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By Holly SwanExecutive Director, Advisor Institute

As the tax filing deadline approaches, offer to review clients' Forms 1040 to gain a better understanding of all sources of income and discuss opportunities to help improve their tax efficiency.

Here are a few items to look for.

  • Filing status can be found at the very top of Form 1040. Changes to your clients' filing status can have a dramatic impact on their income taxes.

  • Earned income can be found on Form 1040, Line 1z. Compare this number to the amount of earned income they have reported over the past several years, and ask how this number might change going forward. It's important to understand your clients' earned income, as it will impact their tax rates as well as their ability to make IRA contributions.

  • Capital gains/losses can be found on Form 1040, Line 7 with additional detail available on Schedule D. Clients with large realized gains on assets held away from you may not be aware of their ability to harvest losses to offset their gains. Clients who actively harvest losses and cannot use them all in the same year may have carryover losses that are available to use in future tax years. Being aware of your clients' carryover losses can help to inform your gains recognition strategy for 2023.

  • Interest can be found on Form 1040, Lines 2a and 2b (see Schedule B for additional detail). Highly taxed clients with sizeable allocations to bonds should consider their tax-equivalent yields on any taxable bonds. Tax-equivalent yield is the yield an investor would need to earn on a taxable bond in order to match the return on a comparable tax-exempt municipal bond.

  • Dividend income can be found on Form 1040, Lines 3a and 3b (see Schedule B for additional detail). Review this information to see if there is an excess of ordinary dividends. Qualified dividends are favorably taxed at capital gains rates, while ordinary dividends are taxed at higher ordinary income rates.

  • Traditional IRA contributions for clients with earned income are reported on Schedule 1, Part II: Adjustments to Income. For 2023, the IRA contribution limitations are $6,500 for individuals under age 50 and $7,500 for those age 50 and older. If clients are not maxing out their IRAs, they should consider increasing their contributions. If they are contributing to a traditional IRA, they should also consider whether a Roth IRA might be more beneficial.

  • 401(k) plan contributions can be found on your clients' W-2 on Line 12. Reviewing the figures included on Line 12 will help you determine if clients' are maxing out their 401(k) contributions and what they receive from an employer match. If clients are not contributing enough to receive a full employer match, they are missing out on a portion of their compensation. Many employers now also offer Roth 401(k) plans, so it is worth discussing the potential benefits of making Roth 401(k) contributions in lieu of traditional 401(k) plan contributions.

  • Charitable contributions can be found on Schedule A, Lines 11-14 as well as Form 8283. In order to benefit from Schedule A deductions, clients' itemized deductions must be greater than the standard deduction ($25,900 for married couples filing jointly in 2022). Clients who are giving in cash may benefit from giving with appreciated securities instead. There are several charitable giving strategies that can help clients unlock tax advantages such as donating stock over cash, donor-advised funds or split-interest giving vehicles.

Bottom line: A review of clients' tax forms can help identify opportunities to help improve next year's tax outcomes.