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Best Practices for Preparing Clients for Tax Season

The process for preparing clients for tax season differs greatly depending on your services. An individual advisor with the right credentials may also offer tax services, and advisory firms can hire or partner with CPAs to better provide for client needs.

However, even a firm without tax filing services must consider how taxes affect a client’s long-term goals. Capital gains and losses, in particular, play a prominent part in portfolio tax optimization. Retired clients, too, must consider tax as a significant expense in their financial plan when it comes to retirement account withdrawals. A small business client or solopreneur may also require extensive tax prep outside of the regular April 15th deadline. 

In this article, we will cover some of the best practices for talking to clients about tax preparation.

First: Compliance considerations

Tax advice for registered investment advisors is complicated.

The IRS dictates that only CPAs, EAs, and JDs can give advice regarding tax strategies. In addition, tax advice often comes equipped with risk. Incorrect advice can lead to hefty financial and legal expenses. 

That said, it’s impossible to avoid tax discussions entirely. Decisions on retirement planning and investing, for example, all require tax planning. Unlike tax advice, tax planning is used in the financial planning process to minimize a portfolio’s tax exposure. 

Clarify your tax services

It’s not uncommon for a layperson to believe that a financial advisor encompasses every kind of financial service, from investments to retirement to taxes. However, unless you’re also a tax accountant, it’s better to stay away from filing taxes for your clients. While current clients may already be aware of your offerings, new clients may require a reminder. If you don’t provide tax preparation services, it can be helpful to have a tax professional who you can refer clients to. 

Explain relevant tax rules — before tax season

Taxes are a significant part of investment and financial planning. Selling a home, withdrawing from retirement accounts, qualified dividends, and asset interest will all affect a client’s taxes in different ways. 

This is why discussing tax implications on a client’s portfolio or savings account is essential. And it should be done before tax season — prior to exchanging the asset or at an annual review meeting. Being proactive in discussing taxes related to client accounts reduces confusion and will make it easier for clients to talk to their tax advisor.

Leverage tax optimization solutions

Whether or not you will file your client’s taxes, it is important to review tax mitigation strategies with clients. Intelligent tax optimization features, for example, run a client’s portfolio through multiple scenarios to keep within the client’s capital gains budget. This kind of feature makes it easier for wealth managers to ensure portfolios align with the client’s risk tolerance.

Similarly, you can use an automated tax loss harvesting process to identify potential tax-savings. 

Help clients understand IRS bracket updates

The IRS adjusts income brackets and tax deductions every year. While you cannot give tax advice, you may be able to tell clients how these changes affect their investment position. These changes can affect how much an individual can contribute to a Roth IRA or how much they will pay in capital gains. 

Ensure client information is updated

Clients move, send their children to college, have children (and a new dependent, as a result), lose their spouse, get a divorce, and experience similar life changes that can impact their investment choices. It can also affect their tax refunds.

You can take this time to ensure that client information is updated, especially for mailing custodian tax documents. Investors may receive variations of the 1099 form, including:

  • 1099-B for capital gains and losses
  • 1099-DIV for dividend income
  • 1099-INT for interest income
  • 1099-R for retirement distributions
  • 1099-OID for original issue discount from debt obligations
  • 1099-Q for distributions from education savings accounts (ESAs) and 529 accounts. 

Begin planning for next year

The current tax season is a good way to initiate plans to mitigate taxes for the current year. Reflecting on the current year’s liabilities can help you pinpoint weaknesses in the client’s portfolio, and determine how to optimize savings in the next year’s tax planning. 

Furthermore, you can identify upcoming changes in income, dependents, and employment status and explain to clients likely changes in tax liabilities. If you do not offer tax advice or file tax returns, it’s best to leave specifics to the client’s CPA. However, you can provide general estimates, or even alternative solutions to potential increased taxes. 

How to streamline tax optimization

RIAs benefit from keeping track of tax expenses throughout the year. Staying on the pulse of potential liabilities enables advisors to provide comprehensive and more accurate investment advice overall. 

To learn about successfully incorporating tax planning into your advisory firm, check out our free webinar on tax planning with Steven Jarvis, CEO and Head CPA for Retirement Tax Services, Chris Field, Chief Growth Officer for Holistiplan, and Max Rothley, Enterprise Services Sales Engineer for Nitrogen.

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