How wealth managers are preparing for tax filing season

March 11, 2024 12:00 PM

Filers may dread — and procrastinate — Tax Day, but financial advisors and tax professionals pride themselves on staying ahead of the season. Still, there are plenty of fresh considerations guiding their approach to this year's filing, from pending tax legislation, a commitment to helping clients embrace extensions when necessary and a convergence of two previously separate industries.

"Most efficient CPA firms will have their ducks in a row long before April 15," Jack Oujo, the founder of Oujo Wealth Strategies and a certified public accountant and certified financial planner, recently said in an interview. "I would never allow a client to push me around and give me a pile of information on April 14 and have it done the next day. That's just not happening."

For clients who do need more time to file, there's often a "misconception that requesting an extension increases the audit risk," according to Liting Chuang, a CPA and CFP who's the director of tax planning for Menlo Park, California-based Bordeaux Wealth Advisors. She counts herself as "a big proponent of everyone filing an extension" when there's a rationale, she said in a recent interview with Financial Planning.

Oujo and Chuang are among a growing band of professionals who straddle both disciplines of wealth management and tax-related services, as these two fields inch closer together.

Certified financial planner and enrolled agent Amy Irvine is another. She launched her registered investment advisory firm eight years ago and "included taxes right from the get-go," she said.

Irvine and other dual professionals have been serving clients in a way that's driving major transactions touching both industries and displaying how wealth management firms are bulking up their tax-related services. The integration poses questions about how to provide a range of those services in-house or team up with an outside certified public accounting firm or another external company with technology that can help financial advisors adapt to a long-term shift in the profession. To the clients of many advisors with expertise in each field, the change simply reflects the outgrowth of their trusted relationships.

Dual practitioners' clients just get a different angle on wealth management than other customers, according to Rupa Pereira, principal at FWJ Planning. "Having both tax-planning and tax-preparation expertise through a single touchpoint ultimately enhances the client experience since the service offered has more depth and covers a wider range in their overall financial picture," she recently told Financial Planning.

Regardless of the current balance between wealth management and tax-related services firms offer, advisors and tax professionals alike are carefully watching the Tax Relief for American Families and Workers Act, which, if passed by the Senate, could severely penalize advisors as "promoters" who may have recommended the employee retention credit to their clients.

The new bill could raise up to $78.6 billion in revenue through an enforcement crackdown and unsought claims for the credit, according to the Joint Committee on Taxation. The retention credit "has been plagued with fraud from unscrupulous promoters encouraging businesses to improperly claim the credit," Garrett Watson and Erica York of the Tax Foundation wrote in a blog last month.

Check out Financial Planning's latest coverage on the developments to watch this tax-filing season.

Why and how to file an extension past Tax Day

Filing a tax extension can sound scary to plenty of consumers, but it can often be the right move, according to financial advisors and tax professionals.

"Haste makes waste," said certified public accountant and certified financial planner Liting Chuang, director of tax planning for Bordeaux Wealth Advisors. "When you rush through, it's just going to end up costing more time and money down the road having to return amended forms."

Financial Planning spoke with a number of advisors to get their suggestions and advice on how to file an extension.

Read more:

16 tips about filing for an extension past Tax Day

Wealth planning and tax-related services are cozying up

Wealth management firms with tax-related services may become far more common than they currently are, particularly in light of increasing client demand for having tax- and estate-planning services as part of a holistic approach to financial planning.

In an online survey of 191 wealth management professionals during the fourth quarter by Financial Planning parent company Arizent, 29% said they currently offer tax and estate planning and another 23% said they work with a third-party firm to give clients those services. Another 18% said they were likely to add them in 2024. Fewer than 20% said they are somewhat or very unlikely to adapt them into their advisory practices.

Advisors who are "able to put together a much more comprehensive financial plan that includes all of the implications" can "deliver more of that value back to the client," Avantax President Todd Mackay told Financial Planning Chief Correspondent Tobias Salinger. "You're seeing much more opportunity to serve clients holistically," Mackay said.

Read more:

Taxes + wealth: 2 connected but still (for now) distinct fields are merging

End to employee retention credit could penalize advisors

The proposed bipartisan Tax Relief for American Families and Workers Act aims to extend $78 billion in tax breaks and credits, and aims to pay for those benefits by ending the employee retention credit permanently and boosting penalties against so-called promoters involved with submitting faulty claims.

The tax break was designed to reward employers who kept workers on the payroll at the height of the COVID-19 pandemic, and its cost has ballooned to as much as $550 billion from an initial estimate of a tenth of that expense only four years ago, according to the nonpartisan Tax Foundation.

The new bill could impose a "heavy burden that's being placed on the advisors" who may have recommended the credit, Niles Elber, a member in the Washington, D.C., office of law firm Caplin & Drysdale, told Financial Planning's Salinger. It may define them as a "promoter" subject to penalties up to the greater of $200,000 or 75% of the income they received from the taxpayer for a faulty claim and a fine of $1,000 for each failure to comply with due diligence requirements, a House summary of the legislation showed.

Read more:

Employer tax credit crackdown could hit industry — if it passes

Business or hobby? Taxpaying gamblers must decide

People have been making money from gambling for a long time. When it comes to taxes, the central issue is whether wagers represent a legitimate business or a fun amateur hobby, certified public accountant Miklos Ringbauer of Los Angeles-based MiklosCPA recently said to Financial Planning's Tobias Salinger.

Questions for financial professionals near Las Vegas or other gambling centers are "part of our everyday life," noted Ringbauer. However, the recent record growth of the industry is making "hard discussions with clients" about their status more relevant nationwide and providing more opportunities for bettors to go pro, he said.

"For practitioners, it is very important that we educate ourselves or to know when we are unable to support the client properly," he said. "The taxpayer has to decide if they are starting a new business or they are just enjoying some good quality time, and they have to be able to defend their positions no matter which one they do."

Read more:

The taxman tango: The key tax question about gambling income

How the election may sway federal taxes on the wealthy

The result of the upcoming election will have a significant impact on which of the many expiring provisions of the 2017 Tax Cuts and Jobs Act will stay in place after 2025, and whether Washington lawmakers will follow through on any of the frequent pledges from Democrats to raise taxes on the wealthy or ultrawealthy.

Amid that backdrop, the industry and its clients are waiting on a Supreme Court decision later this year in a case that some conservatives hope may render the latter effort and many existing taxes unconstitutional.

Financial Planning recently spoke with experts from a number of nonpartisan organizations to find out what billionaires or other wealthy people often hiring industry professionals to manage their taxes or investments can anticipate. The answer? Expect the unexpected.

"There are a huge amount of unknowns," John Buhl, senior communications manager with the Urban-Brookings Tax Policy Center, said in a recent interview, role-playing what he would tell wealthy clients as an advisor working for them. "You can expect people are going to raise your taxes. I just don't know how or when."

Read more:

Will voters veto 'billionaire taxes' and other plans to tax wealthy clients?