Line 2b outlines taxable interest. If the interest is higher than what you reported on the client’s 1099 and if the amount is significant, it indicates assets not under your management. Although a 1040 won’t reveal the account size, you can estimate its value based on interest earned and from where it was paid – which the client and his or her accountant should know. Also, ask if the interest is from six-month liquidity funds for emergencies. This account might be over-funded with assets not invested for optimal returns. A simple equation can be used to forecast balances on the amount of liquid money bearing interest. In this environment of laddered CDs and money markets, let’s infer rates to be approximately 1% returns or less.
- Simply take the amount of interest and divide it by the inferred rate of return of 1%.
- If Line 2b Taxable Interest is $5,000 dollars, what is that 1% of?
- $5,000 divided by 1% return on assets (.01) = $500,000 potential account
- Similarly, if Line 2b Taxable interest is $2,500, take $2,500 divided by 1% (.01) = $250,000 potential account
This discussion can uncover excess cash not being used to its full potential and depending on your client’s goals (protection from marketing volatility, guaranteed rate of return, etc.), you can recommend alternative solutions that might afford tax benefits and greater returns.