Tax Tip Tuesday: Five Tips Your Clients Need This Tax Season, Part 3

The American College of Financial Services
March 17, 2020

Once again, March has arrived, and for most people that means they’ve arrived squarely in the middle of tax season. With all tax materials due to the IRS by April 15, financial advisors are likely to field many more questions from their clients over the next few weeks about the finer points of taxation: how can I keep the most of my hard-earned money? What deductions might I qualify for? Are there better ways to organize and file my returns than I’m currently using? The list goes on and on.

In this series we’re calling “Tax Tip Tuesday,” we outline a series of insights that you as a financial advisor, or possibly even as a client or everyday taxpayer, can use to educate yourself on some of the finer points of taxation. While all financial experts may not agree on the subjects discussed, these tips are a collection of the biggest trending topics for tax season 2020 and are things you’ll likely want or need to consider when filing your return--or helping your clients perfect theirs.


#3: Be Smart About Deductions


As we touched on a bit last week, a majority of Americans opt to take the standard deduction on their tax returns because it’s simpler and less time-consuming than any alternative. In addition, new increases to the standard deduction make it far more likely to save taxpayers money by choosing it over their other options. However, for the savvy financial advisor, there may be some advantages in offering certain clients the chance to go another road.

Itemizing tax deductions can be complex and time-consuming, but with the right advisor client stand to save a bundle of money. For clients who are self-employed, own a home, or live in a high-tax area, itemization could be a boon for this tax season. So when is itemizing worth the work?

If a client had high medical or dental expenses in 2020, such as an emergency operation or other procedure, they could meet the 10 percent AGI threshold we discussed in our previous blog post for a tax deduction there.

If a client is a student with ongoing education payments, these can count as one of many qualified expenses. For 2019 tax returns filed in 2020, the standard deduction is set at just over $12,000 for single taxpayers and $24,400 for married couples filing jointly--if your client is over either of these amounts, itemizing could be a smart decision.

If your client owns a home and has a mortgage they’re paying interest on, makes frequent charitable donations, or engages in other select financial activity, they could benefit from well-known deductions in these areas available to those who itemize on their taxes.

However, this isn’t to say that itemizing works for everyone. With the growth of standard deductions under the TCJA, itemizing on taxes no longer seems to be worth the extra effort clients and financial planners need to put in. But there are alternatives, including a different tax strategy called “bunching” of deductions. When someone bunches deductions, they’re working to exceed the necessary thresholds by pushing deductible expenses into the current tax year: this could be done by paying some bills in advance or making charity donations earlier than in years past. Financial experts say doubling charitable contributions or paying big bills on property taxes, mortgages, or medical expenses this year when they’re not due until next year can give your clients the break they might need to be able to itemize and save every other year.


For more of Tax Tip Tuesday, read:


Part 1 here.

Part 2 here.