While attending the University of Wisconsin--Whitewater, I excelled in my accounting courses and found the income tax class to be fun. I mean, who doesn't want to figure out a way to pay as little in taxes as legally allowed?
After a couple years as a financial advisor, I realized many other financial advisors were either ignorant or outright ignoring the tax consequences of their recommendations to their clients. It became apparent that if I wanted to do the best for my clients, I needed to know and understand the tax code, so I went to grad school and earned a Master's of Science in Accounting with an emphasis in Taxation.
Here are some of the investment-tax-consequences horror stories I have seen in in recent years while preparing taxes:
Fees paid from the wrong account. Financial advisors deserve to be paid for the advice they provide, but it should not cost you more than their bill. This year, a client came in with a 1099-R for a distribution from his IRA to pay for a financial plan the investment advisor completed. Unfortunately for this 56-year-old client, he owed taxes and penalties on the distribution. In the 25% percent tax bracket with a 10% early distribution penalty cost this client an additional $1,050 in Federal taxes and $233 in Wisconsin state taxes for his $3,000 financial plan!
Rebalancing at the wrong time. Like it or hate it, the Affordable Care Act (Obamacare) has given some pre-retirees the ability to afford to retire a couple years earlier than they otherwise could without employer-sponsored health insurance. However, the ACA looks at all income--not just money you receive and spend. Some clients, with non-retirement accounts, may buy and sell stocks or mutual funds during the year or simply reallocate when their portfolios are out of alignment. One gentleman acted upon the advice of his investment advisor and sold some stocks that had appreciated significantly over the last couple of years generating $27,000 of capital gains. While this person never saw or spent a dime of the $27,000, it all showed up on his tax return making him ineligible for the health care premium credit he had enjoyed all year. Not only did he have to pay the state of Wisconsin nearly $1,000 in taxes on the reallocation, but he had to repay nearly $4,000 in health care credits he was no longer eligible for.
I believe that people deserve an investment advisor that understands exactly how a recommendation is going to affect their tax obligations and not an investment advisor that simply recommends you consult your tax preparer.
