Tax planning is not something to be brushed off when working with stockbrokers. Many choices you make in the stock market will affect your taxes. Whether you use a professional, or do the trades yourself, it’s important to keep tax planning in mind as you buy and sell assets.
Hold Your Stockbroker Accountable
Don’t let your stockbroker off the hook when it comes to tax planning. Stockbrokers must know more than just the basics of taxes to get their license. All licensed brokers take a Series exam of some kind. Some take a Series 6 or a Series 7 exam, while Registered Investment Advisors take the Series 65 exam. There are a variety of tests your broker may have taken. The point is – those exams are difficult. They take a lot of learning, and much of that learning is about taxation. No licensed stockbroker can ignore taxes and then blame a lack of education. Not only must registered investment advisory firms and other organizations comply with certain fiduciary standards, but they are also responsible for having a high level of knowledge about their client's financial situations before making any recommendations. This includes information about liquidity, tax brackets, and other key pieces of information.
Having the Tax Conversation with Your Stockbroker
If you talk to your stockbroker about the tax consequences of trading, and you get a response like “Well, people pay taxes” or “Don’t let the tax tail wag the investment dog”, you’re talking to someone that is unconcerned about your tax burden, but not uneducated. They either don’t have time to dive into your taxes, simply don’t want to, or are restricted by their company’s compliance department.
Having this kind of stockbroker as your only financial advisor is dangerous for many reasons. Not considering your complete financial picture can cost you.
If your broker won’t discuss taxes with you then it's time to find a new one. The topic should be an open discussion where they demonstrate care and concern. They should also have resources at their disposal in case they don't have all the answers themselves. Not knowing everything is okay, but they shouldn't brush off the subject entirely. They need to help educate you on what you need to know - even if it isn't their favorite part of the job. It falls under what they were taught when getting licensed and therefore should feel responsible for assisting you properly.
Being Your Own Broker
These days many people have been opting to do things themselves, but that doesn't mean you should. Unless you fully understand the ins and outs of taxes and stock trading, it's best to leave it to the professionals.
Unfortunately, most DIYers have a linear view of their success. “I’ve turned my $100,000 into $120,000. I’m great. I made 20%”. However, with their portfolio still intact inside a qualified or non-qualified account, they haven’t yet actually made anything. They haven’t sold their securities, and the value could plummet in a matter of moments.
The markets can be volatile, as we’ve learned (often the hard way) throughout history. Your account might be up today, but without action, maybe down tomorrow, resulting in no real gain. However, if you sell while the account is up, do you know what the tax consequences will be? Too often, people don’t realize what their gains have cost them until after filing taxes the next year. And they often pay more than just capital gains tax. There are many tiers and secondary actions in taxation. For example, if you trade stocks and don't hold onto them for at least a year - those profits get taxed as ordinary income. This can subject you to owing 35% federal tax plus 6%-7% state income tax.
As a DIY trader, you don’t have to take an exam and you don’t have to know these things. But someone should. You, or your broker, should have a basic understanding of taxation before managing anyone's stock portfolio.
Talking to a Tax Planner
The qualified tax professionals at Ohio Tax Advocates are here to help you manage your portfolio, while minimizing your tax burden in the process. We are your one-stop-shop for all things finance. If you want to be confident in your financial decision making, schedule a consultation by calling 614-356-8647.