Sharing Your Return

February 17, 2019

Income tax season is just around the corner.  Each year we encourage our clients to share their latest income tax return with us to ensure we are current on their tax situation.  Some of our families file in April, but many file an extension, which usually means the tax preparer finishes the return in late summer or early fall before the October 15th filing deadline.  Now is a good time to review the details of your 2018 return. Such a review is especially important given that 2018 was the first filing year after the major 2017 tax reforms.

Reviewing tax returns usually produces greater insight and can result in better investment management oversight.  The tax preparer and the filer typically never sit down to discuss what could be done differently to reduce taxes.  Since returns are so complicated the details and nuances are often lost in the return’s paper stack with the result that investment and planning decisions may be taken without any assessment of tax implications.  Here are just a couple of stories that made for better financial planning following the review of a return.

We had a family with a large net operating loss (NOL) carry-forward from a real estate business that went bust in the great recession.  Year after year the NOL sat unused.  After reviewing the return I asked the tax preparer what income character would allow an offset and was told qualified dividend earnings.  The previous financial advisor never bothered to ask what type of income could be used to offset against the NOL.  The family’s equity portfolio held only mutual funds and indexes which were generating “non-qualified” dividends.  By adding individual securities to the existing portfolio of mutual funds and indexes the appropriate type of income was generated for the offset.  A little insight and thinking saved the family some taxes by enabling the use of their NOL carry-forward.

Another recent tax law change resulted in the creation of Opportunity Zone Investments (OZI).  The legislation was so new in 2018 that the ink on the statutes was still drying when investors began rolling their gains into qualified OZI.  Not only was this legislation new and uncharted territory for both investors and their tax preparers, but the tax filing disclosure is not very clear.  If you have made an OZI it pays to audit your return.  The designation for rolling a particular capital gain is a line item buried in the Schedule D Capital Gains and Losses form.  For one family the tax preparer omitted the OZI deduction so the family reported $100,000 in long-term capital gains that were supposed to be deferred until 2027.  If the return hadn’t been reviewed, the family would have paid unnecessary taxes.  The remedy was a simple amendment and a large income tax refund.

Reviewing your tax return in detail can produce large dividends!

Gary B. Martin