Hiring a financial advisor can be beneficial in a number of ways. These professionals can offer expert advice on a range of financial topics, such as saving, investing, budgeting, retirement planning, healthcare planning, education planning, estate planning, and taxes. A financial advisor can also provide an objective and unbiased perspective backed by professional acumen and rationality. This can be especially helpful if you are feeling overwhelmed or confused amidst unfavorable market conditions. Financial advisors can also help you stay organized and on track with your financial goals. They can help you get the most out of your investments, adopt a suitable asset allocation strategy, mitigate risk, and rebalance your portfolio from time to time.
Tax planning is an important part of financial planning and wealth management. It includes measures to reduce your tax liability and maximize your savings. Tax planning can help individuals and businesses make strategic decisions that reduce their overall tax burden, allowing them to invest more in their future. However, even though tax planning is an integral part of financial planning, most financial advisors do not provide it. The ones who do may not be as adept with it and may focus on other areas of financial planning, with little emphasis on tax. Ask your financial advisor if he offers tax planning advice or not. If not, ask him to refer you to a professional financial advisor or tax planner who has the required expertise to meet your needs.
This article will explain how the lack of proper tax planning can affect investors. It will also discuss what you can do to hire suitable tax planning financial advisors to plan and strategize your taxes and save money.
Can a financial advisor help with tax advice?
Yes, a financial advisor can help clients by offering professional tax planning. Financial advisors play an essential role in helping individuals and businesses manage their finances. Effective tax planning can help create significant savings and ensure that your money is invested in the most tax-efficient manner. Typically, financial advisors who offer tax planning services may provide the following services:
- Helping clients with their tax return preparation
- Using tax-saving strategies like tax loss harvesting
- Maximizing tax deductions
- Understanding capital gains tax and the latest tax rates
- Planning the withdrawal strategy for different investment securities to ensure the lowest capital gain tax liabilities
- Understanding tax liabilities in retirement
- Calculating taxes
- Timely payment of tax to avoid penalties and fines
Why do some financial advisors avoid tax planning?
One of the main reasons why it may be hard for you to find a financial advisor for tax planning is that a lot of financial advisors are not tax experts. In most cases, you will find financial advisors who are trained and experienced in investment management, financial planning, retirement savings and investments, insurance planning, budgeting, etc. While they may have some knowledge of tax laws and regulations, they may not always have the necessary training or experience in providing comprehensive and professional tax planning advice. As a result, they may not be able to provide their clients with the most up-to-date and accurate tax advice.
Another reason why you may not find a tax planning financial advisor is that most financial advisors are not always familiar with the specific tax laws and regulations that apply to their clients. Tax laws and regulations can be complex and can change frequently. They can also differ from state to state. Moreover, the treatment of tax can vary based on the holding period for your investments, the type of security you invest in, etc. It can also differ for international and domestic investments as well as your filing status. Individuals filing as the head of the household, single individuals filing separately, married couples filing together, and married couples filing separately are four tax-filing categories in the U.S. The tax treatment and appropriate tax strategies can differ for each of them. Unless a financial advisor is trained on these statuses and how tax filing differs for them, they would not be the right source for a piece of information or advice on tax-related matters.
Financial advisors may not have the time or resources to stay current on all of the tax laws and regulations that apply to their clients. This can lead to mistakes and oversights that can be costly for clients. Additionally, many financial advisors do not have the necessary tools and resources to provide valuable tax planning services. Tax planning software and other tools can be expensive and may not be available to all financial advisors, depending on where they work and what their interests and qualifications are. Without these tools, it can be difficult for financial advisors to provide their clients with accurate and up-to-date tax advice.
Some financial advisors also do not see tax planning and advice as part of their core business. Many financial advisors focus primarily on investment management and consider it a critical part of their offerings and services. As a result, they do not prioritize tax planning and may not allocate enough time and resources to it. Investment planning is considered to be the most complex of all financial planning components. The market can be tricky where you cannot adopt a one-size-fits-all approach. Each investor has a different risk appetite and financial goals. The market is also unpredictable and cannot be static all the time. This creates uncertainty and fear and the need for investors to reach out to professionals for advice and guidance.
On the other hand, taxes are more or less established rules. You know exactly how much you will be taxed at the end of the year based on your annual earnings. The government offers plenty of sources for taxpayers who check their taxability, understand tax laws, and even calculate their taxes on their own. There is no surprise element here as in the case of investing, and the need for a professional is significantly reduced.
