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4 Reasons Financial Advisors Should Do Tax Planning

7 minute read

Why don’t all financial advisors do tax planning?  We know that taxes are a huge part of finances, but perhaps few advisors realize how much tax savings they can secure for their clients. If they knew how much cash they were leaving on the table by letting clients overpay the IRS, they’d be shocked. One of the most important strategies to build generational wealth is a tax plan! 

Here are the four main reasons why every financial advisor should have tax planning at the top of their minds:

#1 Tax Planning Can Improve Investment Efficiency

There are many possible investment approaches you can take as a financial advisor, but advisors should consider tax consequences when building investment plans for clients. By that, we mean being on the lookout for  tax-loss harvesting opportunities, finding tax efficient ways to withdraw funds from investments and making sure each investment is in the right place.

For example, financial advisors should be helping clients to maximize savings within tax efficient vehicles like retirement plans or self directed IRAs. After qualified tax deferred strategies are maxed out, weighing tax-exempt bond investments, health savings accounts, Roth IRA contributions, or other tax efficient methods. . Whether it’s a brokerage account or retirement account, the idea is to find what best suits each particular client to minimize the tax impact on the portfolio.. 

When it comes to withdrawing or distributing funds, it’s good to strategically manage taxable income so as not to push a client into a higher tax bracket. It’s also good to potentially realize a loss in a portfolio to offset capital gains in the same tax year. In short, if you’re not tax planning with investments, you’re not properly managing investments!

#2 Tax Planning Can Save Clients Money

Building wealth is about growing savings as well as reducing expenses, and saving on taxes is one of the best ways to help a client reduce their cost of living. There are many possible tax credits to take advantage of, such as:

  • American opportunity tax credit: If a client paid qualified higher education expenses
  • Child tax credit: If a client has a family with qualifying children under age 17
  • Earned income tax credit: If a client is under a certain threshold of earned income
  • Foreign tax credit: Helps a client avoid double taxation if they paid taxes to a foreign country
  • Adoption expense credit: If a client paid necessary adoption fees

These are just a few examples, but there are many tax credits to possibly take advantage of. In addition, are you helping your clients to maximize their deductions? You could help them with charitable giving strategies, or advise them to maximize deductions such as by using an administrative home office.

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#3 Tax Planning Can Accelerate Financial Growth

The more money a client saves by paying less in taxes, the more they can reinvest and put toward their financial goals. Instead of paying the IRS, they can put those funds into an IRA, real estate, gold, education savings plans or any other type of investment asset class with the potential to grow their overall portfolio.

With every client having different financial needs and visions, it’s up to advisors to maximize each plan for optimal growth. For example, one client might have the ability to take advantage of the Augusta Rule. This is a simple tax planning strategy which is available to nearly all business owners. 

It allows a client of yours to host business events that are quarterly board meetings, at their home. They can exclude the income from the rental on their personal return, but take the rental deduction on their business return. 

Advisors can help accelerate financial growth by paying attention to details like this, because remember, every little bit of savings can be reinvested. 

Even if you only help them implement a couple of strategies that save them $10k,consider how much $10k invested can grow over longer time horizons. If your client has 30 or 40 years left to grow their nest egg, even just a little tax planning can go a long way to reaching financial goals.

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#4 Tax Planning Helps Small Business Owners Succeed

Did you know many financial advisors never introduce the idea to their business clients that they’re entity structure could be less than ideal? It’s crucial that you take time to organize your clients under the best business structure possible. The fact is, around 75% of small businesses are organized as a Schedule C, yet it often does not make sense that the business remains that way. 

Imagine if you helped a client with a Schedule C move to an S corporation, a partnership or a C corporation. How much taxes could you potentially save? You won’t know if you don’t investigate it. If you get one thing from this article, remember that having a more efficient entity structure can significantly impact your clients’ finances for the better.

Not Tax Planning? It’s Never Too Late to Get Started

Sadly, many financial advisors are still not tax planning in 2022. There are many reasons to do it, and no good reasons not to. Don’t miss out on a big financial lever you can pull for your clients this year. Make optimizing their tax position a priority. Software can help with automatic calculations and creating ready-to-send finalized PDF tax plans with a click of a button. Financial advisors can now easily advise their clients in regard to:

  • Legal entity structures
  • Maximizing deductions
  • Retirement planning
  • Insurance and asset protection
  • Tax Cuts and Jobs Act (TCJA)
  • Families First Coronavirus Response Act (FFCRA)
  • Coronavirus Aid, Relief, and Economic Security Act (CARES)
  • Industry specific strategies
  • Asset purchase and sale strategies
  • International asset and gift freeze
  • Tax-advantaged wealth management
  • Current law vs tax proposals

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This tax planning software is literally going to break the industry! I can’t even imagine what will happen when taxpayers eventually get wind of this because this will change taxes forever. I could literally see this changing tax policy, practice and the evolution of the entire industry! —Vanessa

I quoted a client that I could save him $30K in taxes. After putting the data into Corvee tax planning, I found I could save them $57K. I want to get all of my clients into this software ASAP. Thanks for making my life easier! —Michael

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