Advisors, don’t overlook these items during tax season

All right, advisors, time to strap on your green eyeshades, sharpen those No. 2 pencils, and dig out the shoeboxes containing last year’s receipts. It’s tax season again.

Fine. Maybe those items are a tad outdated, having essentially been replaced by a laptop and a halfway decent WiFi connection. Nevertheless, it’s that time of year when the nation’s wealth managers prove their worth by protecting their clients’ net worths from their good old Uncle Sam.

While it’s true that much of the actual tax preparation will be taken care of by CPAs and professional accounting teams, financial advisors still have their own vital tasks to complete in coming weeks. That’s especially the case given the host of new rules and regulations impacting high-net-worth individuals that take effect this year, not to mention a significant old one expiring at the end of 2025.

“My primary concern this year is trying to get ahead of the expiration of the Tax Cuts and Job Act of 2017,” says Josh Strange, founder and president of Good Life Financial Advisors of NOVA. “Rates could go up, so clients should be acting now to lower their tax bill later, including doing everything from Roth conversions to potentially being more strategic about when to donate money to charity.”

Ed Stober, senior wealth advisor at Nepsis, says he’ll be spending the majority of this tax season reviewing income sources, investments, and potential deductions, and working in tandem with his clients’ accounting teams to make sure no deduction slips through the cracks.

“We often collaborate with tax professionals to explore various strategies, such as income splitting, multiple entity planning, tax-loss harvesting, and the use of tax-efficient investment vehicles,” Stober says. “We review current estate plans and their philanthropic desires to ensure clients are maximizing estate deductions and charitable-giving strategies.”

That’s not the only connection advisors will be making this spring. In many cases, they will need to link their clients’ personal and business affairs to create an efficient, overarching tax plan.

“Because high-net-worth clients often are business owners, being able to create tax plans for their businesses is essential to creating solid plans for their personal taxes. The tax plan also should incorporate their financial plan and estate planning,” says Andy Watts, vice president of planning and growth solutions at Avantax.

Watts adds, boiling it down: “Every financial decision has tax consequences.”

THIS TAX TIME IT’S DIFFERENT

The sunsetting of the 2017 Tax Cuts and Jobs Act at the end of 2025 will likely result in higher income-tax brackets and potentially estate tax exposure for most high-net-worth individuals. This may create opportunities for some taxpayers to pay lower income taxes on various income sources or lower capital gain taxes before the end of 2025.

While that sounds like plenty of time to plan ahead, David Kline, private wealth advisor at Integrated Partners, says a number of his clients have already voiced their concerns about what will happen in the future given the current, highly charged political environment.

“We know our CPA partners also worry if the state and local tax deductions get changed later this year with a retroactive date, they will be scrambling once again, so preparing in advance for the ‘what ifs’ is imperative,” Kline says.

Watts says his primary concern this tax season is the expected “extender package” currently floating around Congress.

“The Tax Relief for American Families and Workers Act has been slowly moving through Congress, and there’s confusion whether it’s better to file now or wait. Some taxpayers will be significantly impacted by this legislation, and the longer we wait, the more compressed tax season becomes,” he says.

Watts adds that tax professionals need to remember that several parts of an extender act contain business tax changes that will need amending before the personal tax return of the business owner can be filed or amended.

“Like any consumer, taxpayers don’t appreciate paying twice for anything, especially a tax return,” he says.

Meanwhile, Victoria Serles, wealth manager with Coldstream Wealth Management, and also a CPA, says clients frequently misunderstand how such rule and code changes can be applied to their taxes, thereby significantly complicating the process.

“We have seen more clients choosing to split time in several states,” she says. “Accounting for time spent, income generated, and several other factors in each of these states impacts filings for these clients.”

Serles adds that she expects several late-filing K-1 forms that report partnership income and losses this year, which can push the filing process into late summer, making it difficult to accurately develop estimated tax payments.

DON’T FORGET ABOUT…

Charitable contributions, claiming tax deductions and credits, and maximizing contributions to 401k plans, IRAs, and health savings accounts are some important ways to implement tax-efficient strategies. Don’t overlook them, says David Hsieh, managing director at Beacon Wealth Advisory at Stifel Independent Advisors.

“Many companies now have Roth 401(k)s that can also play an important part in retirement planning. Roth conversions may not be for everyone, but business owners and others can often take advantage of changes in compensation to implement a conversion and reap the tax-efficient rewards during retirement,” Hsieh says.

Along those lines, clients sometimes fail to consider their income before making Roth IRA contributions, only to find out they are no longer eligible. This can lead to penalties that could have been easily avoided with a little bit of financial planning, Strange says.

Serles says clients often overlook ways to add to a total cost basis of property during the sale process. Neglecting these additions to the total cost of the property can have a major impact on a client’s deductions.

In addition, some clients fail to carefully monitor capital loss carry-forwards, which can deeply impact capital gains management, she says. And in her opinion, far too many clients neglect to engage in year-end tax planning, which almost always can help mitigate costs.

“Without fail, clients do not properly disclose their tax estimate payments. This is part of a larger trend we’ve seen of clients not providing all the information we need to deliver a complete tax plan and strategy. It really comes back to communication,” says Serles.

JJ Feldman, co-head of wealth management at Helium Advisors, says there are often overlooked opportunities for tax savings through investments in solar, oil, gas, and qualified opportunity zone funds.

AND DON’T NEGLECT TO…

“The biggest common mistake we see is missing qualified charitable distributions election because the tax preparer may not be aware that the direct charitable contribution was made,” says David Boniface, president of Legacy Capital Wealth, part of LPL Financial.

Boniface says one item that bears consideration is the two-year lag between the year of one’s tax filing and the calculation of the income-related monthly adjustment amount of one’s Medicare premium. For example, it is the 2023 tax return that will dictate a person’s 2025 Medicare expense.

“This can be very confusing and oftentimes is overlooked in the two years prior to eligibility,” he says.

Another mistake clients frequently make during tax season is sending just the K-1 form and not all the attached statements, Watts says. It’s also common for clients not to provide their tax professional with all the income and expenses for a small business or their gig economy side hustle.

“For tax professionals, paying attention to the questions on Form 8867, Paid Preparer’s Due Diligence Checklist, can head off most of the expensive penalty mistakes,” says Watts. “And remember that no technology is perfect – not even tax-preparation software – so double-check answers because software developers make mistakes too.”  

Finally, despite all these things advisors and their clients need to keep in mind, perhaps the biggest mistake – and the easiest to avoid – is losing track of the calendar.

“If a client files on time or files for an extension, the taxes owed need to be paid by the original due date to avoid penalties and interest,” Feldman says. “Missing a filing deadline can result in significant costs, making it essential for taxpayers to adhere to deadlines.”