Most people see taxes as something you work through with an accountant once a year. However, this way of thinking can cost you in the long run.
Saving money on taxes may require more than once-a-year planning. Lowering your tax bill may require a complete tax strategy—one that involves both your accountant and a financial advisor.
The big picture matters
When your accountant prepares your tax returns, they’re likely only looking at ways to minimize your tax burden that year. Your financial advisor, on the other hand, is looking at your finances this year and your financial goals for the future.
Plus, advisors are trained to look for specific tax advantages and opportunities connected to investments and long-term investment strategies.
Ask a financial advisor to review your most recent tax returns to look at the tax you’ve paid on your investments. Your advisor may be prompted to suggest new strategies or moves you can make with, or within, your 401(k), IRA, Roth, or taxable account(s).
Your tax accountant is limited in terms of the recommendations they can make to reduce the tax you pay on investments, even if they know you’re paying a higher than average rate. A good tax strategy requires a big picture approach.
Examples of tax strategy
Let’s consider a few common examples of when a tax strategy might help reduce your capital gains taxes.
If you have an investment that loses money, an advisor might suggest you sell the investment at a loss, since capital losses can offset capital gains. When done properly, you may be able to reinvest those funds to minimize the overall impact of the loss, while still reaping the tax benefit.
This is known as tax-loss harvesting, and the IRS imposes strict rules around how it’s carried out.
A financial advisor can not only help you harvest potential tax losses, they may suggest you carry those losses forward to create opportunities in the future. The IRS allows you to wait and use capital losses to offset capital gains in the future. (This provision comes with certain rules and limits.)
Since your financial advisor has a better sense of your big picture situation, including your income expectations in the coming years, they may recommend you wait and apply those losses in the future.
An accountant who is simply preparing your tax return, on the other hand, might simply include those losses in the current tax year. Keep in mind that these strategies all come with limitations, and they may impact your deductions as well your taxable income.
Working with both a financial advisor and an accountant can give you the best chance at minimizing your tax burden and taking full advantage of both tax code and investment strategy. It is also important to ensure that there is regular communication between your financial advisor and your accountant.
Finally, tax strategy doesn’t just include investing. For instance, a financial advisor may be able to suggest different ways of giving or help you set up new account types that minimize your tax burden.
For instance, if you routinely give to charity, your advisor might suggest donating appreciated assets instead of cash or using a donor-advised fund to maximize the impact of your gift while retaining the tax advantage.
Share your tax return with your advisor
Even if your advisor has done a thorough review of your income, assets, debt, and other financial obligations, tax returns can still highlight issues that may not have come up in past meetings.
Perhaps, you recently went in on a rental property with friends and forgot to mention it to your advisor, but the rental income appears on your tax return. This is an important development for your advisor to know about, as it may change their recommendations around your investment allocations, retirement accounts you use, or something else entirely.
A tax return is a quick, clear document to prompt the next stage in your advisor’s suggestions and recommendations for your financial future optimization. And they can be a great way to further the conversation with your Bogart Wealth Advisor, as we’re committed to ongoing communications with clients to ensure your financial plan evolves as you do.
If you have questions about tax or investment strategy, reach out to a Bogart Wealth Advisor today.
