What All Financial Advisors Should Do (but Don’t): Review Your Tax Returns

Welcome to the second in our series on what your financial advisor should be doing but perhaps isn’t. In our last article, we said your advisor should analyze your Social Security benefits so you can make informed retirement decisions.

Today, we tackle the review of tax returns, which we believe every financial advisor should do as part of the fees they earn.

Your Tax Return Is Key to Your Financial Plan

Your financial plan is composed of multiple areas, and one of the most crucial areas is taxes. We believe that all financial planning should help clients legally reduce their tax burden in the short and long term.

Financial advisors should review each tax return as a springboard for new strategies in other financial areas, such as investments, retirement, and estate. They should proactively reach out to clients about these opportunities and help them implement them.

This means advisors need to be well-versed in changing tax laws (like the changes that seem imminent in 2021) and, just as importantly, each client’s situation. Tax strategies are not one-size-fits-all, and what works for one taxpayer may not work for you. A financial advisor who knows you and your goals can advise you on the optimal strategies for your needs.

To give you an idea of the tax opportunities and pitfalls a financial planner should analyze, here are some of the responsibilities our fiduciary financial planning firm in Greenwood Village, CO, manages for clients:

Analyze Tax Liabilities

We analyze client’s tax returns to evaluate their tax exposure, both current and future. We then help develop strategies to mitigate their tax liability and take advantage of tax opportunities.

Offset Income Tax Exposure

We help clients determine how they can minimize the income taxes they pay. For example, we might take advantage of tax-loss harvesting to offset a client’s investment gains and reduce their taxes in both the current year and future years.

For clients who want to help family members or support favorite causes, we advise on gifting or charitable strategies that also reduce their tax exposure.

Make Roth Conversions

We regularly evaluate our clients’ financial situations to determine the optimal timing for a Roth conversion. Since this strategy involves paying taxes at the time of conversion, the years where clients make less income can be ideal. Meanwhile, they transition their assets into a much more tax-friendly investment vehicle—the Roth—to benefit their retirement income and estate plans.

Provide Retirement Account Distribution Planning

For retired clients taking distributions from their qualified retirement accounts or supplementing their income with part- or full-time work, we help ensure that accurate tax withholding elections have been set.

Manage Capital Gains

We already discussed tax-loss harvesting, which is one part of our tax-efficient approach to managing clients’ investment accounts. Our goal is to keep capital gains taxes (as well as fees and other expenses) low so that clients can enjoy greater investment returns.

Partner with CPAs

You have a team working for you that includes a tax professional—your financial advisor should be working with your team. Our financial planning team partners with clients’ CPAs to ensure that the CPA has updated financials and that any action steps for the client are taken care of.

We also maintain a network of preferred CPAs and feel confident about referring clients in need of a tax professional to this network.

You Deserve to Get Your Money’s Worth

Any financial advisor who provides ongoing financial planning should review tax returns as part of that planning. If your advisor isn’t doing this, they can miss key opportunities to reduce your taxes. That’s money you could have used to save for retirement, pay off debt, fund your grandchildren’s education, or put toward a great vacation.

You deserve to get your money’s worth. Since many advisors charge similarly, if your financial professional isn’t looking at your tax returns, you may be well-served to find one who does.

Our Greenwood Village, CO fiduciary financial advisory firm offers a complimentary 15-minute call. We can briefly discuss your financial situation and concerns and share how we may be able to help.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice. This commentary reflects the personal opinions, viewpoints and analyses of the Stordahl Capital Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.