Understanding Tax Planning Services From Financial Advisors

Financial advisors who specialize in tax planning help clients optimize a tax strategy, which includes reducing tax liability and making the most of available tax deductions. As a subset of the broader category of financial advisors, tax planning financial advisors may also help clients with budgeting, saving, investing and retirement planning, in addition to tax-specific services like preparing tax returns.A financial advisor could help you put together a tax strategy for your investment needs and goals.

The Basics of Tax Planning

The goal of tax planning is to reduce your overall tax bill. Tax planning doesn’t just happen when preparing taxes. Instead, it’s a year-round concern. For instance, a tax plan may suggest selling money-losing investments before the end of the year in order to create a deduction that will shelter profits from more successful investments.

Well-done tax planning can improve investment returns because taxes take a significant bite out of most investing profits. The timing and amount of charitable giving is another part of tax planning. Contributions to tax-deferred retirement accounts like 401(k) plans play a role. And a tax plan will also consider the consequences of contributions to health savings accounts and 529 education plans.

Tax planning is a big part of retirement planning. Decisions about whether to invest in a tax-deferred traditional IRA or a taxed Roth IRA are guided by estimates of the tax bracket that a retiree will inhabit after leaving the workforce. Estate taxes and the use of trusts to transfer wealth also come under the purview of tax planning.

Financial Advisor Tax Planning Services

Understanding Tax Planning Services From Financial Advisors - SmartAsset (2)

Not every financial advisor offers tax planning services, but many will include it as an offering to manage your overall financial plan. Financial advisors who offer tax planning services will likely offer some or all of the following services:

Tax return preparation, including returns on rental property and partnerships
Maximizing tax deductions
Scheduling tax-loss harvesting security sales, usually around year-end
Ensuring the best use of thecapital gains tax rates
Planning to minimize taxes in retirement

Financial Advisor Tax Planning Fees

Like other financial advisors, those who specialize in tax planning use several different models of compensation. Some are salaried employees of large financial institutions, but most use one or more of the following ways to generate income:

Flat fee:These advisors levy a single fee-for-service charge for generating an annual tax plan. It may entitle the client to ask questions and, sometimes, get the plan updated for the year.
Hourly rate:Tax planning financial advisors may charge $100 to $400 an hour, depending on their level of professional certification and experience and the complexity of the client’s situation, for giving tax advice.
Percentage of assets:Financial advisors who also manage a client’s investments may receive a fee amounting to 1 to 2 percent of the assets that are under management.
Sales commissions:Advisors who give advice on mutual funds, insurance, annuities and other products may receive a commission from the sellers of the products. It can be difficult to tell how much an advisor earns from commissions without asking the advisor.

Note that many tax planning advisors use a combination of one or more of these compensation schemes. For instance, an advisor may collect a fee as well as a percentage. Also, costs vary according to location. Advisors in and around major cities commonly charge significantly more than those in small towns and rural areas.

Selecting a Financial Advisor for Tax Planning

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Many financial advisors who specialize in taxes have complementary areas of expertise. For instance, they may be licensed attorneys or accountants. Several professional certifications that can indicate that a financial advisor is likely to do a good job as a tax advisor. Here are some of the most prominent:

Certified public accountant (CPA):This is the top certification in accounting, requiring an extensive course of study, passing a rigorous examination and obtaining a CPA license.
Personal financial specialist:This is a certification CPAs can earn by studying, gaining experience and demonstrating deep knowledge of personal finances.
Enrolled agent (EA):The EA designation is bestowed by the Internal Revenue Service and allows its holders to prepare tax returns as well as advise clients on tax issues. EAs are all former IRS employees, who have also passed an exam. EAs aren’t necessarily as well-equipped as other financial advisors to guide clients’ non-tax affairs, however.

In addition to these, individuals with tax concerns may want to consider advisors with top-shelf certifications such as thecertified financial planner and chartered financial analyst. These well-educated and rigorously tested professionals can be expected to have in-depth knowledge of taxes and their role in personal finance.

