Tax Tip Tuesday: Five Tips Your Clients Need This Tax Season, Part 1

The American College of Financial Services
March 3, 2020

Once again, March has arrived, and for most people that means they’ve arrived squarely in the middle of tax season. With all tax materials due to the IRS by April 15, financial advisors are likely to field many more questions from their clients over the next few weeks about the finer points of taxation: how can I keep the most of my hard-earned money? What deductions might I qualify for? Are there better ways to organize and file my returns than I’m currently using? The list goes on and on.

In this series we’re calling “Tax Tip Tuesday,” we outline a series of insights that you as a financial advisor, or possibly even as a client or everyday taxpayer, can use to educate yourself on some of the finer points of taxation. While all financial experts may not agree on the subjects discussed, these tips are a collection of the biggest trending topics for tax season 2020 and are things you’ll likely want or need to consider when filing your return--or helping your clients perfect theirs.


#1: Make Your Money Work for You


The first and biggest question to ask clients, as a financial advisor, is likely this: when applied to your taxes, is your money working for you as well as it could? If it doesn’t sound like it has a simple answer, that’s because it contains a myriad of different possibilities for saving, reallocating, or otherwise redistributing funds to protect them from getting taxed more than they need to be. There are, however, a few key points to focus on.

One could be to ask your clients what kind of retirement savings account they currently have, and what the advantages to changing them might be. Two dominant products exist in this area: the traditional IRA or 401(k), or a Roth option. Traditional accounts put their tax breaks up-front, giving savers an opportunity to put away money tax-free: this can both add more money to a retirement savings account more quickly and cut down on a client’s taxable income, but means that at some point, the piper needs to be paid. When your clients begin to withdraw closer to their retirement years, the money they take out will be taxed as usual.

A Roth account, on the other hand, offers its tax benefits later in life, with money going into the account already taxed so that it comes out free later on. Which is better? Well, according to financial experts at The American College of Financial Services and elsewhere, it all depends on where your clients are at in life and when they anticipate being able to afford the tax. If clients are worried about paying taxes during retirement and may not be able to save as much, getting or switching to a Roth could be a better option, but beware, as changing can make contributions taxable and actually increase your clients’ tax bill.

Clients would also be wise to max out their possible retirement contributions before tax day arrives: taking more money out of pocket now may make people nervous, but it’s less tax to pay in the short term and more guaranteed support for the future. The same goes for health savings accounts or other benefits plans: most put away money before taxes and can help reduce this year’s tax burden.

Finally, would you believe encouraging your clients to give more could help them lower their tax burden? With guidance from a trusted financial advisor, clients interested in philanthropy who may be subject to capital gains taxes due to sold market assets could be eligible for tax deductions. Through gifts including monetary donations and stock donations, complex asset donations like private company stock or real estate, and qualified charitable distributions made directly from a retirement account to a chosen charity (tax-free!), clients can get more of their hard-earned money while giving back to the community. In terms of taxes, that’s as much of a win-win as you can get.