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Tax Planning is a Critical Factor in Financial Planning

Financial-planning-consultationCongratulations on making it through another tax season! From those long hours, including rigorous reviews and meetings with clients, you’ve gained unique insight into their lives—insight into their incomes, spending habits, investments and life events. Income tax planning and estate planning elements have become a more critical part of overall personal financial planning with the enactment of the American Taxpayer Relief Act of 2012 and the Net Investment Income Tax. While reviewing those 1040s, you are able to envision potential tax impacts of financial decisions and begin considering tax planning strategies for your clients, which broadens your relationship. This is a great first step in helping them meet their overall financial planning needs, including making estate, retirement, investment and risk management planning decisions to move them toward their long term goals.

In this economy and time, when many baby boomers are retiring and transferring tremendous amounts of wealth to the next generation, it is especially important to take a closer look at the following issues:

  • Investment Strategies. Since the passage of the American Taxpayer Relief Act and the enactment of the net investment income tax last year, clients are faced with a significantly higher income tax rate on investment income. It is causing many to step back, look at their investment strategies and analyze the tax implications. 
  • Asset Placement. Asset placement issues are a critical piece of the planning picture. I think it’s particularly important to do two things: 1) decide whether fixed income that generates a lot of taxable income should be in retirement accounts, Roth IRAs or regular accounts; and 2) determine whether higher growth equities that are taxed at a lower rate belong outside of the retirement account.
  • Harvesting Gains. Harvesting gains can be part of a client’s overall strategy – even in this environment with higher tax rates on capital gains. Trying to plan that around a client’s income year by year, over a multi-year period, is the best way to identify where to incorporate capital gains. I believe that harvesting gains can make sense in the right scenarios – especially for clients with low incomes due to business losses in a particular year.
  • Planning for retirement. One of the main issues I see people focusing on is retirement planning. To be effective, look at an asset’s efficiency and do projections on an asset basis. Determine whether it will last through a client’s lifetime and then look at where that income stream is going to come from (such as an IRA, a pension or from a regular account) when a client retires. 

CPAs are positioned to have ongoing and regular conversations with clients. Taking advantage of that face time will allow us to enhance how we serve our clients and proactively address their personal financial planning needs. 

The AICPA PFP Section has assembled a robust library of content for CPAs who are considering adding personal financial planning services to their offerings and I encourage you to reach out to the AICPA’s PFP team for help along the way. 

For those who would like to make financial planning an integral part of their practice, I’d encourage you to attend the upcoming Personal Financial Planning Boot Camp. We will review all topics that relate to personal financial planning, dispelling perceptions that it primarily deals with managing and selling investment and insurance products, and help you to assist your clients with personal financial decisions.

The Standards in PFP: Compliance Toolkit is also available to help you understand and implement the new Statement on Standards in Personal Financial Planning Services, effective July 1. These standards give you a roadmap to practice consistently, competently and with confidence.

Lyle Benson, CPA/PFS, President, L.K. Benson & Co. Based in Baltimore, Lyle runs his practice as a multi-family office, offering traditional tax services as well as a full scope of financial planning, including estate, retirement, investment, insurance and tax planning. 

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