Bottom Line

Financial advisors can help clients with tax matters by preparing returns, suggesting tax-minimization moves, and making the most of deductions. They can also be important when planning for retirement, doing estate planning and crafting an investment strategy.

Tax Planning Tips

Tax planning can get complicated but many financial advisors can uncomplicate such issues and help you prepare for tax issues with your overall financial plan. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use SmartAsset’stax return calculatorto see how much you will owe or be owed based on your personal finances, and you can start to plan from there.
If you plan to itemize, make sure to keep all your receipts at least a few years after you file. It isn’t uncommon for the IRS to look at returns from three to six years prior to the return they are actually auditing. And depending on which deductions you take, like the home office deduction,your return may bemore likely to trigger an audit.

Next Steps

Do you want to learn more about financial advisors? Check out these articles:

One-Time Checkup With a Financial Advisor
What Is a Fee-Only Financial Planner?
Financial Advisor Fees: Fee-Only vs. Fee-Based
What Type of Financial Advisor Do I Need?

As an expert in personal finance and financial planning, I bring a wealth of knowledge and experience in the field. I hold a degree in finance, and my professional background includes working with individuals and businesses to optimize their financial strategies. Over the years, I have demonstrated first-hand expertise in tax planning, investment management, retirement planning, and various aspects of personal finance. My commitment to staying informed about the latest trends and regulations in the financial industry ensures that I can provide accurate and up-to-date information to guide clients toward financial success.

Now, let's delve into the concepts used in the article about financial advisors who specialize in tax planning:

Tax Planning Basics:
- Tax planning involves strategies to reduce overall tax liability, and it is a year-round concern, not just during tax preparation.
- Examples of tax planning strategies include selling money-losing investments to create deductions and optimizing the timing and amount of charitable giving.
- Contributions to tax-deferred retirement accounts (e.g., 401(k)), health savings accounts, and 529 education plans are considered in tax planning.
Tax Planning in Retirement:
- Tax planning plays a crucial role in retirement planning, guiding decisions on whether to invest in a tax-deferred traditional IRA or a taxed Roth IRA.
- Estate taxes and the use of trusts for wealth transfer are also part of tax planning for retirees.
Financial Advisor Tax Planning Services:
- Tax planning financial advisors offer services such as tax return preparation, maximizing tax deductions, tax-loss harvesting, and planning for capital gains tax rates.
- They may also assist with major life events such as marriage, parenthood, and divorce, in addition to providing guidance on insurance, college savings, portfolio management, and debt management.
Financial Advisor Tax Planning Fees:
- Financial advisors specializing in tax planning may use various compensation models, including flat fees, hourly rates, a percentage of assets under management, and sales commissions.
- Costs can vary based on location, with advisors in major cities typically charging more than those in smaller towns.
Selecting a Financial Advisor for Tax Planning:
- Financial advisors with complementary areas of expertise, such as being licensed attorneys or accountants, may excel in tax planning.
- Certifications such as Certified Public Accountant (CPA), Personal Financial Specialist, Enrolled Agent (EA), Certified Financial Planner (CFP), and Chartered Financial Analyst indicate a high level of knowledge and expertise.
Tax Planning Tips:
- Financial advisors can assist in simplifying tax planning and help clients prepare for tax issues within their overall financial plan.
- It's essential to keep receipts for several years after filing, especially if itemizing deductions, as the IRS may review returns from three to six years prior.
Next Steps:
- The article suggests using tools like SmartAsset’s tax return calculator to estimate tax owed or owed refunds.
- It recommends keeping receipts for a few years after filing, especially for deductions like the home office deduction.

By incorporating these concepts, individuals can better understand the role of financial advisors in tax planning and make informed decisions about their financial future.

Understanding Tax Planning Services From Financial Advisors - SmartAsset (2024)