Consult your financial advisor during tax season

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Tax season is upon us!

Financial advisors can help you in many ways. One often overlooked way a financial advisor can help you is in tax planning and tax return preparation. There is significant overlap between financial advising and tax planning. It would be impossible to do one without considering the other, and most financial advisors can provide both services. Many financial advisors are Certified Public Accountants (CPA), Certified Financial Planners (CFP), attorneys, and/or Registered Financial Planners (RFP), and many hold additional certifications from the National Association of Certified Public Bookkeepers. “Many, but not all, financial advisors specialize in tax issues and provide comprehensive tax advice to their clients, including tax problem resolution, tax planning and return preparation, as well as preparing estate, gift and trust tax returns.[1]” Financial advisors work on both specific tax issues and broad tax preparation services, tailored to their clients’ unique financial situation, with the goal of maximizing their returns and cash flow. Financial advisors can even help clients resolve tax issues with the IRS. Further, if your financial advisor is not using your previous years’ tax returns to help build your investment portfolio, they will miss financial planning opportunities to optimize your tax situation and grow your wealth.

Your financial advisor is better suited to handle your income tax planning and preparation than a standalone income tax planner. Your financial advisor is intimately familiar with your financial situation, long-term goals, short-term goals, investments, estate planning needs, mortgages, business ventures, assets, liabilities, losses, and more. Someone just preparing your taxes is only concerned with minimizing your current, and possibly your future income tax burden, but your financial advisor knows your entire financial portfolio and how your tax returns fit into your financial plan. Tax planning is a year-round activity. Acting throughout the year to reduce your tax burden is essential. Your financial advisor’s knowledge can enable them to tailor tax planning and preparation to your specific financial needs and goals, and may place in their purview specific tax strategies not apparent to someone tasked only with preparing your income tax returns, or beginning their work far too late in the process for you to make adequate decisions, such as transferring income to a non-taxable status savings account, selling securities to establish short-term losses or long-term gains, or positioning yourself to maximize specific deductions and credits, to reduce your current year’s tax burden.

For example, “Your advisor might be investing in tax-free municipal bonds for your portfolio. But if you are in a lower tax bracket, that might not make much sense compared to a taxable investment with potentially higher after-tax returns.[2]

Financial advisors present themselves in a variety of ways. Some are intimate advisors to your important financial needs with qualifications and insurances, but some are informal and lack accountability. Do not trust your tax planning and preparation to an informal advisor who lacks direct accountability. CPA’s, attorneys, and financial advisors holding other esteemed professional certifications have proven a high degree of expertise and will be held responsible by industry associations, state laws, and federal laws for their advice and actions. Regardless of how much trust you have in your uncle’s or a CNBC commentator’s financial advice, they will not be held accountable if you run afoul of the Internal Revenue Service (IRS) and they likely do not possess the intricate knowledge required to navigate the complicated world of income tax preparation.

If you are looking for a reliable, accountable financial advisor, compare several candidates. The websites www.napfa.org and www.fpanet.org can help you find a financial advisor in your area. Inquire their educational background, qualifications, experience, fiduciary responsibility, and accountability for their work. You can research public databases for disciplinary actions against them, and don’t be afraid to ask for references. If you want someone to handle your tax planning as well as financial advising, let them know that and ask if it is something they do. If they don’t, ask them if they work closely with other professionals who perform those services. Report all income. If you suspect your financial advisor, income tax planner, or other financial planner of acting illegally on your behalf, let them know you do not approve of such actions and take your business elsewhere if they persist. Reasonable mistakes are one thing, but failure to report income can subject you and your advisor to steep penalties and criminal charges.

Good luck this tax season!