Now that tax season is squarely behind us, it’s time to collect those tax returns and review them. At Carson Wealth Franklin Lakes, we use clients’ tax returns in our financial and tax planning processes throughout the year, distinctly using it for different points of analysis each quarter.
Overall, there are many advantages to collecting clients’ tax returns including calculating cash flow needs, calculating RMDs, planning for Roth conversions, informing estate planning, reviewing insurance policies and benefits, and looking at opportunities for tax-loss harvesting, capital gains management, and performing a distribution review.
But to harness these benefits, advisors must understand what to initially look at when reviewing a client’s tax return. Keep reading below for the 12 key points to review when evaluating a client’s tax return!
1. Marginal tax rate
The marginal tax rate is the tax rate paid on the next dollar of income, so it should give us an idea of which tax bracket the client is in and assist in tax planning by highlighting the impact of additional income on overall tax liability.
Pro tip: Review the marginal tax rate to see whether the client should take an IRA distribution in a “low income” year. This refers to the withdrawal of funds from an IRA, which can have varying tax implications and penalties depending on the type of IRA, the account holder’s age, and the timing of the withdrawal.
2. Average tax rate
The average tax rate, also called the effective rate, is arrived at by dividing the total tax paid by total income, providing a measure of the overall percentage of income that goes to taxes, which can be useful for understanding the client’s effective tax burden.
Pro tip: The average tax rate helps us understand the client’s overall tax picture as the marginal rate can be deceiving.
3. Carry forward losses
Carrying forward losses allows you to move your capital losses from the sale of stocks to future years, enabling you to offset future capital gains and potentially reduce your overall tax liabilities in those years. Take care: This can be a tricky area as you do not necessarily want to offset a short-term loss with a long-term gain. There is a lot at play here, which is where tax-planning software can be so helpful.
Pro tip: Review carry forward losses (along with unrealized losses) to offset against gains when rebalancing, which can provide a tax-efficient trading and rebalancing opportunity.
4. IRMAA surcharges
The Medicare Income-Related Monthly Adjustment Amount (IRMAA) is an additional surcharge based on income that is added to Medicare premiums for beneficiaries with higher income levels.
Pro tip: Look to decrease income (where possible), consider an appeal for clients that have recently retired and are no longer earning income, and otherwise plan around IRMAA surcharges.
5. Capital gains
Long-term capital gains are typically taxed at a more preferential rate than ordinary income. So, take income minus the standard deduction and add long-term capital gains and qualified dividends, in that order. Your ordinary income is taxed first, at its higher relative tax rates, and long-term capital gains and qualified dividends are taxed second, at their lower rates. Long-term capital gains can’t push your ordinary income into a higher tax bracket, but they may push your capital gains rate into a higher tax bracket.
Pro tip: Be mindful that since capital gains are taxed differently than ordinary income, they can present planning opportunities, which is helpful when selling securities. Look to see if your client is in the 0% capital gains tax bracket, which extends up to $96,700 of taxable income for joint filers and $48,350 for single filers in 2025.
6. Qualified dividends (of total dividends)
Qualified dividends are dividends that are taxed at long-term capital gains rates as opposed to ordinary income rates, which are generally higher.
Pro tip: Review if ordinary dividends are a high percentage of total dividends and, if so, consider changing investment vehicles. It could be due to the high interest income being paid in 2025 that comes through as ordinary dividends in mutual funds.
7. Roth conversion opportunities
Roth conversions can help clients achieve income tax-free and RMD-free income in retirement. Overall, having a Roth account will help to keep income down, which increases other AGI dependent deductions and decreases Medicare IRMAA surcharges, among other benefits. Additionally, since you pay taxes up-front, money can sit in the account and continue to grow tax free, which makes early conversions a good protection against higher tax rates in retirement.
When the market is down, it’s a great time to be talking about Roth conversions, and this means all year long and not just in the fourth quarter. If the value of a client’s portfolio is down right now, it’s cheaper to move their shares over, possibly creating an effective tax rate that is 4–5% lower based on a pullback of about 20%.
Pro tip: Consider going beyond just filling the current marginal tax bracket bucket.
8. Itemized vs. standard deduction
With the standard deduction increasing to $15,000 for single filers and $30,000 for joint filers, most taxpayers assume they don’t need to track their itemized deductions. However, it is important to compare the total value of potential itemized deductions (such as mortgage interest, state and local taxes, medical expenses, and charitable contributions) against the standard deduction amount. If total itemized deductions exceed the standard deduction, clients may be missing out on additional deductions, which can be especially impactful as their tax rate increases.
Pro tip: Consider planning strategies like “bunching,” where you move deductions into alternate years so as to exceed the standard deduction in those years. This can be especially effective for charitable contributions.
9. Net Investment Income (NII) tax
The additional Net Investment Income (NII) tax is for single individuals who have a MAGI above $200,000 and married taxpayers who have a MAGI above $250,000. The income over the limit is taxed at 3.8% and is often a surprise to higher-income clients.
Pro tip: Be mindful of the NII tax when performing Roth conversions.
10. Qualified Business Income (QBI) Deduction
The Tax Cut and Jobs Act (TCJA) of 2017 includes a 20% tax deduction for pass-through businesses such as sole proprietorships, partnerships, and S corporations (subject to requirements). This powerful deduction can be taken by taxpayers with pass-through income up to $394,600 for joint filers and $197,300 for single filers in 2025.
Pro tip: Consider this deduction for small business owners and make sure to coordinate with the tax preparer!
11. Phaseouts
There are 50 tax credits available, each designed to reduce your tax liability, but many of them are subject to income phaseouts, meaning the amount of the credit decreases as your income rises beyond certain thresholds.
Pro tip: Know if your client is in a phaseout range and take advantage of tax credits, when possible.
12. Review of credits and deductions
Be aware of your client’s income as well as all the tax deductions and credits they claim to ensure accurate tax planning and optimization of their tax benefits while staying compliant with tax regulations.
Pro tip: 90% of clients take the standard deduction, but you never know!
If you do not already collect your client’s tax returns every year, you should start now!
There is so much an advisor can learn from tax returns and implement into their broader financial and tax planning strategies. We always want to take advantage of every dollar in a client’s portfolio.
Reviewing tax returns will help you determine where unique opportunities lie to maximize your clients’ money.