Planning ideas from Form 1040 (and beyond)

By Ilana Polyak

Form 1040, U.S. Individual Income Tax Return, is one of the most important documents that CPAs who do tax work will encounter. In addition to providing a view of the current tax situation, the form also provides insights into planning opportunities, and CPAs may want to make a Form 1040 review one of the first steps in a new client engagement.

“The 1040 always tells us a lot about the personality of a client,” said Alpa Patel, CPA, tax partner in the Atlanta office of Charlotte, N.C.-based DHG. “It gives a lot of insight into the individual and their preferences.”

For instance, in one case, Patel and her colleagues noted that a client had Schedule C income but was not contributing to a SEP IRA. After pointing this out, the CPAs helped the client set up the account and take advantage of the above-the-line deduction.

Speaking at the AICPA ENGAGE 2018 conference on Tuesday in Las Vegas, Patel and her colleague Tara Thomas, CPA, senior tax manager at DHG, highlighted some of the ways CPAs can use clients’ tax filings to uncover planning strategies, including:

Stacking charitable contributions

When reviewing a tax return, pay special attention to any itemized deductions, especially those for charitable donations. Given the changes made by P.L. 115-97, known as the Tax Cuts and Jobs Act, clients will likely need to rethink their giving strategies.

The new standard deduction of $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for all other individuals means that many clients will no longer itemize deductions, Patel said.

That presents challenges for charitably minded clients, who may not be able to realize the same benefit for their gifts as before. Depending on the client’s charitable goals, you might recommend a strategy known as stacking or bunching deductions, Patel said.

For example, instead of making five $10,000 donations in five consecutive years — which, when combined with other deductions, may not push the donor over the standard deduction threshold — clients can “stack” $50,000 worth of gifts into one year.

“It’s the tax-smart way of giving,” Patel said.

Making sure clients’ investments are tax-efficient

Another reason to scour the tax return is to figure out whether the client’s investments provide the best after-tax return. For example, if a client is projected to be in the 0% capital gains bracket, Patel and her clients look for opportunities to sell appreciated investments in order to maximize the bracket.

Additionally, some clients might benefit from municipal bonds. “You might get a lower return, but [once] you factor in the taxes, you’ll get a higher after-tax return,” Patel said.

Determining whether they have the right type of 401(k)

A tax return can also tell you whether a client has been investing in a traditional or a Roth 401(k). This is the first step in evaluating the optimal 401(k) strategy.

Retirement savers like the Roth version of the 401(k) because it allows them to invest after-tax money in exchange for tax-free growth and withdrawals. However, high earners need to weigh the desire for tax-free retirement income against their current tax liability. A traditional 401(k) would allow them to deduct substantial sums.

“Generally speaking, in retirement you’ll likely pay lower tax if you’re in the highest tax bracket today,” Patel said. “And while people want their money to grow tax-free, they’re paying a lot of tax now when they could really use the deduction.”

Patel also recommended that CPAs perform an analysis on the rate of return of their clients’ portfolios. Clients with a high risk tolerance (and therefore a potential for higher returns) might still fare better with a Roth, given that type of portfolio’s potential higher returns, despite the present tax hit.

Reducing taxable retirement income

A Form 1040 also outlines the sources of income that are available for clients in retirement. In the years leading up to retirement, clients should plan to minimize taxable retirement income.

First, anyone with a nondeductible individual retirement account needs to keep track of its basis to avoid having 100% of the distribution becoming fully taxable in error.

“A portion of the distribution from the nondeductible IRA would be tax-free because they have basis,” Patel noted. “This is often overlooked.”

Additionally, CPAs should anticipate how much of their clients’ Social Security will be taxable. Those who are at least age 70½ must start taking required minimum distributions from most retirement accounts, but that additional income could trigger higher taxes on Social Security, rendering up to 85% of it taxable, a situation often referred to as the “tax torpedo.”

Structuring withdrawals differently in the years leading up to age 70½ could minimize those taxes, Patel said. Taking more withdrawals from traditional retirement accounts early could lessen the amount of Social Security income that’s taxable.

Access resources such as the free Analysis of a Tax Return for Financial Planning Opportunities checklist in the Your CPA Practice and Planning toolkit.

Ilana Polyak is a Massachusetts-based freelance writer. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, a JofA editorial director, at

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