By Ben Birken, CFP®

Traditionally, whenever the word “tax” comes up, advisors immediately point clients to a CPA, and it’s easy to see why with the web of tax laws in our country. But with the growth of tax planning tools, advisors are finding they can give tax guidance while steering clear of giving complete tax advice.

What is Tax Advice?

There is a marked difference between tax planning and tax advice. 

Tax advice has a legal definition in the US Code, as specified in Section 7525(a)(3)(B): 

The term “tax advice” means advice given by an individual with respect to a matter which is within the scope of the individual’s authority to practice described in subparagraph (A).

That referenced subparagraph defines who is a “federally authorized tax practitioner,” saying that the term refers to “…any individual who is authorized under Federal law to practice before the Internal Revenue Service if such practice is subject to Federal regulation under section 330 of title 31, United States Code.”

Tax advice may also broadly include preparing and submitting tax returns and representing taxpayers before authorities and courts of law. 

In short, tax advice is when an accountant tells a client what to do, and it has rigid boundaries around what can be covered.

What is Tax Planning?

Tax planning is not defined (or regulated) quite as clearly as tax advice. 

Tax planning can be defined as the analysis of a specific situation or longer term financial plan with the goal of reducing someone’s tax liability. 

Some choose to define this as ensuring a taxpayer’s tax liability in a given year is as low as possible. However, taking a longer view may adjust that slightly to ensuring that a taxpayer’s lifetime tax liability is as low as possible. As any advisor (or accountant) knows, it may be advantageous to pay some taxes in one year – even if you don’t need to – if that means paying significantly less in future years. 

Examples of Tax Planning

Here are a few simple, high-level examples of what tax planning looks like: 

• Reviewing a tax return and noting areas of interest from that return
• Educating clients on what marginal brackets mean
• Identifying opportunities in future years to reduce tax liabilities

On a deeper level, tax planning can involve something like running scenarios to illustrate potential tax costs and savings for specific situations, such as Roth conversions, different charitable gifting strategies, stock option exercises, tax loss/gain harvesting, etc. 

So…What is the Difference Between Tax Advice and Tax Planning?

In short, tax advice is more concrete and definitive than tax planning. Tax advice says, “You should do this or that” and, as a result, carries with it more of the liability issue of being wrong, because you “told” someone to do something. 

Tax planning is more suggestive of possibilities and not necessarily as definitive. It is more conceptual, with the general tone of conversations being “What might this look like? What if we did this? Etc.”

Tax advice is offered by accountants, not advisors. Stepping into this realm could be problematic for your clients and your practice.

Tax planning, on the other hand, is something every advisor can offer. 

Do Advisors Need Any Expertise to Offer Tax Planning? 

While you don’t have to be a CPA, you do need at least some understanding of the tax system. At a bare minimum, you need to understand how the tax system works so you can speak intelligently to clients (and their tax preparers) about your tax planning ideas.

As you are likely aware, you don’t need to be a CPA to have ideas about how you might work with a client to decrease their tax liability in the long term.

Depending on the level you want go with your planning, knowing some of the more intricate and interlocking parts of the tax system can go a long way in your efficiency of incorporating tax planning into your practice. But there are plenty of opportunities to provide tax planning without getting deep into the weeds.

5 Reasons Advisors Tend to Shy Away from Tax Planning

As we said earlier, advisors have traditionally pointed any and all tax-related issues to an accountant. Here are the top five reasons we see advisors avoid taxes:

1. They believe the definition of tax advice is so broad that it prevents them from talking about taxes with their clients.
2. They are afraid of the liability if they get something wrong.
3. They don’t want to step on their client’s tax preparer’s toes.
4. They don’t think it’s relevant because they are focused on investments.
5. Taxes can be tricky and complicated. 

This last one should be viewed more as an opportunity than an obstacle; if taxes are tricky for you, a financial professional, imagine how intimidating they are for your clients. 

While those five reasons are understandable, we have four ways you can safely and easily offer tax planning without requiring a lot of training for you and your team.

4 Ways Every Financial Planner Can Offer Tax Planning (Without Adding ‘CPA’ to Your Title)

1. Find resources to help automate the process and take care of the big stuff. 

Thanks to technology, advisors are able to offer more services at scale than ever before. Holistiplan can automatically review a previous year’s return and develop observations that you can then discuss with your clients.

2. Stay in your comfort zone

If you don’t want to model Roth conversions, don’t. But you should still know about Roth conversions – when and why they might make sense, and how to frame the conversation with your clients and their tax preparers.

3. Don’t be afraid to acknowledge the edge of your expertise

Advisors are often worried that if they admit they don’t know something, it could negatively impact how their clients view them. But acknowledging areas outside your expertise can actually have a positive effect as it lets them know that you are confident in what you do know. 

It’s ok to say, “I think there’s something here, but we should get your CPA involved.” Which leads us to our next point…

4. Don’t go it alone!

Involve your client’s tax preparers from the beginning. Frame your ideas as suggestions that then go to your clients’ tax preparers to be blessed.

Most tax preparers are backwards looking – they are tasked with making sure that taxpayers are compliant, file the appropriate forms, and pay the right amounts. The good ones will appreciate the input from someone who is looking forward – and who knows more of the details about their shared client’s situations. 

Remember, you know the details of your client’s investment accounts and, hopefully, the entirety of their financial picture. A tax preparer usually only sees what was bought, sold or generated income in a given year. There’s a big difference between those things!

Want to See What Tax Planning Could Look Like for Your Firm?

You could see tax planning in action for your clients starting right now in three simple steps:

1. Sign up for a free seven-day trial of Holistiplan
2. Upload your clients’ most recent tax returns
3. In a matter of minutes, Holistiplan will provide you with a collection of tax suggestions to review

It’s that easy – and free! If you’ve been avoiding tax planning, this is the simplest way to get a firsthand view of what it could look like at your firm.