Most people hand their tax return to their CPA and hope for the best. Over the many years in this business, I can count the number of clients who have read their own tax return in any detail on one hand. Almost no one looks at it the way a financial planner does.
What many families don’t realize is that a tax return isn't just a summary of last year. Used well, it's one of the most useful planning documents you have. If you know what you’re looking for, it can be a:
- A window into how you're building wealth
- Where you might be losing ground without realizing it
- What decisions in the next few years need attention to avoid unnecessary taxes
Keep reading to see what we’re looking for. If this is an area you are looking for more clarity, we are happy to review your tax returns to help you get clarity around these questions.
The First Thing We're Looking At: Where Is the Money Coming From?
The first thing we do when we sit down with a new client's tax return is take stock of their income sources. Wages, investment income, retirement distributions, and business income each tell a different story and open different planning conversations.
From there, we look at capital gains and dividends. We’re looking both at how much and where they're coming from. If a client's taxable account is full of actively managed mutual funds, there's a good chance those funds are throwing off capital gain distributions every year (whether the client asked for them or not). That's a situation we want to flag and address.
We're also looking at whether someone is contributing to their 401(k) and whether they're maximizing it. The tax return alone doesn't tell the whole story there, but it gives us a starting point.
One thing worth saying clearly: when we look at a tax return, we're not making a judgment about last year. We're looking forward. The question isn't "what went wrong?" — it's "what does this tell us about where to go from here?"
The Multi-Year Perspective
We also commonly ask for multiple years of tax returns when building a relationship with a new client. For clients with consistent W2 income, one year's return usually tells us what we need to know. For business owners, 1099 contractors, or anyone whose income fluctuates significantly from year to year, a single return gives us only a partial picture.
When income is variable, we want to compare years to look at what changed, why, and what planning opportunities might exist to smooth things out. In higher-income years, there may be more room to accelerate retirement contributions or pursue strategies that reduce taxable income. In lower-income years, there might be an opportunity to do a Roth conversion at a more favorable rate.
Looking across multiple years is how we catch patterns a single snapshot can miss.
The Bucket Question Every Pre-Retiree Should Be Asking
One of the most important planning conversations a tax return can trigger is the bucket conversation. The idea is straightforward: going into retirement, you ideally want assets spread across three different tax buckets.
The first is pre-tax — your traditional 401(k) or IRA, funded with pre-tax dollars, growing tax-deferred, and taxable as ordinary income when you take it out.
The second is what we call tax-preferred — assets in a regular taxable account, funded with after-tax dollars, where growth is taxed at capital gains or dividend rates rather than ordinary income rates. This distinction matters more than most people realize.
The third is tax-free — Roth IRAs and Roth 401(k)s, funded with after-tax dollars but growing and distributing entirely tax-free.
The reason this matters: having access to all three buckets in retirement gives you flexibility. You can draw from different sources depending on your income needs in any given year, which can have a significant impact on your effective tax rate, Medicare premiums, and how long your money lasts.
A common theme among new clients is that the pre-tax bucket is overfilled for most people who've spent a career contributing to a traditional 401(k). That's not a mistake they made as much as it's exactly what their employer plan offered. It does create a future problem. Required minimum distributions kick in later in retirement and can push income (and tax liability) significantly higher than expected, sometimes in ways that can't be undone.
The tax return helps us see where someone stands today. The planning conversation is about where to direct the next dollar.
What This Means for You Right Now
Tax returns are arriving this time of year. If you're within ten years of retirement, or if you've recently had a change in income like a new job, a severance, or a business shift, this is a good moment to have someone look at your return through a planning lens, not just a compliance one.
If you'd like us to take a look, we're happy to sit down. No agenda other than making sure you understand what your return is actually telling you and whether there are decisions worth making before next year's return looks the same.
Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC. The LPL Financial representatives associated with this website may discuss and/or transact securities business only with residents of the following states: AK, AZ, CA, CO, CT, DE, DC, FL, GA, HI, IL, IN, KY, ME, MD, MA, MI, MT, NV, NJ, NM, NY, NC, OH, PA, RI, SC, TN, TX, VT, VA, & WA. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.