Why Your Financial Advisor Should Prepare Your Income Taxes

Written by Canty Financial - Published on October 21, 2021

Taxes, investments and financial planning are more intertwined than ever. Decisions about investments and financial planning increasingly include weighing the tax implications. Add in the multitude of potential changes in the tax legislation proposed by Congress and the need for an expert financial and tax advisor who understands your entire financial situation is more critical than ever. 

If these experts are the same person, or at least within the same firm, they have the benefit of understanding your total financial situation inside and out. While having your financial advisor prepare your taxes can offer a number of advantages, it's important to be certain that any advisor touting both types of services is truly qualified in both areas. 

Here are the benefits of having your financial advisor also prepare your taxes.

Your Financial Advisor Sees Your Entire Financial Picture 

Your financial advisor is involved in all aspects of your financial situation from general financial planning to retirement planning, investing and more specialized areas of planning such as business succession planning. They also likely have a good handle on your monthly budget, especially if you are near or in retirement. All of these areas have a number of tax implications. Your financial advisor will have first-hand knowledge of what is happening that they can use in preparing your taxes and providing tax planning advice. 

If your financial advisor is also your tax professional, they have access to all of your tax and financial information. This can help your advisor run a number of alternative scenarios to determine if a financial planning or investment move makes sense from a tax perspective as well, and if so the impact of doing more or less of a suggested financial planning or investment alternative.

Tax Planning is Important

Tax planning is one of the most significant components of financial planning. In order to provide the client with an in-depth financial plan, a financial advisor needs to know that client's tax situation. Some financial advisors do not even take a client's tax situation into account when providing investment advice, which we think is a major red flag.

Tax planning is not a one time event. Your tax situation constantly changes year by year and it is important that your advisor is aware of these changes in your life. As your tax situation changes throughout life it will cause your advisor to make adjustments to your financial plan

There are many components of financial planning that take taxes into account. Some examples of these are Roth conversions, capital gain realization, IRA withdrawals, tax loss harvesting and asset location. At Canty Financial we believe that Investment advising and tax planning go hand in hand. In order for an advisor to provide the best quality of service we think it is essential that they offer tax planning as well. 

Change is Coming 

As the legendary folk rocker Bob Dylan said, “For the times they are a-changin'.” Changes proposed by Congress touch on a number of areas including certain Roth conversion strategies, estate planning, what can be held in retirement accounts, capital gains taxes and tax rates in general. In our experience, the one sure thing about tax and financial planning rules is that they are always changing. 

Many, if not all of these proposed changes can impact clients of financial advisors. Having a coordinated team of tax professionals and financial advisors working together in the same firm can help streamline strategies to offer clients with the best guidance possible.

When a client has to deal with a separate financial advisor and tax advisor, often something gets lost in the translation so to speak. 

Asset Location 

One of the issues we often work with our investment clients on is asset location. This entails deciding which types of investments to hold in taxable accounts versus in tax-advantaged accounts like an IRA or their 401(k). 

A lot of this is about being tax-efficient. A financial advisor who also does your taxes has a leg up in our opinion in providing advice on issues like asset location. 

Retirement Withdrawal Strategies 

Some may think that your tax issues are over when you retire. In our experience nothing could be further from the truth. A case in point is crafting a retirement withdrawal strategy that maximizes your income and does so in the most tax-efficient way possible. 

A financial advisor who is also your tax advisor has a leg up in helping you craft a tax-efficient retirement withdrawal strategy. Key factors will be your income in retirement, your age, whether or not you are drawing Social Security and the types of investment accounts available to you. The latter includes traditional and Roth retirement accounts, as well as taxable accounts. 

Minimizing your tax liability when tapping your retirement nest egg is a key factor in helping to ensure that you don’t outlive your money in retirement. Planning around required minimum distributions, any pension income or income from employment can help determine which accounts to tap in which order.

This is not a one-time analysis, but rather something that we update annually with most clients based on their changing situation and any changes in the tax rules. Again, being both our client’s financial and tax advisor gives us a leg up in this critical aspect of retirement planning. 

Estate Planning

As our clients make plans to pass their wealth on to their heirs, we have found that estate planning is a very tax-intense area. Changes in the rules such as those for inherited IRAs under the SECURE Act are a prime example. 

The tax rules surrounding certain types of trusts as well as annuities and life insurance can be complex. Proposed changes by Congress would limit the ability of people to pass on their appreciated investments and even a small business in a tax-advantaged way with the elimination of the step-up in basis above certain asset and income limits. 

How We Help Our Clients

As both financial planners and tax advisors, we have in-depth knowledge of the tax and financial implications of different planning strategies. We help our clients devise the right strategies to maximize their wealth. 

These are just a few examples of why your financial advisor should be preparing your taxes. Of course you will want to ensure that any financial advisor who holds themselves out as a tax expert truly is one. 

We have been meeting the financial and tax advice needs of our clients for many years. We’d love to discuss how our services can help you integrate your financial advice and tax preparation needs under one expert umbrella. 

Bill Canty, CFP®, CPA

Maureen Walsh, EA

Ed Canty, CFP®

Joe Canty, Investment Advisor

Tina Alteri, CPA, Tax Advisor

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