Tax Tips for Financial Advisors

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Tax Tips for Financial Advisors

Financial advisers, like any small business owners, seek strategies to decrease taxes, enhance revenue, and prepare for retirement. Advisors who operate their own firms endure a variety of expenditures that are particular to their line of work, but most or all self-employed taxpayers may take numerous steps to minimize their reportable income.

This article looks at the main ways financial advisers may reduce their yearly tax costs. The following are three suggestions to assist financial advisers reduce the amount of adjusted gross income they must disclose to the IRS.

Key Takeaways

  • As a financial adviser, you must approach your profession as if it were any other small company.
  • This includes comprehending the tax benefits and deductions available throughout tax season.
  • While conventional expenditures like as overhead and marketing materials are common in all types of firms, financial advisers may additionally deduct industry-specific certification and licensing fees.
  • Brokerage fees, software, and expert investment analysis may also be considered business expenses by financial planners.
  • Many financial advisers are also tax preparers, but those who are not should consult with a tax professional.

1. Separate the Business Entity

Many financial advisers, like other small company owners, divide their professions into different legal companies, such as a subchapter S corporation, C corporation, partnership, or LLC. They then pay themselves wages from their enterprises, leaving the remainder of the practice’s revenue taxable to the company.

This protects the practitioner from being personally responsible for any business taxes and enables him or her to avoid self-employment tax. It may also minimize the advisor’s culpability in the event of a lawsuit. If a customer sues the adviser for whatever reason, depending on how the firm is structured, the business itself may be held accountable rather than the advisor.

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2. Deduct Standard Business Expenses

Advisors may deduct a wide range of business expenditures in the same way that any other small company can. These are some examples:

  • Marketing and advertising
  • Business and cell phones
  • Rent, utilities
  • Employee salaries
  • Health savings accounts, life and health insurance, and other advantages
  • Paper, copiers, and furniture are examples of standard office equipment.
  • Accounting applications that maintain track of firm revenue, receivables, and expenditures are examples of computer and software costs.
  • Contributions to traditional retirement plans (those that are deductible now with distributions that are taxable at retirement)

However, financial advisors incur expenditures that are exclusive to their industry. Advisors may be eligible to deduct any or all of the following expenses depending on their business model:

Broker/Dealer costs

Most broker-dealers impose yearly fees to their advisor personnel, including maintenance and administrative expenses. In addition, they often retain a part of the gross commissions generated by their brokers and advisers.

Trading Platforms

When placing securities orders for their clients, many advisers avoid broker-dealers in order to get the best potential market pricing. Trading platforms connect the adviser directly to the markets, bypassing the market makers that broker-dealers utilize to trade for them. Most trading platforms charge a monthly cost for this service, which varies based on the services that the adviser requires.

Financial Planning Software

Most advisers now examine assets and portfolios using sophisticated computer algorithms. There are also numerous extensive financial planning applications available that enable advisers to input every element of a client’s financial status and then generate thorough reports demonstrating what may happen in different hypothetical scenarios that the customer may choose to follow.

Many of these programs cost thousands of dollars to purchase and hundreds of thousands more to keep running each year.

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Businesses may no longer deduct the cost of tax preparation costs after the adoption of the Tax Cuts and Jobs Act in 2017.

Education and Certification Expenses

The fees of continuing education and classwork for professional certifications like the CFP, CLU, or ChFC may be substantial and are tax deductible for advisers. Depending on the advisor’s circumstances, the fees of licensing to offer securities or insurance may or may not be deductible.

A new adviser who has just transitioned from a totally other vocation to begin a new practice will not be allowed to deduct these costs since they will qualify the advisor to operate in a different line of business. However, advisers who are already working in some manner may be allowed to deduct this if the IRS deems them to be in the same field.

3. Report Income and Expenses

Financial advisers must file the same tax forms as other small company owners to disclose their business and personal income. All business income and costs must be reported on Schedule C by sole proprietors, while others must submit partnership or corporation tax filings.

Employee financial advisors must disclose any unreimbursed job-related costs on Form 2106 and carry them to Schedule A. (those who are not able to itemize deductions cannot do this).Major purchases, such as new furniture, may be deducted in the year of purchase on the appropriate kind of tax return under Section 179 of the Internal Revenue Code.

Advisors should also ensure that their business costs are broken down by customer for recordkeeping reasons, since the IRS may request information in the case of an audit. This also allows advisers to see how much money they are spending on each of their customers. Most advisers may easily meet these requirements using a normal company accounting package.

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Can I Deduct Financial Advisor Fees?

Prior to 2018, financial advice fees that exceeded 2% of a taxpayer’s adjusted gross income might be claimed as a deduction. The Tax Cuts and Jobs Act of 2017 repealed this deduction for the years 2018 through 2025.

How Do You Choose a Tax Specialist?

The Internal Revenue Service has compiled a list of recommendations for locating a trustworthy and competent tax preparer. The first thing to ask a tax expert is about their prices and credentials; the IRS maintains a registry of tax return preparers, so checking their disciplinary history and licensing status is simple. Finally, it is critical to study a tax return, including bank information, before signing it. Tax preparers who are abusive should be reported to the IRS.

How Much Do Financial Advisors Make?

According to ZipRecruiter statistics, the typical financial adviser earns about $70,000 per year. Salary distribution, like that of other professions, is significantly influenced by region and experience, with top earners earning more than $100,000 per year.

The Bottom Line

Although many of the tax-saving measures provided here are relevant to the majority of small company owners, there are a few expenditures that only financial experts must bear. Some advisers can prepare and file their own returns, but those who are not professional tax preparers should transfer this responsibility to someone else.

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