XYPN Roundup: Everything You Need to Know From Our Tax Experts

7 min read
March 15, 2021

How's your relationship with the IRS? Are you feeling frustrated, confused, or even that you'd be better off on your own? You're not alone. Millions of others are right there with you every single tax season. The IRS can be pretty darn hard to get along with.

As an independent advisor, on top of your own personal return to deal with, you likely have a business return (your reward for being a badass entrepreneur) and however many clients' returns you've decided to lend a hand with as a part of your service offering—unless of course your leveraging an outsourced solution like XY Tax Solutions 😉. All that to say, you likely (and totally understandably) have some tax questions.

Where to turn? A good IRS relationship counselor (AKA tax professional) can get you off onto the right path, and the good news is we've got plenty of them over here at XY Tax Solutions. The even better news? They take the time throughout the year to offer up their expertise on a silver platter in the form of blog posts that cover an impressive amount of tax territory. 

To lend a helping hand, we've rounded up our top tax blogs that you can refer to as you navigate all things taxes. 

Considering the Benefits of a Tax Extension as a Financial Advisor

Let's talk about procrastination and when it can sometimes be the right thing to do (when it comes to your taxes, at least). By procrastination, I don’t mean putting filing off. I am talking about filing an extension to give yourself more time to navigate the ever-changing tax landscape. From the pandemic to natural disasters, there are plenty of extenuating circumstances affecting how and when you or your clients will be ready to file taxes.

As the current tax deadlines approach, it’s often asked if it is better to file an extension in order to file later than it is to hurry a return to completion. As we will discuss, it usually is. Your tax preparer will also thank you for allowing them to finish the return during the normally slower summer months. Let’s consider some circumstances that may make it appropriate for you to file an extension as a way of advocating for yourself or your clients.

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How State Conformity to Federal COVID-19 Relief Measures Impacts Your Taxes

COVID-19 relief measures brought rapid-fire tax law changes and provisions that rained down from the federal level like an especially judicious new form of precipitation. While these new policies were issued at the federal level, the actual impact they will have on your filing this tax season is primarily shaped by your state’s conformity (or non-conformity) to these measures.

Flashback to your high school government class and you’ll remember that because state governments have a certain level of autonomy, things like state tax codes can differ substantially from the federal tax code. Regarding COVID-19 relief measures, states had to weigh their priorities and decide whether or not to adopt these federal provisions.

Now that we find ourselves face to face with tax season, it’s time to dig in to understand how our states responded to federal COVID-19 relief measures and, subsequently, how our tax liabilities may have changed. This guide outlines how different states have navigated these new federal provisions and the resulting tax landscape. Don’t worry—no more high school flashbacks required.

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Everything Independent Financial Advisors Need to Know to File Their Taxes

The most wonderful time of the year is here! At least for those of us here at XY Tax Solutions, where we prepare all year round to hit the ground running and make tax season as seamless and stress-free as possible for advisors. But we realize not everyone virtually no one feels the same excitement we do about this time of the year.

We get it. Tax season can feel overwhelming at best, especially if you're a business owner. Throw in a global pandemic and subsequent tax changes and the thought alone of prepping taxes this year is enough to send any firm owner into a panic. That’s why we compiled a handy list of all the necessary information and documentation you’ll need to prepare your individual tax return this year.

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Outsourcing Tax Services as a Financial Advisor: Working Less to Achieve More

As a business owner, it’s important to tune into the things that fuel you. Some advisors enjoy writing, creating content, and leveraging a podcast to grow their business. Others like to spend their time tinkering with technology to create a high-level of automation and efficiency in their business processes. But what about the tasks you don’t enjoy? That’s where outsourcing comes in handy.

You can outsource everything from web design, to bookkeeping, to yes, even tax services. Typically, advisors outsource the more technical and tedious aspects of running their businesses (compliance anyone?). We commonly see advisors leaning on a turnkey asset management platform (TAMP) to oversee clients’ investment accounts, outsourcing to a paraplanning service, and/or leaning on a virtual assistant. Decisions like these are everyday occurrences in our industry because solopreneurs simply can’t do it all.

