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The Role of Taxes in Your Practice

By Linda Leitz

Financial planning is a multidisciplinary profession. While each of us may have an aspect of financial planning that resonates with us more than others, our duty is to be conversant in all areas. While some tax professionals broaden their approach to become financial planners, many financial planners feel that tax is an area they’d prefer to avoid. But tax is part of integrated financial planning, and each of us needs to incorporate it into our practice to some level.

There is a gap between the services that consumers want and what they receive, says Chris Field, chief growth officer of Holistiplan, a NAPFA Strategic Partner. He pointed out that the Spectrum Group finds that over 90% of those surveyed wanted tax planning advice, but only a quarter of them received it. Moreover, he said, Edelman Financial Engines’ 2022 Everyday Wealth in America report says that tax guidance is the fourth most desired service among Americans, but it’s the number one most desired service among those with higher assets.

Advisors should consider taxes in at least four different areas.

1. Tax Implications of Recommendations

As fiduciaries, even if we don’t provide tax planning or tax preparation, we need to know if a recommended strategy in investments, estate planning, or another aspect of planning will have tax implications, and we need to inform clients of the tax effect. A look at some of the cases of CFP Board’s Disciplinary and Ethics Commission will reveal that CFP® professionals have been sanctioned for actions on behalf of their clients that had negative consequences that were not disclosed to clients. In some cases, it seems that the financial planner did not know the tax ramifications before taking action.

2. Tax Return Reviews

Tax planning is one course in the education component for CFP® certification, and tax planning is included in the comprehensive plan required to complete the capstone course. Tax planning is also included in the comprehensive test for certification. 

Even if you don’t do in-depth tax planning for your clients as part of your service offering, providing a review of your clients’ tax returns is helpful. Ben Birken, CFP®, Holistiplan’s vice president of customer success and engagement, suggests that “… just reviewing a client’s tax return to make sure all the numbers make sense (based on the advisor’s intimate knowledge of the client’s financial picture and activities performed in the previous year) is a huge value-add.” He adds that advisors often are able to identify errors resulting from clients miscommunicating with their tax preparers, like not correctly identifying qualified charitable distributions or noting 529 plan contributions for those states where contributions result in state tax deductions. He also points out that taxes are one of the biggest expenses clients experience each year, but many consumers don’t understand their returns. Making tax mistakes can be even more expensive. Having their planner explain it to them can be an excellent value proposition.

3. Annual Planning

Most financial planners who have ongoing relationships with clients provide an annual review of investments. In many cases, no major changes are made to an investment portfolio. And having huge above-market returns—alpha—based on those changes usually isn’t something that happens based on the changes we make. But as Birken points out, tax strategies can have an annual alpha. Whether recommending a Roth strategy, employer retirement plan contributions, or charitable giving options, to name a few, we can have short-term and long-term positive tax outcomes while helping clients meet their life goals. 

Tax planning can be done in collaboration with the client’s tax preparer, or it can be done separately by planners. We can develop spreadsheets and other templates. Roger Pine, Holistiplan co-founder, says he and his co-founder “… both offered tax planning for our clients in different firms we each ran across the country from one another. And it was one of the highest-impact and value-added services we gave our clients every single year.”

4. Tax Preparation

A higher level of service would be to provide tax return preparation as part of the financial planning process. In-house tax return preparation allows the financial planning firm to incorporate its tax planning strategies into a tax return. Preparing tax returns is a way to have a deeper understanding of our clients’ finances, and this has many benefits. One example involves qualified charitable distributions (QCDs). Consumers are often confused because QCDs are not detailed on Form 1099-R, and they don’t always know they should give QCD information to their tax preparer. Clients also like having as many of their financial services as possible in one relationship.

Preparing tax returns is certainly a major commitment of both time and education (see “Incorporating tax preparation or tax planning into your practice: the good, the bad, the ugly” in the November 2022 NAPFA Advisor). The time commitment may mean that the firm doesn’t do much other than tax returns for a couple of months each year. As with tax planning, advisors have access to software that makes tax preparation efficient. There are many sources for information on annual tax code updates.

CPAs who become financial planners are perhaps best positioned in this area, but there are other options for getting a good education in taxes. One option is the Annual Filing Season Program (AFSP) certification, which requires continuing education and a test. Another is the enrolled agent (EA) credential, also referred to as being “enrolled to practice before the IRS.” The EA requires multiple tests about various aspects of tax preparation, as well continuing education (CE) each year, including an ethics course specific to the EA and a total of 72 hours of tax CE every three years. However, the IRS does not require a credential in order to be paid to prepare tax returns.

Tax Planning Helps Client Commitment

Consumers indicate that they want tax planning and a better understanding of their tax situation. They like the familiarity of having a consistent annual tax process. They are more likely to stick with a financial advisor who also can provide tax preparation, and they appreciate having multiple aspects of their finances addressed in one place. Whether you do annual tax return reviews, provide tax planning, or include tax return preparation and planning as part of your services, you’ll be providing services your clients want and need.

Linda Y. Leitz, Ph.D., CFP®, EA, is a NAPFA-Registered Financial Advisor in Colorado Springs, CO.

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