With mass affluent households facing greater tax burdens and complexities than ever before, tax mitigation strategies have become at least as important as any other element of a comprehensive financial plan.
But for both tax professionals and financial advisors, it can be challenging to begin the process of gathering, synthesizing and analyzing client data to deliver a truly holistic financial solution that incorporates tax and wealth management. This can be as much a risk as an opportunity for both tax and financial advisors: Offering a greater level of holistic guidance to a client, and then failing to fully deliver, could compromise the broader relationship.
The key is to commence this process with IRS Form 1040. Form 1040, which is typically filled out by tax professionals for their clients once a year during the height of the tax season, is used by the IRS to collect information about the taxpayer or taxpayers in each household. The information it contains is extensive, including dependents, income items, adjustments to income and much more.
Frequently overlooked as a wealth management planning tool, IRS Form 1040 is in fact the best potential vehicle for advisors seeking to deliver integrated tax and wealth management solutions. Among the reasons:
1. Form 1040 review provides one of the clearest views into a client’s entire financial picture.
It’s nearly impossible for any single professional discipline to have mastery over a client’s entire financial profile. And while it’s become the norm to have separate professionals handle tax and investment discussions, this approach is not serving clients effectively. There are 70 lines on IRS Form 1040, and each one tells a different story.
Line 13, for instance, shows capital gains or losses. This not only reveals whether a client has any non-qualified assets but potentially could provide a line of sight into their trading history and the overall tax efficiency of their portfolio.
For many investors, this line alone can be an indicator that they need help exploring tax mitigation strategies. But without specialized tax expertise, many financial advisors find it challenging to place their clients in vehicles that will potentially both lower their tax bill and address their investment objectives.
Similarly, for tax professionals, knowing the implications of line 13 is one thing -- but having the knowledge to execute the appropriate investment solutions is another.
This is just one example. Nearly every other line of form 1040 is a demonstration of how a more integrated, holistic approach to financial discussions would potentially reap huge dividends for advisors and their end clients.
2. A 1040 review can help advisors implement holistic solutions -- immediately.
An integrated review of the IRS Form 1040 can help create a plan for instant action. When a tax preparer advises a client to set up a retirement account or to switch to more tax-efficient investments, all too often their advice goes unheeded -- despite its importance -- due to a very normal human tendency to procrastinate.
I believe that clients are less likely to put off action when they work with advisors who are offering tax and investing services on an integrated basis. By showing, through one document, exactly how the different moving pieces of one’s tax and wealth management profile should be better coordinated, advisors can drive decisions in either sphere.
In fact, advisors may find that starting with Form 1040 almost compels clients to take immediate action -- with, for example, an advisor setting up a qualified retirement account or transitioning investments into more tax-friendly vehicles right away, which will save clients time and possibly considerable money off their next tax bill.
3. Such reviews essentially force clients to begin tax planning early.
The majority of mass affluent investors see their accountants only once a year, in the run up to Tax Day. Because of this, many investors inevitably miss out on a range of advantages to tax-efficient investment strategies that are customized to their tax circumstances -- but must be implemented well before April 15 in order to have full efficacy.
When an advisor delivering integrated tax and wealth management support to clients starts with a Form 1040 review well in advance of tax season, the client benefits by being able to put money to work, as early as possible, in the tax-advantaged vehicles and structures that mesh best with their individual circumstances.
It has never made more sense for professionals to integrate sound tax and investment advice into one wealth management solution. Providing holistic guidance provides the advisor with an enormous business advantage, and gives clients a much better shot at pursuing all of their financial goals.
As with all major new endeavors, the key is to begin things the right way. By working in concert, tax and wealth management professionals will find that starting with a review of IRS Form 1040 paves the way for considerable further success for their businesses and their clients.
Roger Ochs is president and chief executive officer of HD Vest Investment Services, an independent broker-dealer.