Tax Season 2010

Review 1040 for Planning Follow-Up

By Martin M. Shenkman, Esq.

Whether you call it "mining" or "farming," a few choice notes on a tax file when you complete your top side review of the return can be great for post-tax season follow-up. This list of suggestions is a quick template to consider:

Face of Return – 1040 Page 1

• Young children claimed as dependents: Has the client set up 529 or other college savings?

• New children added from last year: Has the client updated will and insurance coverage?

• Kiddie tax: Now applies to a child under 18, or 19 to 23 if a student. Has planning addressed this? Should the child's assets be in tax-exempt investments?

• Address used on the return: Where is the client claiming residency for income tax purposes? Is domicile for estate tax purposes the same? Has planning been done to maximize these benefits?

• Alimony: Has the property settlement agreement been reviewed recently for compliance?

• Retirement plan/IRA: Roth conversion? If none, is the client not using tax-advantaged retirement vehicles

Schedule A

• Long-term care insurance: Is there a deduction for long-term care insurance in the medical expense deduction? If not and the client is age 40  +, should the client consider coverage?

• Medical deductions: If the client's medical deductions are significant, would a business medical reimbursement plan be advantageous?

• Multiple homes: If the client has property tax or mortgage deductions for multiple homes, is personal excess liability (umbrella) insurance sufficient, and are all homes covered?

• Large charitable contributions: Should a sophisticated plan, such as a charitable lead trust be used? Is the client harvesting appreciated assets to make donations?

• Interest expense: What rates are being paid, and is the interest expense tax-qualified? Can the client refinance to lower rates or use an equity line to secure a tax deduction?

• Miscellaneous itemized deductions: Have professional fees been allocated to business and personal to maximize deductions? Is a litigation under way that could be structured before settlement to obtain a better tax result?

Schedule B

• Tax-exempt bonds: Is the client so dependent on tax-exempt bonds in his or her home state that the geographic risk is too great? Does the client understand the interest rate risk of a heavy bond portfolio?

• Bond portfolio: Has the client's bond portfolio been updated to be consistent with the current state of residency?

Schedule C

• Business structure: Is the business organized as an LLC. If not, why not? Should it be restructured for asset protection?

• LLC formalities: If an LLC, have formalities of the entity (operating agreement, separate account, etc.) been maintained? When did the client last consult with his or her business attorney?

• Insurance coverage: Is insurance coverage appropriately handled in the entity name?

• Home office deduction: Is a home office deduction claimed (Form 8829)? If so, has insurance and recordkeeping appropriate for a home office been addressed? Does the locality require a license or permit to operate an office in the home? Has it been obtained?

• LLC vs. S Corp: Should a single-member disregarded LLC be restructured as an S corporation to minimize payroll tax on distributions above reasonable compensation?

Schedule D

• Capital losses: If there are capital losses, how has asset location been handled? Is the wealth manager placing equities in a tax-favored account, such as an IRA, instead of holding the gains personally to offset capital loss carryovers?

• Carryovers: Has the client advised his or her investment advisor about the carryovers and other tax attributes so that these can be considered in the investment plan?

• Asset collection: When did the client last review asset allocation?

Schedule E

• Trusts: If trusts own FLP or LLC interests, has the client/trustee considered the terms of the trust? If the client is a beneficiary, when did he or she last review the trust agreement?

• Old estates: If an estate is more than a year old, why is it still open? Is there a problem, or is someone merely stretching out the estate?

• S Corps, LLCs and other entities: Are formalities being adhered to? When was the last annual meeting? When were shareholders and other governing agreements updated? When were buyout arrangements last updated?

• Real estate rentals: If real estate rentals are reflected, why are they not owned in an LLC or other entity for liability protection? If property is in another state, have state tax filing requirements and ancillary probate been considered?