Several years of rising stock and bond prices have fattened
not only portfolios but the taxes on those hefty gains. As a result, given a
dearth of investment losses that can offset gains, financial advisers note
clients are asking for more sophisticated tax-minimization strategies. Advisory
firms are responding by fine-tuning their portfolio-management technologies and
hiring tax specialists.
While many firms are paying more attention to taxes,
advisers as a whole still lag behind. According to research firm Cerulli
Associates, only 23% of advisers offer a full range of planning services that include
tax strategies and only 6% of advisers have a certified public accountant
designation.
Nevertheless, David Canter, the head of practice
management and consulting at Fidelity Clearing & Custody, says many
advisers are catching up. Offering tax strategies is “where advisers can earn
their keep,” he says. “Increasingly, it’s not about the investments anymore so
much as doing right by clients around tax planning.”
Not only have stock markets risen steadily since 2011, tax
rates have gone up for many wealthy investors. The Affordable Care Act created
a 3.8% Net Investment Income Tax on high-income earners, the long-term capital
gains tax increased to 20% from 15%, and income taxes have risen in some
states, Mr. Vnak notes. One way to avoid capital gains, he says, is by changing
charitable donations from cash to stock to avoid gains from stock sales. Donor
advised funds can be an important strategy for clients who have large
capital-gains taxes in years they retire because they have to sell company
stock and exercise stock options. A client can make a large contribution in
years when the tax bill is particularly high and distribute the funds over
years to come.
Another strategy is to pay state taxes before the end of a
tax year because that creates a tax deduction for the following year. That is
particularly important now because some advisers recommend clients take profits
on stocks that have become expensive. Necessary portfolio reallocation
shouldn’t be put off just because of the expected tax bill.
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