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What's the Perfect Time to Make an S Corp Election for an RIA?

When independent financial advisors first start their firms, they typically structure them as single member LLCs (or occasionally as sole proprietorships). A single member LLC, which is a business structure with one owner, has several advantages.

First, it has limited liability. Second, it is usually ignored for federal tax purposes—all the income is reported directly on the tax return of the sole owner. Third, the LLC can make an election to be taxed differently if it wants.

That last advantage is a big one.
After an advisor struggles through that first year or two of acquiring clients and perhaps having more expenses than income, things finally start to turn around. They have built a solid client base and are generating steady income. Reality hits when they realize they're subject to self-employment taxes on their net earnings—a not at all insubstantial 15% tax on top of their marginal tax rate.

Is there a way to control the self-employment taxes and still make money?

Yes, there is, and it involves being taxed as an S corporation instead of a single member LLC.

But before making the switch to an S corporation—which is a separate legal entity from the owner under the US tax structure—to save on self-employment taxes, advisors should know the benefits and limitations of making the election.

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How to Talk About Taxes with Your Financial Planning Clients

Income tax law changes frequently. While tax law is not usually as volatile as the stock market (thank goodness), it’s still convoluted and difficult to navigate, making it the perfect topic to discuss with your clients, who, like most other people, probably feel like they’re shooting in the dark when it comes to their taxes.

This is especially true this year as we saw several tax law changes in response to COVID-19; filing and payment due dates were extended, stimulus money was distributed, and the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) were announced. In 2020, we also saw the elimination of most required minimum distributions (RMS), and the ability to repay those RMSs already taken was changed back to January 1.

Remember back to your high school government class. US laws—including taxation—are created through compromise in Congress, then applied by the executive branch, and interpreted by the judicial branch. During the compromise phase, legislators negotiate the benefits and burdens of each law—when the law is finally passed, someone inevitably wins and consequently, someone else loses. The result is a tax landscape that is confusing to navigate and filled with limitations, some with phase outs, and some with tax cliffs.

Sometimes a client can decide the relative benefits between multiple tax laws. Therein lies the benefit of planning for taxes by bringing certainty to the financial planning process while taking advantage of the benefits and avoiding the tax cliffs.

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Community Property: What Financial Advisors Should Know

As a financial advisor, you’re likely familiar with the term “community property.” You might know that it has something to do with marriage and the way assets are divided between spouses during divorce. But you might not know that community property laws can be extremely important for tax filing, especially if spouses decide to file separate tax returns and they reside in a community property state. In certain states, community property laws can also affect the taxes of a couple in a domestic partnership even though they cannot file as married.

How might this impact your financial planning clients? This is exactly the question I’ll answer in this post. Whether you know a little or a lot about community property, this blog will give you the comprehensive overview you need to get fully up to speed.

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What Giving Through a Donor Advised Fund (DAF) Means for Your Taxes

The hardship of the past year has made evident that there are those in need in our communities and all over the world. For those able, the desire to give and donate resources where needed has been front of mind. While the title of “philanthropist” is surely one many of us would be eager to add to our byline, we don’t all have the resources to form our own private foundations (yet!). Nonetheless, we give in other impactful ways. As such, we here at XYTS would be remiss not to provide you with information about an opportunity to reduce your tax burden while giving.

The Tax Cuts and Jobs Act of 2017 (TCJA) nearly doubled the standard deduction, consequently making it more difficult to itemize deductions, including donations, and file Schedule A. That’s a big reason I am writing this today. I am excited to introduce the Donor Advised Fund (DAF) as an opportunity to give more generously and reduce the tax burden for individuals, families, and even corporations at the same time.

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Looking for more personalized tax support that is sure to make things right between you and the IRS? From one return to 1,000, Team XYTS has got your back (and your clients'). 

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