You know a lot about your tax clients — their jobs, their kids’ names, what kind of cars they drive — and you know even more about their finances. Most of the time, your clients are happy to share their complete financial lives with you. But, occasionally, when delving into the numbers, you’ll uncover financial moves you didn’t know about. Often, those moves involve their investments.
You may be hesitant to talk to your clients about their investments. But remember, proactive conversations about all the financial issues affecting them are part of a CPA’s job. In addition, talking about investments as a part of their entire financial picture is a great way to start planning conversations — especially as we head into year-end. Not to mention, this is an added chance to cement your relationship as their trusted adviser.
You want to help your clients avoid investment-related tax headaches, but you can only do that if you know what could cause them. Here are three examples of how investment choices could negatively affect your clients’ taxes and what to do to get them back on track.
Schedule D woes
When preparing a client’s taxes, pay close attention to the number of Schedule D transactions. If your client reported significant capital gains from multiple investment sales that will be taxed as short-term gains, something in their lives may be changing their financial situation.
Schedule a meeting with your client to dive deeper. You may find that they are going through a difficult situation that requires your attention. Or perhaps they just needed cash for that empty-nesters trip to Cabo. In any case, you’ll want to explore whether there are plans for such sales, and plan for the tax liabilities associated with them.
A short-sighted portfolio
Year-end investment statements contain more information than just account balances, holdings and transaction information. These statements can reveal when a client is — frankly — too dependent on a couple of assets.
If you notice your clients’ portfolio is heavily weighted in one or two assets, you may want to find out why. Your client may not realize they haven’t diversified their portfolio. Or maybe they think this emerging company is a “sure winner.” Either way, talk through these investments with them and make sure they’re aware of the potential risks and tax-efficient ways to diversify.
Publicly traded partnership issues
If your client owns shares in a publicly traded partnership, make sure they understand that the placement of these investments could result in major tax implications. Unlike other investments, you must carefully plan unique tax treatments for these companies.
You may also want to explain to these clients that a Schedule K–1 will be needed to complete their taxes. As the K–1 isn’t due until March 15 for publicly traded partnerships, this delay of the receipt of tax documents could mean your client will need to plan to extend their return. Let them know these investments come with more complicated reporting, and their resulting delays could make preparing tax projections and future tax planning more difficult — and more expensive.
Bonus: Talking about timing
When your client buys or sells a stock or shares in a mutual fund, it can be just as important as what investment they sell from a tax perspective. Not only should your clients focus on long term vs. short term capital gains, they should consider how sales of stocks during the year could affect how the gains from the sales are taxed. Purchasing shares of a mutual fund before the end of the year could subject the individual to a full year of capital gain distribution without the benefit of the full year of the funds’ appreciation.
As you head into year-end planning with your tax clients, make sure you’re talking with them about all of the pieces of their financial puzzle. These resources can help:
- The AICPA Tax Section has a list of valuable busy season tools, webcasts and resources to help you prepare your clients for springand make sure your clients get their most favorable tax result come April.
- Find a handy checklist to help identify key issues and personal financial planning opportunitiesduring tax return preparation, courtesy of the AICPA PFP Section.
- Take a deeper dive into investment planning by listening to this AICPA podcast.
- Expand your knowledge and get CPE by earning the Investment Planning Certificate, letting your clients know they can come to you for help. And it will get you one step closer to the premier personal financial planning credential, the Personal Financial Specialist.
- Read more tax-smart tips on topics like retirementand estate
Smart tax planning plays a vital role in a sound investment strategy. Being ready to address this issue and other planning topics with your clients can contribute to your firm’s continuing success.
Matt Rosenberg, CPA/PFS, President of RoseCap Financial. He is the recipient of the 2018 AICPA Outstanding Young CPA award and is on the National CPA Financial Literacy Commission. He has received tenure as professor of finance and accounting at Colorado Mesa University and recipient of the AICPA’s Standing Ovation Award for excellence in personal financial planning.
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Originally published by AICPA.org