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Financial Planning > Tax Planning

What CPAs Want Advisors to Know About Tax Mitigation

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What You Need to Know

  • Tax professionals say it is always important for wealth advisory professionals to collaborate with their clients’ CPAs.
  • However, periods of substantial market gains or losses raise the stakes when it comes to the effect of taxes on wealth generation.
  • Even if an advisor is not ready to fully integrate nuanced tax considerations into their planning process, there are some basic steps to take that can pay substantial dividends.

Ryan Losi is an executive vice president of the boutique certified public accounting firm PIASCIK, where he leads the firm’s business development efforts in addition to managing key client relationships.

Given his 30 years of experience and deep expertise in tax matters affecting high-net-worth individuals and international business interests, Losi serves as a technical resource for professionals across the firm. In addition, his understanding of the complex tax needs of professional athletes has enabled him to achieve a registered representative status with the NFL Players Association, and his practice includes a substantial number of professional athletes and entertainment professionals.

During a recent interview with ThinkAdvisor, Losi offered some key insights and tips for financial advisory professionals who are seeking to add “tax alpha” to their clients’ financial plans. According to Losi, it is always important for wealth advisory professionals to collaborate with their clients’ CPAs, to ensure investment strategies and portfolio decisions make sense from a tax mitigation perspective.

However, according to Losi, the current market environment raises the stakes when it comes to tax management issues. When clients suffer market losses, he explains, this comes along with an important silver lining — namely the opportunity to engage in tax loss harvesting and other potentially powerful tax liability mitigation techniques such as Roth conversions.

Losi says the time is right for advisory professionals to step up their game and find better ways to collaborate with CPA professionals. Especially when it comes to higher net worth clients, Losi says, it is hard to overestimate the effect tax issues can have on long-term investment outcomes.

A New Market Environment

In Losi’s experience, heading into 2022, many investors were coming off of three incredible years in the market, such that clients saw meaningful appreciation in almost all the asset classes they owned.

“As such, we saw a record amount of capital gains being realized, and we saw a lot of sales of assets, from cryptocurrencies to real estate,” Losi says. “We saw a lot of initial public offerings, as well, and the launch of SPACs. For us as the CPA, we had a tremendous amount of work to do for our clients.”

Losi says the firm saw a lot of interest in estate planning during this time period, and specifically interest in strategies that involved gifting and the setting up and funding various types of trusts. A good part of this demand, he explains, came from the new limits placed on “stretch IRAs.”

Safe to say, the environment has now shifted, and many clients are likely to experience greater capital losses in 2022 than gains, Losi says. The broad-based market selloff has left clients with nowhere to hide, and only those few sophisticated investors who might have short-sold certain assets will realize substantial gains this year.

“One implication of this for financial advisors is the fact that this might be a good time for a Roth conversion,” Losi says. “With the losses, it is likelier that a given high-net-worth client is going to end this year in a lower tax bracket than they might have anticipated at the start of the year. If the client has a big income dip this year, it’s a significant conversion opportunity.”

In fact, Losi says, investors now face a “double dip” conversion opportunity.

“It’s a double dip because, on the one hand, the client will likely draw less income this year, and on the other hand, the value of the assets in their traditional individual retirement accounts have likely declined, helping to offset the overall level of income,” Losi observes. “This dynamic makes conversions particularly attractive for some clients.”

Tax Loss Harvesting Is Easier Than Ever

According to Losi, wealth advisors should study up on the way the development of the exchange-traded fund market has affected the ability for clients to efficiently enact tax loss harvesting.

“With the rise of ETFs, tax loss harvesting has gotten a lot easier, because you can more effectively sell your holdings as needed and then pick a similar ETF that will give you similar exposure to what you sold,” Losi explains.

As an example, Losi points to the fact that a client can source a lot of attractive S&P 500 ETFs on the market today. In practice, this means a client can make a sale to harvest losses and then also secure a very similar exposure. Critically, the new ETF is not going to be considered to be the same security, and therefore, the client will avoid triggering any wash-sale rules.

Losi says this is one of the big reasons certain advisors and clients are leaning into ETFs over mutual funds, at least for some applications.

The Lowest-Hanging Fruit

In Losi’s view, even if an advisor is not ready to fully integrate nuanced tax considerations into their planning process, there are some basic steps to take that can pay substantial dividends.

“Probably my biggest recommendation is for advisors to know and appreciate their clients’ anticipated marginal tax rate for any given year,” Losi says. “From my perspective as the tax professional, I really appreciate when the fiduciary advisor working with my clients is purposefully reaching out each year and asking me what marginal tax rate they should assume for different types of income. That’s a great place to start.”

Losi says advisors should study up on the way taxes differ across business income, wage income and portfolio income.

“That type of information is going to be very important when you are doing planning and making long-term projections, both on the accumulation of wealth and on cash flow,” Losi says. “I wish more advisory professionals would be purposeful about monitoring this over time.”

Losi says he would also like to see financial planners begin to truly incorporate higher inflation expectations and the possibility of higher tax rates into their Monte Carlo simulations. In his experience, a lot of planning is still going on with the expectation that interest rates will average between 1.5% and 3% over the coming 30-year period.

“In light of what has happened so far this year, do we think that is still a reasonable outlook?” Losi asks. “I’m not so sure.”

Why It All Matters

Ultimately, Losi says, the importance of tax considerations in the planning process cannot be overstated, especially in periods when clients are facing significant tax burdens. This may not be the case in 2022, but it will be in years to come.

“Depending on what your client does for a living and how their business works, you may be surprised to see how much their income varies in a given year,” Losi points out. “Any time we are looking at a situation where a client is in a significant tax-paying position, then these considerations take on extra importance. If you have the ability to strategically pick and choose where cash flow is coming from, you can dramatically reduce your tax liability, not only for one year, but for multiple years over time.”


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