In addition to these reasons, some financial advisors may not provide valuable tax planning due to the fear of liability. If a financial advisor offers faulty or inappropriate tax advice to a client, they can be held liable. This potential risk can make some financial advisors hesitant to provide tax planning services. Not all financial advisors are experts. Those who are not tax experts and not familiar with the specific tax laws and regulations prefer to stay away from them and concentrate on the areas they like and are experts in.
What to do if your financial advisor does not offer tax planning services?
Irrespective of whether or not your financial advisor offers tax planning services, you need to pay attention to your tax liabilities. Tax can be one of the highest cash outflows for an investor in a year. It is a mandatory expense that you cannot eliminate completely. It can render your investments weak and come in the way of attaining your goals and savings targets. Therefore, you must never ignore it. If your financial advisor does not offer tax planning services, here are some things you can do:
1. Look for another financial advisor:
Evidently, one of the things you can do is hire another financial advisor. If you are not satisfied with the services offered by your current financial advisor and tax planning is crucial to you, you can search for a new financial advisor who does offer tax planning services. You can ask for referrals from friends and family or research online to find a financial advisor who specializes in tax planning. Be sure to thoroughly research any potential advisor and check for any red flags, such as disciplinary actions or customer complaints.
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2. Hire a separate tax planner:
If you prefer to keep your financial advisor different from your tax planner, you can hire an independent tax planner to help you with your tax planning needs. Tax planners are professionals who specialize in tax planning and can help you minimize your tax liability, maximize your deductions, and take advantage of tax credits and other tax-saving opportunities. You can search for tax planners online or ask for referrals from your financial advisor or accountant.
3. Do your own research and plan your taxes on your own:
You can also choose to do your own research and plan your taxes on your own. There are many resources available online, such as the Individual Revenue Service (IRS) website, that can help you understand tax laws and regulations. Additionally, there are many tax preparation software programs and third-party mobile applications that can help you complete your tax returns quickly and accurately. However, this option requires caution and may take some time and effort on your part.
4. Ask your current financial advisor for recommendations:
If you are comfortable with your current financial advisor, you can discuss your tax planning needs with them and ask if they can refer you to a tax planner who they trust. Financial advisors often have a network of professionals that they work with, such as income tax planners, retirement tax advisors, accountants, etc. They can refer you to someone who they trust and who has the expertise you need.
Why is tax planning important?
Tax planning is important because it can help you minimize your tax liability and maximize your returns. It helps with budgeting and financial forecasting. The government offers several tax deductions, exemptions, and credits that can lower your tax liability. Proper tax planning can also help you utilize these and make better financial decisions. Further, it helps you avoid penalties and fines for non-compliance with tax laws.
Tax planning also helps you develop a withdrawal strategy based on when and how much you would be taxed. For instance, the 401k retirement account and the Individual Retirement Account (IRA) both have a withdrawal age limit of 59.5 years. Withdrawals before this age are subjected to taxes and penalties. These accounts also have different tax penalties and treatments based on their type. A Roth IRA is not taxed in retirement, but your contributions are made from after-tax dollars. Contrarily, a traditional 401k takes contributions from your pre-tax dollars, but your withdrawals in retirement are taxed. Tax planning can help you understand laws and rules like these and plan your future redemptions. This not only ensures tax savings but better liquidity and peace of mind.
Tax planning can also help you turn around your losses. For example, tax loss harvesting allows you to use your investment losses to offset your investment gains and reduce tax. Further, tax planning is essential when creating an estate plan, too. Proper tax planning and strategies like lifetime gift exemptions, charity, etc., can help you save your hard-earned money and assets from taxes. Tax planning in estate planning helps to protect your beneficiaries from tax liabilities as well as reduces complex tax computations.
All in all, tax planning is critical and you cannot fully enjoy your salary, rental income, investment profits, inheritance, or any other source of money without adequate tax planning.
To summarize
Tax planning is a specialized area that requires a deep understanding of tax codes and regulations. In most cases, it can be a time-consuming and complex endeavor. As a result, many financial advisors may not be keen to take it up. Tax planning services can also be expensive due to the amount of time and research required. However, since tax planning is a complex and technical area, it is important to take cognizance of the applicable tax laws and not make decisions in haste. Therefore, you must either hire a tax professional or learn as much as you can about tax codes and laws in the country. Additionally, when hiring a financial advisor, make sure to clarify whether or not they would be willing to help you with your taxes. If not, you may be better off hiring someone else.
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