Tax Planning Vs Tax Advice

Steuerberatung Hattingen is the guidance that advisors can offer to clients on how they can maximize their tax efficiency by making smart money moves and taking advantage of available deductions, credits, and exemptions. These money moves may be related to investment management, retirement, estate planning, small business, or other areas of financial services. Tax-advantaged money moves could save tens or even hundreds of thousands of dollars in taxes, and can make a significant difference to investors’ bottom line.

As a result, many advisory firms are wary about the potential for tax advice to cross the line into recommendations and be considered taxable advice. For example, it’s common to find compliance departments that require advisors to carefully walk the line between providing tax planning and crossing over into a recommendation (which would be taxable advice). In addition, advisors often feel they aren’t trained or equipped to effectively identify and discuss tax-advantaged strategies with their clients.

The challenge lies in the fact that tax laws are massive and complicated, and the U.S. tax code contains a lot of “trap doors” and hidden breaks that most people don’t recognize. Then, when you add in the complexity of the many changes to tax rules that occur on a yearly basis, it becomes clear why so many financial professionals choose not to give tax advice at all.

What Is the Difference Between Tax Planning and Tax Advice?

To help navigate this issue, it’s helpful to think about tax planning as a spectrum. At one end is general information — simply explaining what the tax rules and regulations say without getting any more specific about how it applies to the client’s situation. At the other end of the spectrum is more detailed analysis, such as running a tax projection or comparison in financial planning software for the client’s specific circumstances.

Advisors who engage in this type of tax planning can clearly state what they’re doing, but it’s important to note that their advice is still a form of recommendation. The more detailed they go, the closer they come to a tax avoidance strategy that may be subject to a recommendation or a prohibited transaction. This is why many compliance departments want their advisors to limit this type of analysis, or avoid it altogether.

Ideally, the best way for advisors to provide valuable tax planning is to be as transparent as possible with their clients and ensure they’re walking that tightrope carefully. This is where a strong training program that builds the comprehension, application, and conversation skills for finding and discussing tax-advantaged strategies can really pay off.

With the right vetting process, advisors can identify and hire credentialed tax professionals to help them deliver this valuable service. Then, they can focus on helping their clients keep more of their own hard-earned money instead of handing it over to the government. Especially in today’s climate where the IRS has increased its auditing and investigative activities, that can be a very attractive proposition.

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