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Tuesday
Apr162013

Five Reasons to Share Your Tax Return with your Financial Planner

 You’ve dotted your “i’s” and crossed your “t’s” and your 2012 tax return is off to the IRS. Make sure that this information also gets into the hands of your financial planner. Wondering why? Here are five reasons:

1. Customizing Recommendations for You

Investment and financial planning decisions are interwoven with your tax situation. Without reviewing the specific details of your unique circumstances, generalizations and assumptions may lead to less than ideal strategies. As you share the way things fell out in the previous year, make sure to also advise on anticipated changes you foresee to your tax situation in the coming year.

2. Smart gifting strategies

Your tax return will show your gifting history (charitable and otherwise) to your financial planner. You’ll want to be sure that if you also have appreciated investments with built-up capital gains that you are considering whether to gift the appreciated stock rather than cash. If you gift stock to charities, you both get the advantage of a tax deduction as well as the opportunity to off-load securities that may carry a considerable unrealized tax burden – that’s a double-win, even if you buy back those securities with the cash you would have otherwise given. If you’re gifting to a person in an appreciably lower tax bracket, it may make sense to send along the capital gains to someone who will be subject to less of a burden.

3. Preparing for the Future

 Here are two examples where your tax situation may affect your investments:

  1. Medicare Surtax: If you’re going to be in a higher tax bracket, it’s likely that you’ve been discussing the impact of the 3.8% Medicare surtax with your CPA. This tax on investment income is being introduced in 2013. The account location of your income-producing investments becomes more important as the surtax is levied and your investment manager may be able to assist you in alleviating some of the burden.
  2. Municipal Income: Let’s say that your effective tax rate has been rising over the years due to new income sources or promotions. It might be time to evaluate the advantages of investing in municipal bonds, which can lower your tax burden on a state or federal level. Likewise, if you were once in a high bracket and correspondingly invested in municipal bonds, but now are in a lower bracket due to lower income or retirement, those tax-free bonds may no longer make sense.

4. Capital Gains Management

 There are several ways your financial planner or investment manager can work with you for capital gains:

  1. Low Brackets: If your income is low (less than $72,500 for a couple, or $36,250 if single), you are eligible to pay 0% on long-term capital gains and qualified dividends. Your planner may suggest that you accelerate gains up to the income thresholds to take advantage.
  2. High Brackets: If your income is going to be above $450,000 for a married couple or $400,000 for an individual, you’ll be subject to a 20% long-term capital gain and qualified dividend rate. If you’re close to that threshold, you and your planner may want to avoid hitting this.
  3. Loss Carry-Forward: Over the years, you may have realized capital losses that you can use against gains in future years. Knowing this information helps your investment manager analyze investment decisions as they will impact your taxes. It’s equally as important to know if you don’t have a loss carry-forward so that the tax ramifications can be considered when a change is suggested.

5. Collaboration in your best interest

In the best of worlds, your financial planner and tax professional are working together to help create ideal outcomes for you and your money. What better way to do this than by opening the lines of communication between them with an introduction so that they can plan for your best interest? In addition to sharing your tax return from the previous year, suggesting that your financial planner and CPA touch base can often be a great idea.

Now that you know the advantages of an open-book policy when it comes to your tax returns with your financial planner, put one more thing on your to-do list. Send a copy of your return to your planner’s office so that everyone is on the same page.

Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2011 and 2012, Melissa was honored by Financial Advisor magazine in the inaugural Research All Star List. In addition to her frequent contributions to Money Centered blogs, she writes frequent investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.


Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Municipal bond interest is not subject to federal income tax, but may be subject to AMT, state or local taxes.  Investments mentioned may not be available for all investors.  Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.  You should discuss any tax or legal matters with the appropriate professional.