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By Holly SwanExecutive Director, Advisor Institute

The bad news is many of your prospective clients experienced a negative surprise when they filed their 2022 tax returns. The good news is they have the rest of 2023 to prevent future unwanted surprises and there are many ways you can help.

  • Under-Withholding or Underpayment of Estimated Taxes. Taxes can fluctuate from year to year as income varies. Those who owed a large amount with their 2022 return may want to consider increasing their withholding or paying additional estimated taxes this year.
  • Non-Qualified Dividends Taxed as Ordinary Income. While qualified dividends are taxed at preferential capital gains rates, non-qualified dividends are taxed at higher ordinary income rates. In order to be qualified, dividends must meet two criteria. First, they must have been paid by a U.S. domestic corporation or a qualified foreign corporation. Second, the investor must meet a minimum holding requirement. Prospective clients should be mindful of the qualified dividend holding period before selling stocks in order to opt in to the preferential lower tax rate.
  • Short-Term Capital Gains Taxed as Ordinary Income. Profits made from selling assets held for a year or less are taxed as short-term capital gains at ordinary income tax rates. Alternatively, gains from assets held for longer than a year are taxed at preferential capital gains rates. Prospective clients who are managing their own assets might not be aware of this distinction. As an After-Tax Advisor you can point out how a small change like this can result in large tax savings.
  • Capital Gains Distributions. Capital gains distributions are an investor's pro-rata share of proceeds received or reinvested from mutual funds resulting from the fund's sales of stocks and other assets within its portfolio. They are not, however, a share of the fund's overall profit. These distributions are often a shock to taxpayers, particularly in down years. Prospective clients looking to minimize their capital gains distributions may consider holding mutual funds in their retirement accounts while using separately managed accounts in their taxable portfolios.
  • Inability to Deduct Charitable Giving. An estimated 90% of tax filers use the standard deduction, which was increased substantially with the 2017 Tax Cuts and Jobs Act.* Due to the higher deduction amount, fewer people are benefiting from itemized deductions. For charitably inclined prospective clients whose itemized deductions no longer exceed the standard deduction, a donor-advised fund ("DAF") might provide an opportunity to make larger charitable contributions every few years in order to recover a tax deduction and continue to support their preferred charities with DAF distributions throughout the year.

Bottom line: The sooner you can help uncover tax issues, the better the outcome—for your prospective clients and your practice.