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4 Tips to Navigate Surge of Client Tax Questions

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The new tax law probably guarantees that advisors will be inundated with questions from clients about its impact on their financial plans and investments, if they haven’t been already.

Here are some key points that advisors should keep in mind for those discussions with clients, courtesy of a recent seminar hosted by Joe Elsasser, president of Covisum, a fintech company that builds software solutions for advisors and financial institutions, and Dave Cechanowicz, senor financial planner with REDW Stanley, a CPA and business consulting firm:

This is not tax advice.

1. 5 magic words: “This is not tax advice.”

Even though most advisory firms use disclosures noting that their advisors do not provide tax advice, advisors need to make sure their clients get that message and understand what services the advisor provides as opposed to those from a CPA, tax attorney or enrolled agent, who can represent individuals before the IRS.

“Be front and center with that disclosure,” says Elsasser, noting it can shield advisors from liability. “Be upfront about you do and don’t do. Be tax aware, explain potential tax implications and explain what tax advice is.”

Cechanowicz recalled a Financial Industry Regulatory Authority arbitration case involving the daughter of an elderly woman with dementia who asked a registered rep what to do about a CD about to expire. The rep recommended the daughter cash in the CD and deposit the proceeds in the mother’s bank account. But the investment wasn’t a CD; it was IRA, which resulted in tax penalties when cashed in. The advisory firm was hit with a penalty for triple damages under Florida law concerning elder abuse. “You have to be extremely careful,” says Cechanowicz.

Bring in a CPA to complete the tax-advice puzzle.

2. Bring in a tax professional to deliver actual tax advice when necessary. 

Develop relationships with CPAs, tax attorneys or EAs now if you don’t have them already because everyone will be calling those tax specialists.

“CPAs will have a limited amount of time and they will be giving priority to business clients,” says Elsasser, noting that business clients are likely to pay more than individual clients. “This is real opportunity for advisors who have relationships with CPAs.” 

Referrals to CPAs can remove the liability from advisors, says Cechanowicz. “They engage with the client, not the advisor, so the liability is with the CPA.”

Tax alpha

3. Take advantage of tax-alpha opportunities.

Tax alpha is the value added to a client’s financial plan and portfolio using strategies that insure taxes don’t eat away more of a client’s wealth than necessary.

For example, pass-through businesses can deduct 20% from qualified business income as a result of the 2018 tax law. But before considering that new deduction, advisors should check if the business has a retirement plan, which could result in a much bigger deduction, says Cechanowicz.

Don't forget about the state and local tax deduction cap.

4. Consider these miscellaneous items that could affect your clients.

As a result of the new tax law, fewer taxpayers will itemize — 15%, down from 30% — and fewer will be subject to the alternative minimum tax — 200,000, instead of 5 million, according to Elsasser.

Long-term capital gains brackets don’t match up perfectly with the new 2018 tax brackets and haven’t changed since 2017. Remember that tax credits reduce taxes; tax deductions reduce income subject to tax.

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