Navigating the unknown tax terrain

Successful financial planning involves managing multiple complex factors, such as investments, estate plans, retirement savings and more. All elements of a financial plan must work together to give the client clear visibility into the implications of their actions.

Taxes are one essential consideration that advisors often avoid due to legal uncertainties and the need for specialized knowledge. However, if advisors use care and expertise, providing tax advice can become a differentiating factor in getting and keeping clients long term. For example, advisors are often not qualified to recommend that clients take specific tax actions. However, they can explain how taxes would work if a client used different tools and tactics, whether for retirement, paying for education or in estate planning. Therefore, advisors must engage in tax planning carefully to ensure that clients can reap the biggest benefits from their investments with the lowest tax burden.

Expecting the unexpected

Advisors who understand tax implications can bolster client portfolios by providing in-depth analyses on topics such as tax transitioning for better after-tax outcomes. Because taxes touch every aspect of one’s finances, leveraging them to increase investment returns will keep clients satisfied and open a new market for potential clients. Therefore, this expanded service offering helps grow your business by adding more expertise to your repertoire.

The current tax landscape has experienced changes that are impacting clients’ tax preparations. In 2024, the standard deduction and bracket thresholds for income and capital gains taxes have all increased. This gives people the opportunity to save money through deductions, positively impacting both upper-middle-class and high net worth clientele. 

Other changes include the use of standard or itemized deductions. The Tax Cuts and Jobs Act of 2017 expires at the end of 2025, creating potential for previous tax rules to return. This means that federal income taxes will likely rise if Congress takes no action. If this happens, itemizing deductions will be more advantageous for some clients. There could also be a positive effect on charitable contributions, which have decreased over the past six years because of the TCJA’s high requirements and could have key impacts on many of our business-owner clients. The ability to prepare clients well ahead of these changes is incredibly important to staying ahead of the curve, rather than holding the bag on the wrong side of preventive tax planning. 

Furthermore, tax policies may be affected by events such as the 2024 election. Advisors must anticipate and be prepared to navigate potential changes in tax policies based on election results. Strategies are available to help sustain clients and prepare them for different scenarios. For example, focusing on estate tax planning prepares for potential tax law changes that could affect future rates. 

Another example is tax bracket management. As clients push into higher tax brackets, advisors can recommend using tax-advantaged accounts like Roth IRAs and health savings accounts to pay or reduce taxes now, at lower rates, and avoid higher costs in the future. 401(k) plans historically make sense when taxes are higher. However, with traditionally low taxes, many retirees face significant tax burdens on pretax 401(k) withdrawals. Therefore, using Roth conversions and charitable donations is recommended to manage future tax liabilities.

Proactive tax planning

Among all these changes and concerns, staying up to date and providing clients with as much information as possible enhances the planning process and solidifies relationships. It is up to the advisor to satisfy clients’ expectations with in-depth knowledge and transparency when further research is needed. For example, bringing in a tax professional allows for more specific recommendations and insight an advisor cannot accurately speak to. By staying informed, advisors can use industry changes to guide clients with education, collaboration and tax planning strategies.

Sara Samuels, J.D., CLU, RICP, is founder of Unicorn Wealth Solutions, partnering with Northwestern Mutual. Samuels is a six-year MDRT member with four Court of the Table qualifications and a Top of the Table qualification. Contact her at [email protected].