If you’re like the average taxpayer, you might be filing your taxes with a CPA. And for a lot of people, this works—especially if you never have to deal with complex tax situations. But for most taxpayers, there comes a time when they need more advanced tax strategies as part of their financial planning game plan. When that time comes, you’re going to want to have a person you go to that can educate you about tax laws and help you reduce your overall tax bill.
When you’re a strategic taxpayer, you end up saving thousands because you stop overpaying Uncle Sam. One of the most important strategic choices you can make is finding a tax professional who does more than just file your tax return.
I’ve had a lot of people ask me, “Who’s the best person to talk to about tax strategy? Do I need a financial consultant? Does a financial consultant provide tax strategy advice?”
I get these questions a lot. That’s why I’m going to walk you through some of your options when it comes to finding a professional to mentor you in your tax strategy. Then, I’ll go over a few tax situations that call for a professional who offers more services than your standard CPA. Here’s what we’ll cover:
- The different types of tax professionals
- Signs you need to start working with a tax strategist
- How to leverage tax law to your advantage
What Are the Different Types of Tax Professionals?
The terms financial advisor and tax strategist are often used to describe a lot of different things, but both have broad meanings. If you’re licensed to provide financial advice, you’re a financial advisor. If you offer tax strategy counseling, you’re a tax strategist. Financial advisors and tax strategists can also be CPAs, consultants, and planners, but they don’t have to be.
In other words, you have a few different options when it comes to finding a tax professional to help with your financial planning. But most people aren’t familiar with all the terms for different types of professionals in the tax industry. For instance, how is a financial consultant different from a CPA? Can a financial consultant or CPA be a tax strategist?
These are all great questions with important answers you need to know if you want to make wise financial decisions. The best person to help you with your taxes will depend on your unique situation. Learn more about each type of financial professional below to find out which one might work best for you.
What Is a CPA?
CPA stands for certified public accountant. This is the type of professional that many people turn to first when looking for help with taxes. If you’re a new taxpayer or you don’t have a lot of complex tax situations, CPAs can be a huge help.
CPAs’ responsibilities include gathering financial information and filing your tax return on time to ensure you’re in compliance with the law. The difficulty with CPAs who do not specialize in tax strategy is that they often don’t offer tax strategy services, which means they can’t help you make proactive decisions to reduce your taxable income for the upcoming year.
Many CPAs are also brought into a firm just for tax season, which is January through April. This makes it tough to get in touch outside of that time frame.
What Is a Financial Consultant?
A financial consultant is a type of financial advisor that helps you evaluate your current financial plan and help you reach your financial goals. A financial consultant can help with estate planning, counseling on how to get out of debt, or strategic financial decisions related to business.
While financial consultants often help clients make strategic financial decisions, not all financial consultants specialize in tax law. If your financial consultant has the expertise to provide tax advice, they are also a tax strategist.
What Sets a Tax Strategist Apart?
A tax strategist specializes in tax law and can help you save money on taxes while remaining in compliance with all tax laws. Financial consultants, financial advisors, and CPAs can also be tax strategists if they choose to specialize in tax strategy. Additionally, a tax strategist typically has a federal license from the National Association of Enrolled Agents that allows them to represent taxpayers before the IRS.
A tax strategist can also be an enrolled agent, financial advisor, or certified financial planner. The title isn’t important when it comes to finding the tax professional you want to work with. The important thing is finding someone with enough expertise in tax law to lower your taxable income and save you money.
Tax strategy is a specialized service. It goes beyond traditional financial planning services by helping you make complex decisions like:
- Whether or not you should hire an employee
- Whether you should establish your business in your state of residency
- When you should purchase an investment property in your own personal name versus a different name
Read on to find out the five most common situations that call for a financial advisor, consultant, or financial planner with expertise in tax strategy.
5 Times You Need a Tax Strategist as Your Financial Consultant
1. Buying an Investment Property
If you are considering buying an investment property, it’s time to sit down with a tax strategist. Most real estate investors ask themselves whether they should buy the investment in their personal name, in the name of an LLC, using a 401K, or inside a self-directed IRA.
If you’ve historically worked with a CPA during tax sessions, you likely won’t be able to reach out to learn about the tax implications of your purchase. A financial advisor specializing in tax strategy will have your back, helping you anticipate, plan for, or avoid certain taxes.
Here are the two most common questions I answer for my clients when it comes to buying an investment property:
- “Should I invest inside my IRA?” If you’re investing inside your IRA, you need to watch out for UBIT (unrelated business income tax). This is a nasty tax that comes up when you earn income from an investment inside your IRA. With UBIT, you’re subject to a nearly 40% income tax. This doesn’t mean you have to avoid investing inside your IRA, but you should consult with your financial advisor or tax strategist first.
- “Should I purchase my investment property in my personal name?” Purchasing an investment property in your name creates a sole proprietorship. There are tax advantages and disadvantages to holding an investment property as a sole proprietorship, an LLC, or a corporation. Depending on how much income your property generates, incorporating can help you remain in a lower tax bracket and avoid self-employment taxes. In other cases, an LLC has more tax benefits.
Guys, like I always say, don’t shoot from the hip when it comes to these investment decisions. You have to make intentional and strategic decisions with your investments, and that means you need a financial advisor or consultant who is also a pro in tax strategy.
