Every year I see the same mistakes that people make which cost them big bucks at tax time!
Most of the mistakes, and extra taxes paid, could be avoided by communication between you, your CPA, and a financial advisor who has some tax knowledge and experience!
The most common mistake that I see every year is the sale of stocks with apparently no consideration as to the impact of short term vs long term capital gains on taxes! When I see a large number of short term sales (which are taxed at a higher rate than stocks that are held for a year or more) I advise my clients to tell their broker that I would like to discuss the tax ramifications before making future sales. If nothing else, this keeps the broker/advisor “honest” knowing that someone who understands what they are doing is keeping an eye on them! Of course the broker usually becomes defensive and says that of course he/she considers the impact of taxes, but that this was a “high” point that they just couldn’t pass up, and that the great gain that they attained for the client outweighed any lost taxes.
Well, being the accountant that I am, I decided to test those claims, and I have yet to find a situation where the brokers claim was true!! More likely, there was a hot new stock or fund that they would make a big commission for selling, so they had to dump one of your other funds/stocks to buy it! I don’t want to give the impression that ALL brokers and financial advisors are out to make a buck, with no consideration for your well-being. In fact, the definition of a ”fiduciary” requires that an advisor who works under the RIA designation as a fiduciary MUST work in your best interest. Unfortuntely, there are way too many advisors and brokers out there who do not work as fiduciaries. If you’re not sure, ASK YOUR ADVISOR and ask for proof!
And that leads me to my next bit of advice! If you are paying a financial advisor/broker a % of assets under management, make sure that you or your tax professional takes the deduction on your Schedule A under miscellaneous deductions. Only the portion that is greater than 2% of your AGI is deductible, but since most people’s portfolio is more than their AGI, and some advisors actually charge 2% of assets under management, there’s a good chance that you will get a deduction!
As a side note, I personally would recommend using a CPA who is a Registered Investment Advisor as my first choice for investments, with my second choice being a “fee only” CFP (Certified Financial Planner) to handle financial investments. My last choices would be insurance sales people (they tend to push annuities, which are rarely the best option) or broker/dealers.
I’ll share more of my opinionated opinions on fee structures of financial planners later!
