and/or change based on new tax laws.

You must partner with someone that does know

If you are still trying to decide between potential advisors, consider the following ten questions, one of which is the type of services the firm provides. Think through the type of advice you are seeking – that which is solely related to your investment portfolio or a holistic approach specific to your financial situation. It is important to carefully consider what the advisor or firm can offer in each area that directly affects your financial stability.

“Information is a source of learning. But unless it is organized, processed, and available to the right people in a format for decision making, it is a burden, not a benefit.” – William Pollard

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