Planner’s Guide to the 1040 Form

By W. Andrew Unkefer
AnnuityNews

-- Plan (noun): “a program worked out beforehand for the accomplishment of an objective” --

One of the best ways to beat the competition in financial services is to work within a domain they know little or nothing about. Another way to beat the competition is to focus on financial product features they are not capable of providing. For many decades, planning strategies have been the domain of the traditional insurance agent. As stated above, a plan is something that is worked out beforehand for the accomplishment of an objective.

Financial planning, therefore, is a program worked out beforehand to accomplish an individual’s financial goals. One reason insurance producers have dominated this area is that we work with a set of financial products that are designed for a specific purpose to accomplish a specific objective at specific points in time. Advisors who do not work with such products suffer the fate of the financial prognosticator who uses assumptions, trends and crossed fingers to hopefully, with a little luck, approach the goal of the client.

This planning advantage, combined with clear tax advantages, allows an annuity and life insurance agent to identify opportunities and capture business that others simply miss. There are many methods for identifying challenges and solutions, but one of the easiest is to just follow the suitability directive we work under.

A key part of suitability (making a good recommendation) is to understand the client’s tax status. So, just ask to review your client’s tax return. Here is a brief list of line items you should consider…

Lines 1-5: Filing Status
Learn of your client’s marriage status or if they are responsible for others in their life. Their playing field may affect financial decisions they make.

Line 6c: Dependents
Clients with dependents lead to life insurance sales. If you see dependents, make a note to also include a complete review of existing coverage. Evaluate if you can improve their situation.

Line 7: Wages
Review the sources of W-2 income. Understand their employer and their line of work. This will lead to other assets like 401(k) money. If you see multiple W-2s, you may find they have changed jobs and some of their retirement resources may be eligible for transfer to an IRA. In addition, more employers are allowing “in service distributions” of some or all of the 104(k) assets.

Line 8a & 8b: Interest
Typically, interest-bearing assets are fairly easy to liquidate into cash. Is the client earning interest and not using this interest to pay for daily living expenses? If so, tax-deferral may be a great benefit. If they own bonds, check the maturity date. Many people are surprised to see that they own bonds that do not mature for 25 years or more. This means that if they need liquidity, they will be forced to sell at the market price. This value could be higher or lower than what they paid. They don’t decide how much that asset is worth – the market does.

Line 9: Dividends and Line 13: Capital Gains
The accompanying schedule B will provide you with good insight into the client’s investment portfolio. Consider: Does their market driven portfolio conflict with their risk tolerance?

Line 11: Alimony
A key part of planning includes any and all future income. Be sure you and the client know the nature of the alimony, when they began and when are they scheduled to stop.

Line 12: Business Income or Loss
Small business owners have a great need of insurance to protect their families and their employees. They will also find alternative savings methods simpler and more appealing than many options they have seen in the past. For example, max funding a universal life insurance policy allows for attractive cash-value buildup that can be borrowed income tax-free at a later date. The individual may prefer to convert existing IRAs into a Roth IRA so they can drive down their future taxable income.

Line 15a: IRA Distributions
If the client is under 70½, be sure you know why they are touching their IRA funds. This may indicate an income planning opportunity. If they are over 70½, ask if they would like to explore eliminating future required distributions. This may lead to a Roth IRA conversion. Historically, a high percentage of IRAs are invested in risk-based investments. Is it time to stabilize this important retirement asset? Line 16a: Pensions and Annuities
Systematic income and understanding the nature of their pension or annuity income is “must have” information prior to making any recommendations.

Line 17: Rental Real Estate, Royalties, Partnerships, S Corps and Trusts
These are often huge sources of assets or cash flow that may be ready for a change. Divesting of real estate creates cash. Excess cash flow may lead to funding life insurance or increasing contributions to retirement accounts.

Line 20a: Social Security Benefits
If your client is receiving benefits and other income, they could very well be paying taxes on their Social Security Benefits. Tax deferring any interest they don’t plan on using can help them keep more of this important retirement income.

Line 28: Self Employed
Think - life insurance - for business protection or succession planning. Think accumulation of assets and future income planning. Discuss key employees that are highly compensated. These folks are potential clients as well.

Line 32: IRA Deductions
If they are deducting, they are savers – let’s evaluate that IRA!

Line 40: Itemized Deductions (Schedule A)
This is where you may see the client’s disposition for charitable giving. Charitable planning strategies often lead to very fulfilling sales for you and the client. You will also see the evidence of any fee based planning advice incurred during that tax year.

The Paid Preparer Line
Knowing their tax preparer and working in cooperation together will improve your chances of success.

Now, make it happen! Leave the world of “maybe” behind. Use guaranteed products with clear purposes and advantages to accomplish financial objectives. Fixed annuities, indexed annuities, income riders and life insurance will set you apart.

W. Andrew Unkefer is the president and CEO of Unkefer & Associates, Inc., a national annuity and life insurance marketing firm. The company’s goal is to be the No.1 resource for independent agents in their life and annuity business. He may be reached at 800.523.5851 or [email protected].

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