Accounting

How to unlock tax savings in incoming client portfolios

Published

2 months ago

September 26, 2024

An incoming client could turn into a lifetime customer if their new financial advisor or tax professional finds savings on their payments to Uncle Sam during the transition.

Continuing industry consolidation through recruiting moves and M&A deals test advisory practices’ scale and onboarding abilities. That influx of client portfolios to a different wealth management firm or technology platform presents opportunities for tax savings through strategies such as loss harvesting, winding down big stock concentrations and rebalancing of their asset allocations, advisors and other industry experts told Financial Planning.

“If the financial advisor is also a tax professional, it’s a single touchpoint for managing the customer relationship and guiding the client through suggested changes while explaining the rationale,” Rupa Pereira, the founder of Apex, North Carolina-based FWJ Planning, said in an email. “In other cases, it’s a facilitative process so the client is informed of the current state and federal tax implications of no action and gets recommended changes in order of urgency. The advisor and tax professional will need to tag-team so it’s a seamless process for the client.”

After ensuring that the portfolio aligns to the clients’ goals, advisors could begin checking the tax efficiency of their overall financial picture by looking at their latest Schedule D to see if there are any capital losses they’re carrying over from the prior year and examining the investment holdings for any unrealized gains or declines, according to Jack Oujo, founder of Wall, New Jersey- and Fort Lauderdale, Florida-based Oujo Wealth Strategies.

Large, highly appreciated stock concentrations equate to “tax bombs” that need defusing through charitable giving with donor-advised funds or charitable remainder trusts, he noted in an interview. In the case of older, wealthier clients, they could also hold that stock until their deaths so their heirs avoid paying taxes on the appreciation through the step-up in basis, Oujo said. With time, some of that yield may fall in a down market for stocks as well.

“Sometimes we let a portfolio go without being rebalanced if it will hurt a client from a tax point of view,” he said. “If we sell off these positions, we’ll be creating our own crash with all the taxes we’ll have to pay.”

The combination of industry consolidation and healthy stock values over roughly an entire decade after the Great Recession create “more of a scale problem than ever before” for advisors and their clients, according to Anton Honikman, CEO of MyVest, a wealth management technology subsidiary of TIAA. That means transitions to a new firm often pose tax implications.

When an advisor “has multiple clients that are in transition at any point,” they can work with the tax overlay team at MyVest or other technology firms that are increasingly offering that service to offset capital gains with losses to ensure there is a “consistency of care across the book of business” without trying to handle the entire workload, Honikman said.

“Any losses give you more gains that you can harvest. We provide the technology to automatically apply all of them,” Honikman said in an interview. “The ongoing implementation can be done by someone else.”

As part of this evaluation of new clients’ portfolios from a tax perspective, advisors should keep in mind that long-term capital gains in stocks and dividends often bring lower rates than bond income, Pereira noted. However, in taxable brokerage accounts, municipal bonds as well as stock indexes “are tax-friendly choices,” she said. The timing of any rebalancing and distributions and the location of the assets loom large in importance as advisors confront the typical tax pitfalls of incoming clients’ accounts.

“The most common area is the asset selection between taxable/deferred and tax-exempt accounts where the investment selection may not always be tax-optimal for respective asset location,” Pereira said. “Another common area is not accounting for overall portfolio allocation across all the individual client accounts that could lead to asset imbalance relative to risk tolerance.”

Planners may consider setting up a technology-assisted “gains budget” for the new client to decide how quickly to liquidate concentrated stock, Honikman suggested. Since the tax savings represent “a really helpful share-of-wallet enhancer,” the management of the timing of the selloff each quarter or year can create the optimal short- and long-term capital gains, he said.

“You’re highly likely to see embedded gains coming in. It’s just something one should expect,” Honikman said. “There is a balancing act to staging that diversification over time.”

Above all, advisors can use the transition time to coach clients on the value they can unlock through the tax savings on stock losses, so that, “When the red arrows are on CNBC, they don’t have to call us and panic and scream,” Oujo said.

For whatever reason, the comprehensive calculation of losses and gains against cash flow from individual retirement account distributions in the pre- and post-retirement phase tends to register with women more easily than men, Oujo noted.

“If a man goes from $2 million to $1.8 million, they don’t like it. If you can explain to them that their interest and dividends are still there, it’s like a magic trick,” he said. “Cash flow is a big deal to a retiree, and doing it in a tax-efficient way is very important.”

Accounting

The tax outlook for president-elect Trump and the GOP

Published

2 hours ago

November 18, 2024

Business Finance News

President-elect Donald Trump and his Republican party clarified one aspect of the uncertainty surrounding taxes with a resounding victory in the election.

That means that the many expiring provisions of the Tax Cuts and Jobs Act of 2017 — which Trump signed into law in his first term — are much more likely to remain in force after their potential sunset date at the end of next year. Financial advisors and tax professionals can act without worrying that the rules will shift underneath them to favor much higher income duties.

However, the result also presents Trump and incoming Senate Majority Leader John Thune of South Dakota and House Speaker Mike Johnson of Louisiana with a series of thorny tax policy questions that have tricky, time-sensitive implications, according to Anna Taylor, the deputy leader, and Jonathan Traub, the leader, of Deloitte Tax’s Tax Policy Group. Once again, industry professionals and their clients will be learning the minutiae of House and Senate procedures. Taylor and Traub spoke on a panel last week, following Trump’s victory and their release of a report detailing the many tax policy questions facing the incoming administration.

Considering the fact that the objections of former Sen. Bob Corker of Tennessee “slowed down that process for a number of weeks in 2017” before Republicans “landed” on a deficit increase of $1.5 trillion in the legislation, Taylor pointed out how the looming debate on the precise numbers and Senate budget reconciliation rules will affect the writing of any extensions bill.

“They’re going to have to pick their budget number on the front end,” Taylor said. “They’re going to have to pick that number and put it in the budget resolution, and then they’ll kind of back into their policy so that their policies will fit within their budget constraints. And once you get into that process, you can do a lot in the tax base, but there are still limits. I mean, you can’t do anything that affects the Social Security program. So they won’t be able to do the president’s proposal on getting rid of taxes on Social Security benefits.”

Individual House GOP members will exercise their strength in the negotiations as well, and the current limit on the deduction for state and local taxes represents a key bellwether on how the talks are proceeding, Traub noted.

The president-elect and his Congressional allies will have to find the balance amid the “real tension” between members from New York and California and those from low-tax states such as Florida or Texas who will view any increases to the limit as “too much of a giveaway for the wealthy New Yorkers and Californians,” he said.

“You will need almost perfect unity — more so in the House than the Senate,” Traub said. “This really gives a lot of power, I think, to any small group of House members who decide that they will lie down on the train tracks to block a bill they don’t like or to enforce the inclusion of a provision that they really want. I think the place we’ll watch the most closely at the get-go is over the SALT cap.”

Estimates of a price tag for extending the expiring provisions begin at $4.6 trillion — without even taking into account the cost of President-elect Trump’s campaign proposals to prohibit taxes on tips and overtime pay and deductions and credits for caregiving and buying American-made cars, Taylor pointed out. In addition, the current debt limit will run out on Jan. 1.

The Treasury Department could “use their extraordinary measures to get them through a few more months before they actually have to deal with the limit,” she said.

“But they’re going to have to make a decision,” Taylor continued. “Are they going to try to do the debt limit first, maybe roll it into some sort of appropriations deal early in the year? Or are they going to try to do the debt limit with taxes, and then that’s going to really force them to move really quickly on taxes? So, I don’t know. I don’t know that they have an answer to that yet. I’ll be really interested to see what they say in terms of how they’re going to move that limit, because they’re going to have to do that at some point — rather soon, too.”

Looking further into the future at the end of next year with the deadline on the expiring provisions, Republicans’ trifecta control of the White House and both houses of Congress makes them much more likely to exercise that mandate through a big tax bill rather than a temporary patch to give them a few more months to resolve differences, Traub said.

Both parties have used reconciliation in the wake of the last two presidential elections. A continuing resolution-style patch on a temporary basis would have been more likely with divided government, he said.

“Had that been what the voters called for last Tuesday, I think that the odds of a short-term extension into 2025 would have been a lot higher,” Traub said. “I don’t think that anybody in the GOP majority right now is thinking about a short-term extension. They are thinking about, ‘We have an unusual ability now to use reconciliation to affect major policy changes.'”

Accounting

M&A roundup: Aprio and Opsahl Dawson expand

Published

2 hours ago

November 18, 2024

Business Finance News

Aprio, a Top 25 Firm based in Atlanta, is expanding to Southern California by acquiring Kirsch Kohn Bridge, a firm based in Woodland Hills, effective Nov. 1.

