Only two things are certain in life, according to Benjamin Franklin: death and taxes. Both, it turns out, can be improved by financial planning. And yet, these two topics can sometimes feel taboo. Financial advisors may not want to coordinate the legal aspects of an estate plan, and many strive to differentiate their services from those of a CPA. But that mindset may lead to missed opportunities, particularly in the wake of tax season.
While clients tend to focus on taxes between December and April, tax planning is more of a year-round sport. The IRS can affect everything from an RMD strategy to charitable giving, real estate transactions, and more. This year, consider using your clients’ most recent tax returns as a jumping-off point for a broader conversation about financial planning and tax strategy.
The first point to make with clients? Tax planning, or tax strategy, is different than simply filing your taxes for you. The former analyzes the moving pieces of your finances, looks at your goals, and helps you figure out the best way to try to minimize what you pay to the government. A CPA simply takes your actions and files them with the IRS; while CPAs can look for opportunities to reduce your tax liability, their options are limited since they’re working in retrospect.
However, the product of that CPA’s work—an annual tax return—can form the basis for tax planning and strategy. If you aren’t already asking clients for copies of their returns, this is a good year to start. There are several tech solutions to help advisors analyze client tax returns, including Holistiplan, Corvee, Bloomberg BNA, and others. But even if you don’t want to subscribe to tax-planning technology, consider doing a manual review of client returns to highlight your expertise.
Here are a few things to highlight:
Diversification and tax-advantaged accounts
Chances are you’re already helping your clients balance their retirement savings across traditional and Roth accounts. A tax return can help clients see your work more strategically. This can be a great time to highlight Roth conversions (and when they make the most sense) and ask clients about employer benefits that you may not have a line of sight into. For instance: Does your client’s employer offer Roth or after-tax 401(k) options? What about in-service distributions or withdrawals?
Capital gains and tax location
Tax diversification can be a great way to segue into a conversation on tax location. For instance: Does the client or prospect have municipal (muni) bonds in a tax-advantaged account? If so, they may be missing opportunities. You can also use returns to look at capital gains on taxable accounts, the potential for a loss carryover, and more complex strategies like tax-loss harvesting. As these types of tax strategies gain popularity in the mainstream (thanks in part to roboadvisors), explaining how they actually work, and the potential benefits and risks involved, may highlight the added value you bring to the table as an advisor.
Folks aren’t always aware that tax-advantaged accounts exist for purposes other than retirement planning. For instance, slightly less than 40% of parents know about 529 accounts. Clients may also have misconceptions about trust funds and donor-advised funds. In fact, many of the rules around charitable contributions can be confusing for folks outside of the financial services industry, particularly following the Tax Cut and Jobs Act. While many people know you may be able to make qualified charitable distributions (QCDs) to satisfy a required minimum distribution (RMD), they may not know that the tax paperwork required to document that transaction isn’t necessarily automatic. Advisors can highlight both the availability of these products and the benefit of working with an advisor to help navigate the details.
A tax return can also be a conversation starter around common tax surprises. For instance, the IRS guides employers to withhold taxes from bonuses at a different rate than regular wages, even though the payments are taxed at the same rate as normal income. This is a great time to explain to clients how you can help them sort through these issues as they come up throughout the year, and not just in the window between December and April. The same holds for restricted stock units (RSUs).
Not only does asking a client (or prospect) to share their tax returns allow you to highlight the services you offer and value you can bring to the table, but it also helps fortify the client/advisor relationship. Returns are a quick and easy way to share a significant amount of financial information.
Both clients and prospects can securely share their tax return with you via client or prospect portals. To see how else Advyzon may be able to help you support your clients with year-round tax planning, schedule a demo.