‘Tax advice’ is left to federally authorized tax practitioners who prepare tax returns and defend clients pursuing relief from federal agencies for their own tax payments or to dispute tax payment errors. Financial advisors don’t provide tax advice, but provide information on the tax consequences of specific investments they sell or recommend to clients. This type of advice is within the scope of financial planning. Some financial advisors are CPAs (Certified Public Accountants) or have the CFP (Certified Financial Planner) designation and can prepare tax returns for their clients.
Financial advisors without these certifications can provide advice on a number of financial situations and the tax consequences to the client. Financial advisors provide advice on pension and retirement savings contributions and distributions, purchasing life insurance or annuities and other investments and relevant tax information for each. Additionally, financial advisors can provide advice on work-related income and pre-tax and tax-deferred savings options and the effects on personal income now and at the time of distribution. Advisors are able to provide tax information on the financial products they sell to their clients when it is within the scope of their professional licensing and the client’s financial planning.
It is common for financial advisors to request copies of a client’s tax returns even if they don’t prepare the tax return. What do advisors look for in their client’s tax information?
Income and Capital Gains Taxes- Advisors look for income in your portfolio, whether it is from qualified dividends, ordinary dividends or tax-free income. Your tax bracket helps determine what types of investments are best suited for your portfolio, both for growth and from a tax savings perspective. You may have carry-forward losses from a bad year which will offset growth from another investment. A lot can be determined by reviewing your tax return.
Missed Deductions and Opportunities- It’s common for clients to miss out on deductions they could be taking or maybe their accountant wasn’t aware they could take. These could be as common as payroll deduction for W-2s being filled out incorrectly, missed deductions for college savings plans, long-term care premiums (if they exceed 7.5% of your adjusted gross income) and health insurance if you’re self-employed.
When people retire, they are in a lower tax-bracket their first and possibly second year of tax filing. There may be an opportunity to convert taxable investments to tax-free investments with lower tax consequence than if they liquidate and may higher taxes later. It may benefit clients to invest in a donor-advised fund to harvest the deduction on a tax-return, but only if the opportunity isn’t missed.
Working with tax practitioners pertaining to your investments and how they affect your tax situation is highly recommended. If you have any questions on what tax-planning advice financial advisors can provide in regards to investing, please feel free to contact our office anytime.
