The US tax code is complex, and it’s the job of a professional to stay on top of changes so they can legally help their clients minimize their taxes. Tax advisors have varying professional backgrounds, but most are certified public accountants (CPAs), registered financial planners, or enrolled agents (EAs).
The amount of money you pay in taxes each year depends on your income level, the types of investments you make, and your business structure. A good tax advisor will be able to reduce your tax liability by helping you take advantage of deductions, credits, and other benefits that you may not have known existed.
For example, if you were granted stock options as part of your compensation package, a tax advisor can model different exercise scenarios to help you avoid the alternative minimum tax (AMT). Likewise, if you’re thinking about buying or selling a rental property, a tax advisor will inform you of the 1031 exchange, which allows you to defer capital gains taxes.
A good tax advisor can also advise you on actions you can take throughout the year to reduce future taxes. For instance, if you’re planning to move from California to Texas, your tax advisor can run calculations to see if it makes sense to exercise your stock options before the move or wait until after. They can also inform you of retirement and investment accounts that can be used to lower your taxable income, like the mortgage interest or residential energy credits.
If you’re self-employed, a tax advisor can help you set up the right combination of business and personal financial accounts to lower your taxes. They can help you find and maximize deductions and credits, like those for business mileage and the home office deduction, that you may not have been aware of. They can also help you establish a cash flow plan and set up your books for long-term success.
Many people who hire a tax advisor recover the cost of their services in reduced tax liabilities each year. In addition, hiring a professional tax advisor can save you time and improve the accuracy of your return compared to doing it yourself or using a DIY software program.
However, if you’re an advisor who provides investment or insurance advice, you may be prohibited from giving tax advice. This can make it difficult to discuss strategies with your clients, especially when you’re referring them to a CPA for advice. Fortunately, there are ways to give casual advice on tax matters without violating your firm’s compliance policies. Whether you’re a CPA or not, understanding what does and doesn’t constitute tax advice can help you engage with your clients more confidently on this topic while reducing the risk of getting hit with a malpractice claim. Steuerberatung