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Individual Tax Returns: A Treasure Trove of Sales Ideas

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How many of you have studied federal income tax returns? How many of you make it a general practice to ask for copies of the last 2 or 3 years of tax returns from your prospects or clients? How many of you rarely or never ask for this information?

If you’re not asking for copies of tax returns to analyze, then one of your competitors probably is. But it won’t do you any good to review them if you don’t know what to look for. Today, we will share with you a treasure trove of sales ideas located inside individual tax returns, specifically Forms W-2 and 1040 with their accompanying schedules.

Form W-2

The first place to go in the examination of an individual tax return is the Form W-2 (wage and tax statement). Notice if there is a difference between line 1 (wages, tips, other compensation) and line 3 (Social Security wages). A difference between line 1 and line 3 indicates that a person could be a participant in a 401(k) plan, a 403(b) plan or a Section 125 plan, or both.

Box 12(c) indicates the taxable portion of group term life insurance in excess of $50,000. The premium attributable to the first $50,000 of group term insurance is, of course, tax-free. This information is important because it raises several questions:

(1) Is there a need for individual life insurance coverage?

(2) Is the taxpayer’s employer a prospect?

(3) Could you position yourself to review the company’s employee benefit plans?

Box 12(d) includes the following information:

(1) Line 12 (Code D) indicates if the individual is contributing to a 401(k) account.

(2) Line 12 (Code E) indicates if the individual is contributing to a 403(b) account.

3) Line 12 (Code G) indicates if elective deferrals are being made to a 457(b) deferred compensation plan.

4) Line 12 (Code S) indicates there is an employee salary reduction contribution under a Section 408(p) SIMPLE Plan.

5) Line 12 (Code Y) indicates elective deferrals under a Section 409(a) non qualified deferred compensation plan.

Lastly, examine Line 13 on Form W-2 to see if the retirement plan box is checked.

Some questions that arise after reviewing these items in Box 12(d) & Line 13 include:

? If clients have a qualified plan, whom do I contact at their place of employment to discuss it?

? What is the type of plan?

? Is the company satisfied with the administration of the plan?

? Are employees satisfied with the plan’s investment performance?

? Are the owners happy with the amount they can contribute to the plan?

No difference between lines 1 and 3 (Form W-2) could indicate there is not a Section 125 or pension plan. Therefore, the company may be a prospect for one or both of these plans.

Form 1040

Next, let’s examine page 1 of the Form 1040 (U.S Individual Income Tax Return). As we stated in the beginning, when you’re engaged in any type of financial planning, always get copies of the tax returns for the last 2 to 3 years. If your prospects or clients don’t give you copies of the tax returns, they will probably not give you all of the other relevant information you need to do a thorough financial plan.

Line 6C of Form 1040 is where dependent children of any age are listed. If a child is not living with a taxpayer due to divorce or separation, one thing that comes to mind is the possibility of a life insurance sale. Some states require that life insurance be provided to an ex-spouse in the event of a divorce. We’ll ask client prospects if that’s the case, and, if so, the amount and type of coverage required and when last time the policy was reviewed.

Also look for dependents not listed on Line 6C. Is an elderly parent being claimed as a dependent? If so, the children may be good prospects for long term care. The dependent on this line may also be a special needs child. If so, the parents may be prospects for a special needs trust and life insurance planning to care for the long-term needs of the child.

Line 8B regards tax-exempt interest, which is generated from municipal bonds. Though it is not taxable, tax-exempt interest is included with all other income to determine the portion of a person’s Social Security benefits that may be taxable. One question to ask the prospect: Is your tax-exempt income causing your Social Security benefits to be taxable?

Another thought: If the taxpayer does not need the tax-exempt interest for living expense purposes, consider repositioning some of these assets into a tax-deferred annuity. Repositioning these assets into annuities takes this income off the tax return.

Schedule B

Line 8A under Schedule B (Part I) concerns taxable interest income. If taxpayers are accumulating interest, they may be excellent prospects for a tax-deferred annuity. If they’re spending the interest, they may be prospects for a single premium immediate annuity.

Line 9A on Form 1040 pertains to ordinary dividends under Schedule B (Part II). If there are many dividends from stocks and mutual funds, the taxpayer could be a prospect for a variable or index annuity or tax-efficient mutual funds.

Part III on Schedule B deals with foreign accounts and trusts. If this section is completed, then the prospect likely works closely with a CPA or tax attorney who specializes in that area and who could be a new center of influence for you.

Line 12 on Form 1040 refers to business income or loss on Schedule C, which indicates the taxpayer has a profit or loss from a business operated as a sole proprietorship. If there is an entry on this line, you have an excellent prospect for estate and business planning, including key person insurance, individual disability income insurance, critical illness insurance and long-term care insurance and health insurance.

It’s also important to closely examine Part II, which is the expense section. It’s critical to obtain information regarding expenses because there may be discretionary income to help fund the products and services you offer.

Line 15A on Form 1040 deals with IRA distributions. If the taxpayer is not spending the required minimum distribution, help him or her find the right way to reinvest it–or give it away. A provision of the Pension Protection Act of 2006 allows IRA owners who are 70 1/2 or older to make a tax-free donation (up to $100,000) directly to a charity from their IRA instead of taking a taxable distribution.

Another provision of the act allows a non-spouse beneficiary of a qualified retirement plan, 457 or 403(b) plan to roll over a distribution into an inherited IRA. And in 2008, participants who leave an employer can roll over their retirement plan savings into a Roth IRA directly without first rolling it over into a traditional IRA. This, too, could be an excellent planning opportunity.

Schedule E

Line 17 on Form 1040 refers to Schedule E. Part I includes income and loss from rental real estate and royalties. Part II shows income or loss from partnerships and S Corporations. A taxpayer who is a partner or shareholder in one of these entities may be a prospect for multiple sales opportunities (e.g., key person insurance, DI, critical illness insurance, LTC, etc.).

Schedule F

Line 18 on Form 1040 deals with Schedule F. This line indicates a sole proprietor farmer, who is a prospect for all products and services applicable to a sole proprietor on Schedule C.

Line 20b on Form 1040 indicates the amount of Social Security included in income. An individual could reduce the amount of Social Security that is included in income by shifting unneeded taxable or tax-exempt income into deferred annuities.

The space on the return indicating “paid preparer’s use only” (page 2 – Form 1040) is where you find the name and phone number of the paid preparer. Consider contacting the preparer and introducing yourself as a part of the team of financial advisors. Could this person be a prospective center of influence? You bet!

Schedule A

If medical expenses are high on Schedule A (lines 1 through 4), they could indicate health issues that may impact insurability for life insurance, or else the need for LTC or DI insurance.

If lines 15 & 16 of Schedule A show substantial gifts to charity (both cash and non-cash), the client may be a prospect to gift life insurance to a charity. They may also be a prospect to gift an IRA or other highly appreciated asset to charity, replacing the asset with life insurance owned by an irrevocable life insurance trust.

Creating Trust

Reviewing the W-2 and 1040 with your prospects may be your first and only chance to create a relationship built on trust. If you don’t review their tax returns, you won’t know everything about them. But if you make the effort, you can uncover a treasure trove of sales opportunities for yourself, create the trust necessary for a long term relationship, and become an expert at uncovering problems and needs that will make you all the more valuable.


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