What is a tax letter?

It's a recap of the previous year's activity that you can give directly to your accountant. It may include information that is not captured on a W-2, 1099, or other forms. The benefit of tax planning is only fully captured if the correct information makes it to your tax return.

As I was finishing my tax letters for 2025, a CPA remarked that everything would be easier if all advisors provided a tax letter for their clients. So, why don't all advisors write tax letters for their clients?

I imagine there are a few reasons. Creating tax letters can be technically difficult and time- consuming. Creating a tax letter requires a firm understanding of what is relevant to your tax return and the ability to speak the same language as the tax preparer.

Most importantly, the tax letter opens a line of communication between your tax preparer and your advisor so they can collaborate on your return. If your advisor and tax preparer are not talking, you will need to be the go-between. I recommend keeping a running document as the year goes on to keep track of activity your tax preparer will need to make sense of the documents you receive come tax time.

The documents you receive from your advisor at the beginning of the year don't always tell the entire story. This is especially true if you are doing backdoor Roth IRA contributions or making qualified charitable distributions. A 1099-R will report a qualified charitable distribution from an IRA as taxable even though it was donated to charity and is not taxable. A tax preparer won't know the difference which leaves you on the hook for the additional tax.

As we approach the tax deadline, now is a great time to start thinking about your tax letter for next year or make sure your advisor is handling it for you. Your tax preparer will be grateful and your wallet may be too.