The Triple Threat Of Tax Returns, Tech And Financial Planning

Below is an article on how financial technology can help with tax planning written by eMoney CEO, Ed O’Brien. This article was originally published on Forbes.com.

For most of us, tax time means one thing – filing our returns accurately by that dreaded April deadline. However, tax season should also be viewed as an opportunity to review and update your financial plan. In fact, if we pay attention to our taxes year-round, perhaps we’ll find ourselves actually looking forward to tax season and the returns it may bring.

In my years of partnering with financial professionals and listening to clients, I have heard time and time again that a tax return is one of the most valuable financial planning tools available, both for advisors and their clients. I can personally vouch for this too. My advisor has provided great insight after reviewing my tax return. Recently, he reminded my wife and me to fund an open IRA that we forgot about and convert it to a ROTH. He also helped analyze our move last year from Boston to Philadelphia and the impact it would have on this year’s tax withholdings.

What your tax return might say about you

Whether you do your taxes yourself or use a CPA or tax professional, your return can offer a wealth of knowledge. If you’re planning to meet with your advisor or engage with a new one, consider bringing up the following topics:

  • Investment gains and losses. These may seem basic, but they could indicate that you are buying and selling frequently. Or it might indicate that you are holding mutual funds and ETFs in taxable accounts that are throwing off significant capital gains. This is an opportunity for your advisor to discuss asset location in terms of what’s held in a taxable account and what is held in a tax-deferred retirement account.
  • Tax Forms. The type of tax forms you file also provide great insight. Forms B, D and E can offer a wealth of information about investments, including diversification, passive income, loss carryovers and much more.
  • Your Job. Discussing where you work, especially if you’re self-employed or retired, can uncover meaningful financial opportunities. For example, if you are a sole proprietor, perhaps you might consider a different business structure such as an LLC or an S-Corp.
  • Your Income and Distributions. Do you receive significant income from variable sources such as stock options or bonuses? Or, if you’re retired, are you impacted by required minimum distributions? Perhaps using some of their required minimum distributions (RMD) for charitable contributions makes sense.

These are just samples of the valuable financial planning information that flows through a tax return. This isn’t to say that the “tax dog should wag the investment tail,” but any qualified financial advisor will tell you that managing your investments and financial affairs in a tax-efficient fashion just makes sense. As you approach retirement, it becomes even more important with the need to manage your retirement withdrawals. Tax-efficiency here is critical and can mean the difference between a comfortable retirement or a less desirable lifestyle than you had planned for your golden years.

Sharing your digital financial story

In today’s world, it’s likely that much of the source information used to prepare your return (whether you do it yourself or use a tax professional) is available electronically. You and your advisor should review your return and interpret the “financial story” it is telling you. Even better, invite your tax accountant in on the conversation.

Today’s sophisticated online financial planning tools utilized by many advisors allow the entry of your tax information and have modules that will review client information and suggest deductions. Some platforms even allow third party access, so your accountant can view other parts of your financial life first-hand.

Much of this information is available via the client data aggregation capabilities of these programs. This includes company retirement plans, bank accounts and investment accounts that might not be managed by your advisor. The better versions of these online planning systems allow the client and their advisor to collaborate and view the same data online. This data should capture more than financial info. Life events and other factors can have major financial and tax planning implications, which should facilitate discussions and decision-making throughout the year.

An analysis of your prior year’s returns offers a glimpse into what you have been doing. Combining this with an understanding of your lifestyle changes allows your advisor to model the impact of these changes for financial planning as well as for tax planning. It is always easier to make adjustments prior to an event than after the fact and even better to check in with your advisor throughout the year so tax time becomes less stressful.

Although it’s too late to use this approach for last year’s returns, consider reaching out to your advisor after you file or receive your return to get a head start on next year. You might also want to digitally connect your advisor with your tax accountant sooner rather than later. Your financial plan will thank you.

Ed O'Brien

Written By

CEO, eMoney Advisor