3 signs your client’s investments aren’t tax friendly
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3 signs your client’s investments aren’t tax friendly

3 years ago · 3 min read

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:

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

April Walker, CPA

April Walker is a Lead Technical Manager in the AICPA’s Tax Division. Prior to joining the AICPA in January 2016, April was in the public accounting field for twenty years, specializing in individual tax, closely held businesses and their respective owners, and not-for-profit taxation. April practiced at Blackman & Sloop, CPAs, a local firm in Chapel Hill, NC, for the past 14 years and prior to joining that firm, she worked for almost 5 years at PriceWaterhouseCoopers, LLP in Raleigh, NC. April is a member of the American Institute of CPAs and the North Carolina Association of CPAs.

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