Tax Preparers and Financial Advisors

Why you need both these professionals and why they need to communicate with each other.

There are two professionals that everyone should have at their disposal; a financial advisor and a tax accountant. Both of these professionals save you more time and money then they will cost you. And you don’t have to be rich to see the benefit. However, just going out and finding the best financial advisor and tax accountant isn’t going to solve all your problems, they need to be communicating with each other because they both have critical information that the other needs to properly do their job. I can attest that everything done on the financial planning and investment side has a tax impact. Choosing which accounts to use, when to take gains and losses, what kind of investments to use, and when to take income during retirement all have tax consequences which can either cost or save you a lot of money. Having both these professionals watching your back, and more importantly communicating with each other allows you to get the most benefit possible.

Why It’s Important to Have these Two Professionals Talking

While a tax professional will be able to prepare your taxes without any input from your financial advisor they will be able to plan better and save you more on taxes if they know what the financial advisor is planning to do with your investments. Is your financial advisor planning on harvesting any losses or gains from the portfolio this year? By knowing ahead of time your tax accountant can better plan for the additional income and even help your financial advisor decide how much gain to take before hitting a higher tax bracket. Likewise, a financial advisor should always know your tax situation and have access to your tax return information. Yes, they will be able to put together a financial plan without it but they will certainly miss opportunities to save you money on taxes. Not only that, the law is constantly changing on both the tax side and the financial planning side. Both these professionals have different continuing education requirements which allows them to stay up-to-date on their respective fields. They need to share this information in order to make adjustments to the financial plan or your tax strategy.

There is a lot of Important Information on your Tax Return


Your tax return is basically your own personal income statement. Each and every year the IRS has you complete the necessary forms to tell them how much money you made, and what expenses you had. Not only that it provides information on your housing situation, any businesses you are involved in, your charitable giving situation, education spending, and many other areas of your financial life. This is exactly the type of information that is needed for a comprehensive financial plan. At the very least you need to make sure your tax professional and financial advisor are sharing the information on your tax returns (with your permission of course).  In fact, I would find it very difficult to prepare a complete financial plan without this information. By having this information your advisor will be able to determine which account to add money to like a Roth IRA, Traditional IRA, or Back-door IRA for example. They will be able to see if Muni bonds are a good fit for your bond exposure. They will be able to see if carry forward losses can be used to offset portfolio gains. Or decide if it’s the right time to do a Roth conversion. All of this is important and could change each year depending on what happens to your tax situation. If your financial advisor isn’t asking for your tax return information on a regular basis you need to consider how comprehensive their planning is and if it’s taking into account everything it should.

Manage Your Tax Brackets


One of the most important areas where taxes and planning overlap is through the management of your tax brackets. In the US we have a tax system with marginal tax rates. That means you pay a specific percentage on the money you earn to a certain point. At that point the percentage you pay goes up. For example, in 2015 if you are married filing jointly you pay 10% on the first $18,450 dollars you earn. If you earn one more dollar it’s taxed at 15%. The rate then goes up to 25%, 28% and so on. This is a marginal tax rate system. This type of tax system allows for a lot of opportunities to “manage” these tax brackets by either adding income or taking deductions to accelerate or reduce income in any given year. I will provide some examples of each why it’s so beneficial.

1.       Increasing Income – Let’s say you are in the middle of the 15% tax bracket. But next year you anticipate having more income which will push you into the 25% bracket. As long as you are in the 15% tax bracket you will pay 0% on your long-term capital gains. So, it would be very smart to harvest any long-term capital gains in your portfolio up to the 25% tax bracket. This ensures you are getting these gains without paying any taxes. If you wait until next year, when you are in the 25% tax bracket, you will have to pay 15% on those same capital gains.

2.       Reducing Income – Let’s say you will be in the 25% tax bracket this year. By doing a little planning you could decide to increase your 401(k) contributions or make a deductible Traditional IRA deposit. In doing so you can push your tax bracket back down to 15%. This maneuver would save you 10% on everything that would have been taxed in the 25% bracket as well as allowing you an opportunity to harvest some gains as in example one.

3.       Retirement – When you retire and quit working your income will most likely go down. This provides you with an excellent opportunity to use up your lower income tax brackets before social security starts paying out. This means getting your 401(k) and your traditional IRA assets out of those accounts at a much lower tax rate through withdrawals or conversions. Wouldn’t you rather pay 10 or 15% rather than 25%? It’s a no-brainer but you have to be actively managing your tax brackets to do so. Once social security kicks in it probably makes more sense to use your Roth IRA and taxable brokerage account assets to fund your retirement spending. By being smart about how and when you take money out of your accounts you can extend the life of your portfolio by years.

By having a thorough understanding of your tax situation you can actively manage your tax brackets potentially saving you money each year on your taxes. This can only be accomplished if your tax accountant and financial advisor are sharing information and talking to each other. In the above examples both your tax accountant and your financial advisor should be pointing out these opportunities. If they aren’t they aren’t likely communicating like they should and it could be costing you.

Why Not Just Have a Financial Advisor That is Tax Preparer


Most financial advisors refer their clients to tax accountants to get their taxes done. This makes sense if they don’t have the expertise to do it themselves. While this is fine, it’s not ideal. Having prepared thousands of tax returns myself, I know I can gain a deeper understanding of a person’s financial situation by going through the process. As well, I am able to better plan for retirement and other goals by having a deeper understanding of a client’s tax situation. This is why in addition to being a financial planner I went through the IRS testing process to become an RTRP, Registered Tax Return Preparer. My partner, Jim, is another financial advisor at our firm and is also a CPA with a background in tax. I am surprised more financial advisors don’t gain this expertise and offer tax preparation and tax planning. I know my clients find this an extremely valuable service, not only because it save them money but arguably more important it makes their lives easier, more organized, and efficient. It just makes sense.

I built my practice around the idea that comprehensive planning should guide how you invest. The planning and the investments are intertwined and should not be done independently. This comprehensive plan always includes tax planning. We also provide tax preparation services as an added benefit to our clients. Not only is it more efficient for both us and our clients, you now know there are many other benefits to having everything integrated. If you are looking for this kind of service, let’s chat. Reach out send me an email, give me a call, or schedule a meeting.

If you’re looking for more information on how to find the right financial advisor for you check out some of my other posts.

Shopping for a Financial Advisor – A guide on what to look for when searching for your new financial advisor.

How your Financial Advisor Gets Paid is Important – One of the most important things to figure out is how your current or future advisor is paid for their services. This is a must read if you have ever been confused after talking to a financial advisor about their fees.

Financial Advisor Checklist – A great starting point with 17 questions you should ask any financial advisor. Print it off and bring it to your next meeting.