Whether you file your own tax returns or hire a tax preparer, it is a great sense of relief when your returns are filed, and you can check that off your list.  But in financial planning, we say not so fast!   We like to think of our clients’ income tax return as a vital part of your financial planning portrait.

Your tax return can tell us a lot about you at a given point in time — whether you are a new client or have been with us for many years — and how that could impact your financial plan. Below, we apply some brush strokes worth appreciating from your tax return:

  • Income Sources: The U.S. Individual Income Tax Return can reflect a lot about your income sources in a condensed space. For example, are you an employee earning W-2 wages, a 1099 contractor, or do you have your own business? We can also see your most recent Social Security or pension benefits before any taxes and Medicare premiums are withdrawn. Schedule B of the Form 1040 itemizes sources of investment income.  Are you receiving interest on your cash holdings?  Can you consolidate accounts?

    Modera can use this information about your income sources to lay out or update your financial plan and further optimize it to best suit your current and anticipated sources of income.

  • Retirement Planning: Your income sources may also inform us better about appropriate retirement planning strategies for you. For example, if you are a sole proprietor or other type of business owner, you may be able to deduct and save more by contributing to an individual or “solo” 401(k) plan or defined benefit plan compared with other types of retirement accounts. As more and more people semi-retire, individuals may also become eligible for Roth IRA contributions (something they may not have been eligible for with full-time employment).  Alternatively, if you are already receiving annual distributions from your retirement accounts, your tax returns help provide us with a picture of your effective and marginal tax brackets.

    This is important information to determine efficient ways to withdraw from your different account types, IRA vs. taxable account, during your retirement years.

  • Deductions: The IRS does not treat all sources of income the same. Some income sources have different tax rates; others allow deductions against that income to reduce what is taxable (which is how we arrive at “adjusted gross income” or AGI).

    Tax law changes in 2018 impacted the types of deductions and the amounts that individuals can deduct against their income, but your deductions still tell us a lot about you for financial planning purposes. For example, how much mortgage interest are you paying, and is there an opportunity for you to refinance your mortgage? What about charitable giving? If you have large gains on investment securities, you may receive a deduction for contributing appreciated securities rather than cash. A donor-advised fund can be another great way to take current charitable tax deductions while benefitting charities you care about over the long term. Finally, federal tax law allows you to deduct medical costs if they total more than 7.5% of your adjusted gross income. However, this threshold can be much lower in some states (For example, in New Jersey, this threshold is 2%).

  • Marginal Tax Rate: A higher marginal income tax bracket may warrant adjusting investment product selection. For example, municipal bonds (munis for short) can provide tax-free income at the federal (and sometimes state) level. On an after-tax basis, munis may provide a higher rate of return versus alternative taxable income strategies.

    Your tax return also provides an instant snapshot of your marginal tax rate that can help us determine if there have been any changes year-to-year that warrant a new strategy, such as a Roth Conversion.  If you are in a lower marginal bracket, it might make sense to convert funds from your IRA to a Roth IRA and pay the taxes knowing that your tax bracket is likely to increase in the future.  A classic example of this is an individual who retires in their early 60s before they start receiving Social Security and before Required Minimum Distributions kick in.

  • Overpaying vs. Underpaying: In a perfect world, we would suggest that you neither want to significantly owe or receive money back from Uncle Sam at tax time. If you find yourself owing too much to the IRS, Modera can help you determine what changes in your tax situation are impacting you the most and how to optimize your payment of taxes during the calendar year (e.g., establishing estimated tax payments or increasing W-2 withholding) to minimize surprises at tax time. In contrast, while it might feel nice to receive a huge tax refund every April, you may find it even more useful to receive more of that money earlier during the prior calendar year.

  • Carry-Forward Losses: The stock market has rebounded since the market lows of March 2020. During the downturn in 2020, Modera implemented tax-loss harvesting strategies by selling certain investments at a loss.  These losses can help to offset future gains.  Schedule D on your Form 1040 illustrates any carry-forward losses we can use to offset gains in 2021 and beyond.

Our advisory team at Modera Wealth Management enjoys the art of creating a financial plan that best depicts your financial needs. Your income tax return can go a long way toward providing us with the appropriate paint and brushes to create your masterpiece. To learn more, please get in touch with our advisory team.


Modera Wealth Management, LLC (“Modera”) is an SEC-registered investment advisor with places of business in Massachusetts, New York, New Jersey, Pennsylvania, North Carolina, Georgia and Florida. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. SEC registration does not imply any level of skill or training. For information pertaining to our registration status, fees and services, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov) to obtain a copy of our disclosure statement set forth in Form ADV Part 2A. Please read the disclosure statement carefully before you invest or send money.

This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements, information and opinions expressed in this article are subject to change without notice.

Investing in the markets involves gains and losses and may not be suitable for all investors and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.