Alpha Architect’s Jess Bost noted in a conversation with VettaFi: “Tax season is a great opportunity for advisors to both deliver value and also to die by a thousand client questions.”
As the busiest week of the year kicks off for many, financial advisors need to be prepared to answer questions from clients and implement smart strategies. Bost observed, “In all seasons, and especially tax season, it’s helpful for advisors to remind themselves of their primary role with clients, to filter all the potential service requests through the lens of what constitutes tax planning (typically compliance-approved) vs. tax advice (not approved unless the advisor also holds their CPA), and to delegate everything outside that scope to other professionals and client service partners.”
Wealth Strategist and Your Dedicated Fiduciary® founder Vance Barse, CPWA®, AIF® concurred, saying: “Having spent thousands of hours consulting financial advisors nationwide before becoming one, it was my observation that much of the industry, unfortunately, does not fill the gap between the tax world and the investment world.”
How to Approach Tax Season
Barse said that prudent financial planning starts and ends with the tax bill in mind. “Many of the CPAs out there are reactive tax filers, not strategic tax planners, and it really takes some expertise to understand which of the two you have in the tax world,” he said.
Advisors who aren’t thinking about taxes year-round are missing a potentially critical component of stewarding their clients’ wealth. “Anyone who has ever been to a medical specialist knows that the medical specialist, in almost all cases, asks for one thing. That one thing is the general health history of the patient,” Barse said. “In an analogous way, I need to understand the general history of the tax return, because there’s so much vital information that’s available on a tax return that can help bring maximum planning value to the client.”
As an example, Barse noted that a client who is consistently making a $10,000 yearly donation to a Boys and Girls club or church and has the charitable intent to continue to do so for the next 10 years could set aside $100,000 for a Donor Advised Fund. “With that in mind, we can use the most highly appreciated tax lots from those expensive tax-inefficient mutual fund holdings, that not only are significantly more expensive than their ETF peers or equivalents, but they also are forcing some of the capital gains tax drag on the Schedule D. We can use that $100,000 to make a Donor Advised Fund contribution to one, give them a tax deduction to pre fund their charitable intent, which, in a Donor Advised Fund, can be invested for long-term appreciation.”
Every Season Is Tax Season
One of the big issues with all of the noise around tax season is that it obscures the reality that taxes are a year-round issue. Investors should be thinking about tax mitigation all year and making strategic decisions around it, not just in March and April. According to Barse, “Ultimately, the problem with thinking about tax season around tax filing deadline is that the real tax season for the current year is an all-year process.” October 1 through December 31 are the times when most advisors need to be making the proper tactical moves to ensure the best outcomes for their clients. “By the time we’re in tax filing season, for the previous year, many of the tax alleviation and tax reduction strategies for which a financial planning client is eligible are often off the table,” Barse said.
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