How to Spot Tax Planning Opportunities from Last Year’s Tax Return

Fifth Third Bank


Eager to optimize and strengthen your tax planning strategy for this year, but not sure where to begin?

Try going back in time and starting with last year’s experience. Melissa Register, Senior Wealth Strategist at Mirador Family Wealth Advisors, a division of Fifth Third Bank, shares some strategies on how you can leverage the information on last year’s tax return to not only hone and leverage what served you well in the past, but also make the changes that can help maximize your potential future results… before year-end officially arrives.

Focus on the First Few Pages

Though your entire tax return may total more than 100 pages, the first few often provide the most useful, detailed guideposts to options for smart, informed future moves. “From there we can to drill into details—sources of income, how will it be taxed, etc.—to tease out what can be improved upon,” Register says. Using your adjusted gross income (AGI) on last year’s tax return, for example, you may be able to leverage certain tax benefits by shifting income from one category to another—think rental income versus wage income.

If you’re a high-income earner in the top tax brackets—currently defined as single filers who earn $400,000 or more a year, or $450,000+ for a married couple filing jointly—Register believes seeking out the perspective of seasoned professional advisors, including a CPA, could prove extremely valuable as you work to successfully navigate limited deduction opportunities and manage possible exposure to the alternative minimum tax.

Refine Your Retirement Contribution Strategy

The retirement contributions indicated on your previous year’s tax return are an important reminder to complete this year’s counterparts by the deadline for the upcoming tax year. Also keep in mind the tax implications your contribution amounts may trigger if you’ve established multiple retirement accounts.

“We see a lot of business owners who overfunded one account, but didn’t notify the other plan provider that they contributed to another,” says Register. Her advice? “Monitor contributions, but max out your plans. Some clients do it in a lump sum, but that’s something that can and should be monitored.”

Tax Loss Harvesting

If last year’s tax return indicates you paid a significant amount of capital gains tax and your investments performed similarly in the current tax year, that may signal opportunities to reduce your tax liability in the current tax year with a tax loss harvesting strategy. “Clients should do this throughout the year, not just in a rush at the end of the year,” says Register. While “asset allocation” refers to the types of investments a person holds, it’s also about making sure assets are held in the right types of accounts for optimal tax advantages.

Charitable Gifts

If you plan to give significantly more to charity this year than in previous tax years, that may present an opportunity to maximize the value of the charitable gift. Register tells of one client who pledged a generous $100,000 to a local animal charity, but hadn’t put much thought into how to execute the transaction. When the client shared his plans with his team of wealth advisors and his CPA, his advisors devised a “win-win” approach: if you gift your appreciated Facebook stock directly to the charity, you may receive a considerable charitable deduction on your next year’s tax return and the charity benefits more from the value of the appreciated stock gift compared to cash.

Smart, forward-thinking charitable tax planning can also help maximize the potential value of required minimum distributions (RMD) from retirement accounts. “At least for the 2017 tax year, past 70 ½, clients who have to start taking RMDs can use a charitable rollover to send up to $100,000 of their RMD directly to a public charity of their choice,” explains Register. “You cannot deduct it, but you do get to count it to RMD—and if you want, send it to the charity so they can maximize the benefit of it. Otherwise, you take the RMD, pay taxes—and then gift the charity.”

Mortgage Interest

The mortgage interest deduction is one of the few deductions that doesn’t phase out based on income—which is why Register advises all clients to weigh all the pros and cons before paying off a mortgage.

“We go through an analysis with clients who want to pay off a mortgage when heading into retirement and look it at through the lens of: Does this make you feel better? Is this a good financial decision?” she says. “If you have a low rate on your mortgage, could you make more money on the money you would otherwise use to invest? For most clients we suggest they do not pay it off. But for those who are in a financial position where using the money isn’t going to have a negative impact on their retirement cash flow, then it may not be a bad move.”

Consider Your Family’s Tax Situation

Your tax return isn’t the only place to seek out innovative tax planning opportunities— especially if you have assets you intend to gift to children or grandchildren: If, for example, you want to invest in something you expect has the potential for appreciation but don’t need the income, Register says, the asset could be attributed to an heir in a lower tax bracket to shift it off the client’s personal balance sheet.

Consider How Your Tax Return May Change Based on Future Laws

There are many ways to employ last year’s return as a roadmap for this year’s tax planning, but it can also serve as a guide to discuss steps that may be appropriate to consider now in the event that tax laws change in the near future—the way income is characterized, for example, or the urgency a client should feel about making a large planned charitable gift.

“There is the potential for tax reform,” says Register. “We don’t know exactly what will happen, but it’s important to be aware of it and ready so that your professionals can be proactive now and in the future.”