Multi-Skilled Financial Advisor + CPA = Tax Savings
Published on by Andy Bertke in Wealth Management
You’re most likely familiar with strategic tax planning – a powerful financial management tool that both businesses and individuals rely on to optimize their tax position. But to be truly effective, strategic tax planning must also include a detailed look at financial planning and investment management – which requires ongoing close communication between the financial advisor and the tax professional. If that doesn’t happen, opportunities can be missed – and potential savings can be lost.
Understanding the divide
When tax professionals and financial advisors work in silos, their ability to help their clients can be notably limited. Say a CPA identifies a tax-saving strategy, such as finding opportunities to maximize retirement plan contributions or making use of tax-advantaged accounts.
If they’re not able to communicate the plans with the client’s financial advisor, they may not include these strategies in their plans with clients. Likewise, a financial advisor could recommend an investment strategy without being aware of the ultimate tax implications, saddling the client with unnecessary and unexpected tax burdens.
Intersectional opportunities
There are many examples where having a collaborative approach to tax and financial planning can come in handy:
Capital gains
Taxable income can come from capital gains, either from regular or one-time contributions to income. To make the most of these moments, capital gains events should be paired with strategies that can defer or minimize the associated tax burden. For example, sale of a property can be a good call from a financial planning standpoint, but the financial advisor may not think about the tax implications the way a CPA would.
Tax brackets
While growing a business is a good thing, certain situations can trigger particularly high effective tax rates that could be balanced with tax-advantaged investment options, such as Roth IRAs or municipal bonds. If the financial advisor isn’t aware of the client’s tax situation, they may not propose these options – again potentially leading to an increased tax burden.
CPAs can also help individuals understand when they are reaching certain thresholds that may trigger surcharges, such as excise taxes for Roth IRA contributions for taxpayers who surpass a specified income level.
Social Security
Because of the unique way Social Security is taxed, it can push someone into a higher marginal tax bracket, which can lead to their income being unnecessarily being taxed at a higher rate.
Charitable giving
Giving can be particularly advantageous for individuals in higher tax brackets, especially with the Pease Limitation lifted by the Tax Cuts and Jobs Act (TCJA). Maximizing tax deductions through charitable giving requires the know-how of tax professionals combined with the overall personal, business, and retirement planning goals a financial advisor can offer.
College financial aid and tax planning
Families with children heading to college also need to consider the tax implications of different education-based financial decisions, especially income limits and need-based financial aid. Balancing eligibility for aid with creating a sound future financial plan is key. For parents whose children aren’t yet college-age, 529 plans are often integrated into their financial strategies.
Retirement planning
CPAs can help choose suitable retirement accounts based on current and future tax brackets, and financial advisors can provide information on where their client is headed so CPAs can make better projects and plans. Tax experts can also help individuals make efficient tax withdrawals. Again, working closely together ultimately benefits the client.
Investing
A financial advisor may tell a client to diversify their assets, but a CPA can use tax planning ideas about how much a person wants to invest and show the tax implications of different investment types, helping them allocate investments across different accounts based on financial goals and tax characteristics. Meanwhile, financial advisors can make suggestions to offload investments yielding less-than-ideal returns in exchange for those that are performing well without necessarily considering the tax implications.
Paying taxes
Of course, one of the main considerations for individuals throughout the year when it comes to tax planning is ensuring taxes are paid in a timely manner, employing estimated payments, withholding, and annual returns. Financial planning can help taxpayers understand how much they are likely to make during a year, and tax planning can help ensure taxes are paid appropriately.
Narrow the gap – or close it
When two financial professionals such as a financial advisor and CPA have a close working relationship, taxpayers can reap the benefits of a collaborative approach to financial planning, investment management, and tax planning. But it’s not unusual for barriers to get in the way – client loads, different schedules, diverse communication styles, and so on. To get the most out of investment advisory and tax planning services, the ideal solution is to have both skills under one roof, and even in one person.
That’s where a Personal Financial Specialist (PFS) comes in. A PFS is a designation available only to Certified Public Accountants and requires additional training, years of experience, and certification. The benefit of working with a PFS is having an understanding of your overall financial situation, objectives, and timelines as well as the ability to develop optimal tax strategies that maximize resources and minimize tax burdens.
Contact Us
CPA/PFS professionals can help individuals optimize their strategic approach to finances while minimizing their tax burdens, whether they’re planning for retirement, growing their business, or preparing for other major life moments. If you have questions about how your financial strategies impact your tax burden or are interested in learning more about how CPA/PFSs work, Barnes Dennig can help. Contact us for a free consultation today.
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