Understanding Tax Planning Services From Financial Advisors

Financial advisors who specialize in tax planning help clients optimize their tax strategies, which includes reducing tax liability and making the most of available tax deductions. 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. 

Financial advisors can help you manage different areas of your financial life. Connect with a fiduciary advisor for free.

Tax Planning Basics

Contrary to what some may think, tax planning is not just a consideration at tax time. Instead, it is a year-round effort that requires careful planning and a finely-tuned financial strategy.

The goal of tax planning is to lower your taxable income in order to reduce your overall tax bill. For example, a tax plan may suggest selling poorly performing investments before year’s end to realize losses that can offset gains from the sale of more successful investments.

When done right, tax planning can improve investment returns, allowing you to keep more of your earnings from your investments.

Tax planning can also involve decisions about charitable giving and other tax-advantaged contributions. The type, timing and amount of contributions all affect your tax liability, and different vehicles, such as 401(k) plans, health savings accounts (HSAs) and 529 education plans, are treated differently under the tax code.

Tax planning is also a big part of retirement planning. Decisions about whether to invest in a traditional IRA or Roth IRA are largely guided by the retiree’s tax bracket after leaving the workforce. Estate taxes and the use of trusts to transfer wealth are also under the purview of tax planning.

Financial Advisor Tax Planning Services

Not every financial advisor offers tax planning services, but many do include it as part of their overall financial management. These tax planning services typically perform a few standard tasks:

• Preparing tax returns (including those for rental properties and partnerships)
• Maximizing tax deductions
• Scheduling tax-loss harvesting security sales (typicallyaround year-end)
• Planning for reduced tax liability in retirement

In addition to preparing for retirement and death, a financial planning tax advisor can help evaluate the tax effects of other major life events like marriage, divorce and having or adopting a child.

Financial advisors may also specialize in other areas:

Financial Advisor Tax Planning Fees

Like other financial advisors, those who specialize in tax planning employ different compensation models

• Flat fee: These advisors levy a single fee for generating an annual tax plan. Clients may be able to ask their advisor questions directly and receive an updated plan for the year. The median subscription or retainer fee is $4,500, according to The Kitces Report. ¹
• Hourly rate: The median hourly fee that financial advisors charge is $300, according to The Kitces Report, but this varies based on their professional certifications and experience, as well as the complexity of the client’s tax needs.
• Percentage of assets: Financial advisors who manage a client’s investments may charge an annual fee based on a percentage of assets under management, often ranging from 1% to 2%. This type of fee generally applies to investment management services rather than tax planning alone.
• Sales commissions: Advisors who recommend certain financial products, such as mutual funds, insurance or annuities, may receive commissions tied to those products. These commissions are separate from tax preparation or tax planning services, and their cost can vary, so it is typically disclosed by the advisor at the time of the recommendation.

Note that tax planning advisors may use a combination of these compensation structures. For instance, an advisor may collect a fee, as well as a percentage. 

Costs also vary by 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

Many financial advisors who specialize in taxes have complementary areas of expertise. For example, they may be licensed attorneys or accountants. 

Several professional certifications can indicate that a financial advisor is experienced in tax planning:

Certified Public Accountant (CPA)

The CPA certification is the top accounting credential and requires completing an extensive course of study, passing a rigorous examination and obtaining a state license. CPAs must also meet ongoing continuing education requirements to maintain their license.

Personal Financial Specialist

CPAs can earn the additional Personal Financial Specialist (PFS) certification through education and experience that demonstrate advanced knowledge of personal finance. The designation also requires continuing professional education to remain active.

Enrolled Agent (EA)

The Enrolled Agent (EA) designation, issued by the Internal Revenue Service (IRS), authorizes professionals to prepare tax returns and provide tax advice. EAs may be former IRS employees or individuals who pass a three-part IRS examination, and they are subject to ongoing continuing education requirements. While EAs focus on tax matters, they may not provide broader financial planning services.

Other Certifications

Additionally, individuals with tax concerns may want to consider advisors with top-shelf certifications, such as the Certified Financial Planner™ (CFP®) and Chartered Financial Analyst (CFA). These well-educated and rigorously tested professionals can provide in-depth knowledge of taxes and their effect on other areas of personal finance.

Run your numbers to get a clearer picture of your overall tax liability before choosing a tax strategy.

When to Work With a Tax Planning Financial Advisor

Working with a tax planning financial advisor can be especially useful if you have a high net worth and want to reduce your annual tax liability. Advisors can help you structure your investments and deductions in ways that lower what you owe while remaining compliant with tax laws. This kind of guidance can be valuable if your earnings push you into higher tax brackets or expose you to additional taxes, such as the net investment income tax (NIIT).

Business owners often turn to tax-focused advisors because they face more complicated tax filings than employees with W-2 income. An advisor can help with choosing the right type of business structure, planning for quarterly estimated payments and maximizing deductions for expenses and retirement contributions. With this support, owners can enjoy better cash flow management while keeping more of their profits.

Individuals and families may also benefit from tax planning during major life events. Marriage, divorce, the birth of a child or receiving an inheritance can all change your tax situation. A financial advisor can explain how these changes affect your tax return and create tax strategies to limit unexpected liabilities.

Finally, tax planning advisors play a crucial role during retirement. They can help with critical decisions, such as whether and when to do a Roth IRA conversion, how to draw down retirement accounts in a tax-efficient manner and the best time to claim Social Security. These choices can not only affect your total tax bill but also how long your savings last. For many people, retirement is the time when they can benefit from professional tax planning the most.

How to Find a Financial Advisor Who Does Tax Planning

To find financial advisors offering tax planning, start by checking organizations like the CFP Board, the National Association of Personal Financial Advisors (NAPFA) or the Financial Planning Association (FPA). These directories allow you to search specifically for advisors providing tax planning services. 

Additionally, firms like Vanguard, Charles Schwab and other well-known financial institutions and brokerages often have in-house advisors who specialize in both investment management and tax planning.

Once you identify potential advisors, it is important to vet them thoroughly. Review their website to confirm that tax planning is available and check for any relevant qualifications, such as CFP® or CPA designations.

Then, review their Form ADV brochure, which is available through the SEC’s Investment Adviser Public Disclosure (IAPD) website. This provides detailed information about the advisor’s business practices, including the scope of services, fee structure and disciplinary history. It can help you assess the level of tax planning available so you can determine if their approach aligns with your financial needs.

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 some financial advisors can navigate this important process. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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’s tax return calculator to 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 be more 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?

Photo credit: ©iStock.com/PeopleImages, ©iStock.com/Korrawin, ©iStock.com/Ridofranz