2. Hiring Employees
Let’s say you’re ready to hire employees but aren’t sure how to do it. Maybe you’d like to hire contractors. Or you have contractors you want to place on a W-2 payroll, but you’re not sure how to do that or how often to pay them.
This is a situation where a tax law-informed financial advisor could come in handy. To save money, you need to understand the differences between when you pay an employee as a 1099 and when you pay an employee as a W-2.
A tax strategist or financial advisor can help you weigh the pros and cons. For example:
- W-2 employee: A W-2 employee is paid on the employer’s payroll. As an employer, you are required to withhold multiple payroll taxes from your W-2 employees’ paychecks to pay directly to the government. These payroll taxes include Medicare, Social Security, and State and Federal Unemployment Tax.
- 1099 contractor: 1099 contractors are not placed on payroll and often do not work for the employer on a regular schedule. Employers do not withhold taxes from 1099 contractors because contractors are responsible for paying taxes on their own.
Hiring someone as a 1099 contractor has many benefits, but you need to understand when it makes sense because you can only do this in certain situations. If you’re paying employees as contractors, but they should be classified as W-2 workers, you can find yourself in a lot of trouble. Think about the people who work for you and ask yourself these questions:
- Are you dictating how they do their work?
- Do you provide all supplies and equipment for when they show up to do their work?
- Do you control their hours?
If so, these might be employees. Paying them as contractors could be a worker’s compensation violation.
3. Liquidating Stocks
Whenever you consider selling stocks, bonds, or crypto, or you want to pull money out of your 401K, you need to know what your tax burden is going to be. When liquidating these assets, you may have losses that can offset your taxable income.
Let’s say you decided to trade in a brokerage account last year. Maybe you got on Robinhood to trade in the market, but you had some losses because you were still learning the markets. Those losses can go to offset your taxable income.
If you’re selling stock—same thing. You need a strong understanding of your tax burden. When selling stock, you are going to have capital gains tax. When you don’t understand the industry, you might do a quick Google search and think capital gains tax is at 20%. But it’s not that simple. You could fall into a 0%, 15%, or 20% tax rate. You have to consider the different rates.
Not to mention, are the capital gains going to be short-term gains? Short-term gains are when you hold onto stock for less than 365 days. Short-term and long-term gains are taxed differently. That’s why you have to partner with someone you feel comfortable having a conversation with to describe your financial goals.
4. Experiencing Low Business Expenses
Running a business with low business expenses can be tricky when it comes to taxes because you don’t have as many obvious options to write off. Don’t get confused, though. I’m not talking about business owners who just started out. Of course, you will have low business expenses when you just started your business.
However, this is a different story if you have a business where you make a lot of income and you don’t have a lot of expenses. If you don’t work with a tax expert who can help you reduce your taxable income, you’re going to lose big money.
For example, my clients who are day traders and run Amazon automation businesses work mostly from home, and the business is very hands-off. You might have a similar situation, where you have a very low-maintenance business that doesn’t require much more than your laptop and cell phone. If that describes you, then you need a tax strategist.
Does making a change mean we just need to spend more money?
Not at all! You have to understand that tax strategy is not just spending more money to avoid paying Uncle Sam. Business owners don’t want to be in a position where they constantly have to spend money to avoid taxes.
So what do we do? We partner with strategic financial advisors. You need someone who can say, “I have strategies for high-income earners, who also don’t have a lot of expenses inside their business.” These savvy strategies keep your tax bill low. If you partner with a financial advisor who understands the laws, you’ll see where all the advantages lie in the tax code.
5. Making a Filing Status Change
Guys, none of us want this to happen, but at some point, you might be going through a divorce, or you may have had a spouse pass away. This changes your filing status. Marriage is another event that can trigger a filing status change. Any time you make a change to your status, you need to talk to a tax strategist.
These are the five types of filing statuses:
- Head of household
- Qualified widow(er)
- Married filing jointly
- Married filing separately
I have clients all the time who say something like, “Hey, I’m getting married, and my wife is an independent contractor and owner of an LLC, and I work for a company as a C-level executive, so what should we do? Do we combine finances? Does it make sense to file as married or separate?”
These decisions have got to happen ahead of time. Don’t wait until your tax appointment in April to figure this out. Take the following situation, for example, to see why this is a bad idea.
Let’s say one of you owns a business, and the other is a W-2 taxpayer. Maybe the business owner has the ability to take additional write-offs ahead of time. Depending on the write-offs, it could make sense to file separately.
Another situation that impacts whether you want to file with your spouse is if one spouse has student loans and the other does not. When you file jointly, you’re disqualifying one spouse from being able to take the student loan interest deduction.
The tax brackets are different for filing married versus filing single. If you have children on your tax return and you file separately, now you don’t get to take all the tax credits you would’ve if you filed together. Do you see now how important it is that we take the time to speak with a financial advisor or alternative tax professional? That way, we’re never putting ourselves in a compromising position.
Leverage the Law to Your Advantage
The last thing I want you to do is to say, “Hey Karlton, I’m a taxpayer who just shot myself in the foot because I didn’t know what I was doing.”
People miss out on hundreds of thousands of dollars because they don’t know how to make tax laws work for them instead of against them. Leveraging tax laws to your advantage really requires working with someone who has made it their mission in life to study tax law and help people save as much as they can.
To learn more and save as much money as possible, start by checking out my other articles here: