I spent an afternoon last week reviewing my uncle's finances. He is about to retire in a couple of years. I had gifted him some stock a few years ago which we finally sold last year, so I wanted to make sure everything was in order for his tax filing.
The cost basis of the gift stock was essentially zero, but I found that he didn't have to pay any capital gains tax at all because he had substantial loss carryforwards. Very awesome, that was really good use of gifted appreciated stock (saved several thousand in taxes). I'm too curious for my own good, so I wanted to trace the history of all those losses to make sure someone didn't screw up somewhere. I ended up reviewing all his tax returns back to year 2000. Ah yes, the year 2000 when everyone had huge losses, and probably lots of people forgot to offset their losses.
I found a $2000 error his tax accountant made in favor of the IRS. The warning lights came on when I saw that he paid AMT in year 2000. AMT at his income level? It turns out that there was an error made in the TMT calculation which flowed through all the way to the bottom line. I left instructions for his accountant to ammend my uncle's tax return (and heard today that the accountant was quite embarrassed about the mistake). We are beyond the 3 yr limit for ammendments, but there is some hope that the IRS will refund him the $2000 because the IRS agent didn't catch the error either!
Hopefully the knowledge I have about taxes pays off here. It really helps to understand the big picture and not get lost in the maze of numbers, which apparently happened to his accountant. His accountant should have known that my uncle's income level should not have triggered AMT.
I spent a couple of hours reviewing his investments. It appears that he gets little to no advice on his substantial account. Beyond the initial funding, he has added to his holdings only a couple of times in the past 5 years. There does not appear to be any major annual rebalancing. The holdings in the account are mutual funds that are available at any discount brokerage. The portfolio is approximately 60% fixed income, 40% stocks. The stock holdings are well diversified, including international, growth/value, and all cap sizes. The shocker is that in addition to the mutual fund fees, there is a 1% annual advisor fee, which for his portfolio amounts to $4000. A 1% fee for a mostly-fixed-income portfolio, ouch! So next month, we will transfer all his holdings over to a discount brokerage. No need to sell anything for a couple of years, the allocation looks decent. He will have a nice pension, so we don't need to get ultra-conservative.
Altogether, we saved several thousand on this year's taxes, possibly $2000 on a prior year's taxes (keeping fingers crossed that the ammendment is accepted), and another $4000 in annual advisor fees. Not bad for an afternoon's work!