Why a Financial Advisor Should Review Your Tax Returns

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    Most people see taxes as something you work through with your accountant, not your financial advisor. After all, your accountant is the one who knows your tax needs, and your financial advisor is for help with investing, correct? In this case, showing your advisor your tax returns isn’t necessarily about that year’s taxes, but rather about starting a conversation. 

    Even individuals who believe they’ve shared all pertinent information with their financial advisor may not realize that there is more to discuss. An advisor sees a tax return as a snapshot of your money picture right now, and they can start a discussion that helps you make strong choices in the coming year, minimize tax burdens over time, and make the most of aspects of your financial pictures that you haven’t yet utilized. 

    Knowledge of Your Holistic Financial Picture Can Lead to Fruitful Tax Conversations 

    While your tax accountant is already looking for deductions for you, remember that your financial advisor is also keeping an eye out for ways to take advantage of any opportunities to reduce or eliminate income tax and capital gains tax on your investments. If they see how much you’ve been paying in taxes on your current investments, they may be prompted to suggest new strategies or moves you can make with 401k, IRA, and other investment accounts that will lower your overall tax burden.

    Your tax accountant is less likely to suggest that you change your investment plan, even if he or she knows that you have a higher-than-average tax burden, so working with both an advisor and an accountant can be helpful for your overall tax picture. 

    Allocating Your Money For Great Returns Requires Some Tax Optimization 

    In particular, if your portfolio is resulting in extremely high capital gains taxes, your financial advisor will want to see what options are available to invest in more tax-advantaged ways. For instance, some years your tax return might reflect carry-forward losses, which open up opportunities if you were hoping to rebalance your portfolio without incurring additional capital gains taxes. The ins and outs of the taxation of investments are connected to a variety of factors, including your taxable income, yearly limits on how much can be allocated to each account, and the returns made on 

    the investment. Let your financial advisor see how your current strategy is bearing out in the tax return, and you give him or her the resources to move you forward. 

    Advisors Can Help Maximize the Impact of Charitable Giving 

    If you are already a person who enjoys giving back to your community through charitable giving, you may be eligible to donate from particular accounts in ways that help your overall financial picture. Your tax return is a great way to demonstrate your current level of charitable giving to your financial advisor and start a conversation about making your charitable giving do the greatest good without being subject to high taxes. 

    Financial Advisor

    Advisors Can Help to Reallocate Your Underinvested Cash Reserves 

    One factor that many people don’t consider is that they report interest income on their tax returns, which is usually coming from underinvested cash reserves. Your financial advisor can start a conversation about why you’ve chosen to keep liquidity in cash and what near-term goals you have for that money.

    Once they understand your tolerance for risk on that money, they can help you find investment vehicles that take your risk tolerance into account while also keeping that money easily accessible for near-term use. In many cases, this conversation results in recognizing that cash reserves are not doing all they can be doing for you, and that even if you want to spend some of that money soon, you can wisely invest it to greater benefit. 

    Optimizing Benefits Strategies For Early and Middle Retirement 

    When you are nearing or entering retirement, you may receive a barrage of options and requirements: you can choose to take Social Security income at a variety of ages, and you have to take minimum distributions at a certain point from certain investment accounts. This information ends up on your tax return, where your financial advisor may see that you’ve, for instance, taken Social Security payments earlier than you really need to.

    Your financial advisor can work with you to make changes to your retirement plan choices in order to make sure you have the income flow you need to maintain your lifestyle while maximizing your future cash flow. For instance, those who do not need to take Social Security income early in their retirement receive some boosts in their future checks by waiting a few years to begin. Your financial advisor can talk about how to diversify your streams of income in retirement, as well, and discuss which ones are likely to be most fruitful for you. 

    Even a Thorough Advisor Might Not Know About Your Complete Money Picture Yet 

    Your advisor has likely asked you about your income, assets, and debt before, but the tax return may raise a question that he or she didn’t happen to ask in your consultations in the past. Perhaps they discover that your total income is higher due to a rental property you didn’t mention, changing their recommendations for the kinds of retirement accounts you might use. Your own financial situation is unique, and 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. 

    Ultimately, the tax return is a chance to see how the decisions you and your financial advisor are making together are bearing out in your income and tax payments. Sometimes, a decision that makes sense in your investment allocations in June won’t seem like the best course of action once June of the next year rolls around and the new tax return is complete, because your individual circumstances have changed.

    Part of the reason to keep in consistent contact with your financial advisor is that they can help you adjust to the changes in life and keep your financial future adjusted as well. Contact Bogart Wealth and talk to a financial advisor today

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