Advisor Tax Mistake #4 – Doing Tax Planning One Year at a Time

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This article is the fourth in a series of the seven most common mistakes financial advisors make on tax planning with clients.

In my previous article, I discussed the mistake of making tax planning difficult for the client (and their tax preparer). This week, I want to draw your attention to a mistake that is most commonly made by tax preparers, but trips up financial advisors as well: doing tax planning one year at a time.

When it comes to preparing and filing a client’s tax return, the focus is naturally the 12 calendar months of the prior tax year (with a few allowances for carry-forward losses, etc.). Unfortunately, the requirement to fulfill the annual tax filing can lead to a singular focus on what has happened versus what will happen.

A small step in the right direction is that once I know what happened, I focus on what needs to happen this calendar year. For example, I may notice that last year a client who is married filing jointly (MFJ) had adjusted gross income (AGI) of $173,000 (line 11 of the 1040) and taxable income of $127,000 (line 15 of the 1040). Assuming their current-year numbers are basically the same, I can have a discussion with the client about Roth contributions (MFJ income limit of 214,000), harvesting capital gains at 15% (MFJ limit of 517,200 of taxable income) and/or Roth conversions up to the top of their 24% marginal tax bracket.

This discussion sounds something like this: