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Should advisors offer clients tax planning services?

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The new tax law has become a conundrum for financial advisors.

Two-thirds of financial advisors surveyed by Financial Planning said that they aren’t offering tax planning services, while one-fifth of those polled during a recent webinar aren’t sure it’s even worth the effort.

“Competition is really out there and being able to incorporate some tax planning is a real value add,” said Sheryl Rowling, principal of Rowling & Associates, discussing how advisors can help clients better understand the new tax law.

“You do want to be careful in two areas," Rowling cautioned. "Number one, if you’re not a CPA you want to be careful that you are not stepping outside of your area of expertise. Number two, you want to make sure that you’re working with CPAs because that’s also a source of clients.”

Advisors have a unique ability to look at a client in a broader context than a CPA, noted Bill Morgan, an advisor for Buckingham Strategic Wealth.

Indeed, advisors have a holistic advantage over accountants, according to Morgan, a CPA himself who headed a national accounting firm's tax department for 15 years.
"Accountants can get so caught up in compliance, getting tax returns prepared and meeting due dates that they aren’t as proactive as they should be," he maintained.

But advisors can and should work with CPAs, Morgan added.

“Reaching out to a CPA and participating in that discussion with the clients is a way to offer tax planning advice without being the expert,” he said. “I think what holds back a lot of people is that they don’t have the depth of expertise. But if they can bring the client to the table with a CPA I think the client will appreciate that and get a good result.”

Another webinar panelist, Susan Green, director of financial planning standards for Wescott Financial Advisory Group also stressed the importance of being proactive with clients when it comes to tax planning.

For example, in the wake of the Tax Cuts and Jobs Act, passed by Congress in December 2017, advisors should conduct an analysis for charitably inclined older clients, Green said. They can then determine whether it is more advantageous to gift appreciated securities or to make a Qualified Charitable Distribution from their IRAs.

"If you gift appreciated securities, you don’t pay tax on the capital gains," she said. "If you make a QCD, you lower your taxable income by that amount, up to $100,000."

The tax law's rules concerning deductibility of home mortgage interest should also be on advisors' tax planning radar, Green pointed out. For example, "if a client takes out a mortgage on his primary home to finance the construction of a vacation home, it will not be deductible," she said.

The qualified business income deduction has been another flash point of the tax law.

"Essentially, it’s a 20% income deduction that is applicable to businesses other than C corporations," Rowling explains. "For personal service businesses, the deduction is allowed in full when total taxable income is less than $315,000 for married couples or $157,500 for singles. Above that, the deduction phases out down to zero once income exceeds $415,000 for married couples and $207,500 for singles."

Non-service businesses can take the deduction with no income limitation, Rowling said. "However, it is limited to the greater of 50% of W2 wages or 25% of W2 wages plus 2.5% of qualified business assets," she clarified.

The tax law also impacted the Alternative Minimum Tax, "perhaps the most misunderstood and certainly one of the most disliked concepts of personal income taxation," according to Morgan.

"Changes made through tax reform will decrease the number of people impacted by AMT due to a larger exemption and increasing the amount of income over which the exemption phases out," he said.

What's more, state and local taxes are not deductible for AMT purposes, Morgan noted. "With the new limitation on SALT to $10,000, the difference between AMT and regular taxable income should decrease," he said.

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