Financial advisors get trained in taxes, of course, but they often just get a basic framework for how to structure investments. Naturally, a CPA can bring a much deeper level of understanding to a clients tax situation. Heres how:
1. Taxes are more complicated.
From the Medicare surtax to the new, higher top tax rate, wealthy clients face a tax picture with widening complexity. While its never wise to let the tax tail wag the investment dog, knowing how investments impact the tax picture in ways that are not always obvious can save clients big.
Will selling an investment this year produce gains big enough to trigger the Medicare surtax? Should municipal bonds be pursued as a source of tax-free income? Do you want your tax-oriented financial planning from someone who has one course in tax or from someone who does it all the time? asks Michael Kitces, director of financial planning at Pinnacle Advisor Group in Columbia, Md.
2. Asset location is critical.
Investment professionals know that asset allocation is important, but so is asset location. The tax treatment of assets varies by which type of account theyre housed in. Bonds, for example, are better held in tax-sheltered accounts because their income is taxed at the ordinary rate of up to 39.6%. Stocks fare better in non-retirement brokerage accounts because long-term gains can be taxed at the favorable capital gains rate of 20% rather than the higher ordinary income rate.
Where assets are housed is a key component of Morningstars gamma factor, a way to calculate an advisors value. Proper asset location can boost returns by 20 to 50 basis points a year, Morningstar researchers have concluded.
3. Your boomer clients are retiring.
You know the stats: 10,000 baby boomers retire each day, a pace expected to continue for the next 19 years. If your boomer clients havent already made the shift to retirement, they soon will.
They are going to need financial advice on how to minimize taxes and generate enough income, says Roger Ochs, CEO of independent broker-dealer HDVest.
Retirement withdrawal strategies are complicated. The rules of thumb around which accounts to tap, and when, may not work in all circumstances. Some clients may be better off depleting their tax-deferred accounts early on in order to avoid a big tax hit late in retirement, for example. Accountants take a holistic approach to this, Ochs says.
4. Tax returns show what youre missing.
For a CPA, a tax return is like catnip. A talented accountant can spot not just missed opportunities for tax savings, but also potential gaps in a clients financial picture. I can look at somebodys tax return and in five minutes have a basic ideas of where they should be going with their wealth management, says Jack Oujo, a CPA and financial planner in Wall, N.J., whos affiliated with HDVest.
Can your clients shift income into another year to be eligible for a federal subsidy for health insurance on the new exchanges? (A family of four can earn up to $94,200 to be eligible.) Are they contributing enough to tax-deferred retirement accounts or too much?
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