Taking a holistic view of tax strategies
If clients could tally up their total lifetime expenses, they would find that the Internal Revenue Service is the biggest beneficiary.
“Given taxes are our No. 1 expense, every investment decision is a tax decision. Financial advisors who help mitigate tax expenses may be the most valuable for clients,” says Chad Smith, a wealth management strategist with HD Vest Financial Services, based in Irving, Texas.
A lack of planning and foresight often leads to gratuitous tax expenses, he says.
There are several things that clients should avoid such as paying too little and too late and incurring penalties, Smith says.
Disorganization of financial records also may have a cumulative cost, he says.
Based on his observations of clients, Smith says, “the people who pay the least amount over a long period of time are staying on top of their organization.”
When the IRS sends a notice of an alleged underpayment or taxpayer mistake, clients shouldn’t simply write a check.
The IRS’ software can kick out particular anomalies as errors, even when they might be explained.
Instead of paying, clients should have a tax advisor look at the alleged error, Smith says.
“They should have a professional write a letter and tell the agency where to look for the explanation on the return,” he says.
As a rule, advisors should ensure that clients don’t pay late, Smith says.
Too often, “people get intimidated by those letters,” he says.
Smith had a client who almost, before he stopped her, wrote a $7,000 check to the IRS that she didn’t owe.
When it comes to tax planning, “people have a tendency to shoot first and aim second,” says
Mark Hyma, president of Professional Financial Services of San Diego, which uses HD Vest as its broker-dealer.
He distinguishes between tax preparation and tax planning.
Tax preparation is forensic, determining what evidence needs to be sent to the government, while tax planning is figuring out in advance what steps to take to create the least tax drag, Hyma says.
At HD Vest, advisors have expertise themselves or access to tax experts for their clients.
But “all financial planners can invest in themselves and get training on tax issues and be aware,” Hyma says.
A lack of a tax preparation license shouldn’t serve as an advisor’s excuse for being ill-informed about IRS rules, which will always be an integral part of any effective long-term financial planning, he says.
Too many advisors use that excuse as “a crutch,” Hyma says.
Miriam Rozen is a staff writer for Texas Lawyer who writes about financial advisors.