What CPAs Want Advisors to Know About Tax Mitigation

What You Need to Know

Tax professionals say it is always important for wealth advisory professionals to collaborate with their clients’ CPAs.
However, periods of substantial market gains or losses raise the stakes when it comes to the effect of taxes on wealth generation.
Even if an advisor is not ready to fully integrate nuanced tax considerations into their planning process, there are some basic steps to take that can pay substantial dividends.

Ryan Losi is an executive vice president of the boutique certified public accounting firm PIASCIK, where he leads the firm’s business development efforts in addition to managing key client relationships.

Given his 30 years of experience and deep expertise in tax matters affecting high-net-worth individuals and international business interests, Losi serves as a technical resource for professionals across the firm. In addition, his understanding of the complex tax needs of professional athletes has enabled him to achieve a registered representative status with the NFL Players Association, and his practice includes a substantial number of professional athletes and entertainment professionals.

During a recent interview with ThinkAdvisor, Losi offered some key insights and tips for financial advisory professionals who are seeking to add “tax alpha” to their clients’ financial plans. According to Losi, it is always important for wealth advisory professionals to collaborate with their clients’ CPAs, to ensure investment strategies and portfolio decisions make sense from a tax mitigation perspective.

However, according to Losi, the current market environment raises the stakes when it comes to tax management issues. When clients suffer market losses, he explains, this comes along with an important silver lining — namely the opportunity to engage in tax loss harvesting and other potentially powerful tax liability mitigation techniques such as Roth conversions.

Losi says the time is right for advisory professionals to step up their game and find better ways to collaborate with CPA professionals. Especially when it comes to higher net worth clients, Losi says, it is hard to overestimate the effect tax issues can have on long-term investment outcomes.

A New Market Environment

In Losi’s experience, heading into 2022, many investors were coming off of three incredible years in the market, such that clients saw meaningful appreciation in almost all the asset classes they owned.

“As such, we saw a record amount of capital gains being realized, and we saw a lot of sales of assets, from cryptocurrencies to real estate,” Losi says. “We saw a lot of initial public offerings, as well, and the launch of SPACs. For us as the CPA, we had a tremendous amount of work to do for our clients.”

Losi says the firm saw a lot of interest in estate planning during this time period, and specifically interest in strategies that involved gifting and the setting up and funding various types of trusts. A good part of this demand, he explains, came from the new limits placed on “stretch IRAs.”

Safe to say, the environment has now shifted, and many clients are likely to experience greater capital losses in 2022 than gains, Losi says. The broad-based market selloff has left clients with nowhere to hide, and only those few sophisticated investors who might have short-sold certain assets will realize substantial gains this year.

“One implication of this for financial advisors is the fact that this might be a good time for a Roth conversion,” Losi says. “With the losses, it is likelier that a given high-net-worth client is going to end this year in a lower tax bracket than they might have anticipated at the start of the year. If the client has a big income dip this year, it’s a significant conversion opportunity.”

In fact, Losi says, investors now face a “double dip” conversion opportunity.

“It’s a double dip because, on the one hand, the client will likely draw less income this year, and on the other hand, the value of the assets in their traditional individual retirement accounts have likely declined, helping to offset the overall level of income,” Losi observes. “This dynamic makes conversions particularly attractive for some clients.”