The deal will grow Aprio’s geographic footprint while enabling it to expand into new local markets and industries. Financial terms were not disclosed. Aprio ranked No. 25 on Accounting Today’s 2024 list of the Top 100 Firms, with $420.79 million in annual revenue, 210 partners and 1,851 professionals. The deal will add five partners and 31 professionals to Aprio.

In July, Aprio received a private equity investment from Charlesbank Capital Partners.

KKB has been operating for six decades offering accounting, tax, and business advisory services to industries including construction, real estate, professional services, retail, and manufacturing. “There is tremendous synergy between Aprio and KKB, which enables us to further elevate our tax, accounting and advisory capabilities and deepen our roots across California,” said Aprio CEO Richard Kopelman in a statement. “Continuing to build out our presence across the West Coast is an important part of our growth strategy and KKB is the right partner to launch our first location in Southern California. Together, we will bring even more robust insights, perspectives and solutions to our clients to help them propel forward.”

The Woodland Hills office will become Aprio’s third in California, in addition to its locations further north in San Francisco and Walnut Creek. Joe Tarasco of Accountants Advisory served as the advisor to Aprio on the transaction.

“We are thrilled to become part of Aprio’s vision for the future,” said KKB managing partner Carisa Ferrer in a statement. “Over the past 60 years, KKB has grown from the ground up to suit the unique and complex challenges of our clients. As we move forward with our combined knowledge, we will accelerate our ability to leverage innovative talent, business processes, cutting-edge technologies, and advanced solutions to help our clients with even greater precision and care.”

Aprio has completed over 20 mergers and acquisitions since 2017, adding Ridout Barrett & Co. CPAs & Advisors last December, and before that, Antares Group, Culotta, Scroggins, Hendricks & Gillespie, Aronson, Salver & Cook, Gomerdinger & Associates, Tobin & Collins, Squire + Lemkin, LBA Haynes Strand, Leaf Saltzman, RINA and Tarlow and Co.

Accounting

Johnson says Congress will ‘do the math’ on key Trump tax pledge

Published

3 hours ago

November 18, 2024

Business Finance News

House Speaker Mike Johnson said Donald Trump’s plan to end income tax on tips would have to be paid for, injecting a note of caution into one of the president-elect’s key campaign pledges.

“This is one of the promises that he wants to deliver on,” Johnson said Sunday on CNN’s State of the Union. “We’re going to try to make that happen in the Congress. You’ve got to do the math.”

Johnson paired his comment with pledges to swiftly advance Trump’s economic agenda once the newly elected Congress is in place with Republican majorities in the House and Senate. The former president rolled out a series of tax-cut proposals during his successful bid to return to the White House, including rescinding taxes on overtime, Social Security checks and tips.

House Speaker Mike Johnson — Mike Johnson

“You have got to make sure that these new savings for the American people can be paid for and make sure the economy is a pro-growth economy,” said Johnson, who was among allies accompanying Trump to an Ultimate Fighting Championship event at New York’s Madison Square Garden on Saturday night.

Congress faces a tax marathon next year as many of the provisions from the Republicans’ 2017 tax bill expire at the end of 2025. Trump’s declared goal is to extend all of the personal income tax cuts and further reduce the corporate tax rate.

A more immediate challenge may be ahead as Trump seeks to install loyalists as cabinet members for his second term starting in January, including former Representative Matt Gaetz as Attorney General, Robert F. Kennedy Jr. as secretary of health and human services and former Representative Tulsi Gabbard for Director of National Intelligence.

Gaetz was under investigation by the House Ethics Committee for alleged sexual misconduct and illicit drug use, which he has denied. RFK Jr. is a vaccine skeptic and has endorsed misleading messages about vaccine safety.

Donald Trump Jr., the president-elect’s son who has been a key player in the cabinet picks, said he expects many of the choices will face pushback.

“Some of them are going to be controversial,” Trump Jr. said on Fox News’ Sunday Morning Futures. “They’re controversial because they’ll actually get things done.”

‘Because of my father’

Trump Jr. suggested the transition team has options if any candidate fails to pass Senate muster.

“We’re showing him lists of 10 or 12 people for every position,” he said. “So we do have backup plans, but I think we’re obviously going with the strongest candidates first.”

Trump Jr. said incoming Senate Majority leader John Thune owes his post to the president-elect.

“I think we have control of the Senate because of my father,” he said. “John Thune’s able to be the majority leader because of my father, because he got a bunch of other people over the line.”