Tax Season Gives Advice Extra Power

Nearly half of U.S. investors take advantage of tax season to address their broader wealth and financial situation, according to a recent Charles Schwab survey of more than 1,000 investors.

The research shows nearly half (46%) of investors surveyed “approach tax time with their total financial situation in mind,” while 40% say they “review their overall financial plan coincident with tax preparation.”

While nearly all investors describe tax planning and financial planning as being related, 47% go so far as to suggest they are “one and the same activity.” Along the same lines, 44% say tax planning “plays a major role” in how they decide to invest and manage their wealth over time. Among affluent investors with $250,000 or more in assets, even more (50%) say tax planning plays a major role in informing their future wealth protection plans.

Charles Schwab researchers explain that active engagement in the investing process can make a big difference when it comes to achieving financial goals, “and tax season provides an invaluable opportunity for people to think holistically about investing and financial planning.” Joe Vietri, senior vice president and head of Charles Schwab’s retail branch network, adds that tax season is “a time of year when people have all their financial information top of mind, so it’s the ideal time to pay attention to broader financial goals and plot how you plan to get there.”

Echoing other recent industry research, Charles Schwab says the survey reveals that those with a financial plan are more likely to consider their total financial situation during tax season, and they are more confident in preparing their taxes. Among this group of advice consumers, 50% with a plan treat tax time as an opportunity to address their overall financial situation, compared to 31% who don’t have a plan. Among the 59% of survey respondents who use a financial adviser to help them with their investments, 42% are “extremely confident” in preparing their taxes, compared to 31% who don’t use an adviser. Even more dramatic, 66% with an adviser believe they’re doing all they can to reduce the tax impact of saving and investing, compared to just 48% without an adviser.

“Having a plan or getting advice has a positive impact on investors’ confidence, both in the short term on topics like annual tax planning, but also when it comes to longer term goals like saving for retirement,” Vietri concludes. “Even beyond the findings of this survey, we’ve definitely witnessed that our clients who have a financial plan or receive some form of professional advice feel more confident making financial decisions and more secure about reaching their goals.”

NEXT: Tax impact on portfolios is significant 

According to the survey, there’s also room for improvement when it comes to investors’ approach to tax planning. Over the course of the year, just 29% of those surveyed pay attention to the impact of taxes in their investment portfolios, while only 15% use tax loss harvesting to minimize the impact of investment-related taxes. In addition, just one in five (21%) include charitable contributions as part of a tax planning strategy.

“Tax planning shouldn’t just be a seasonal activity for investors,” Vietri adds. “Taxes can have a significant impact on portfolio returns, which affects progress toward achieving long-term goals, so it should really be an ongoing focus.”

Fifty-nine percent of survey respondents expect to receive a federal tax refund this year. In this group, 49% plan to use their refund to save; 34% will pay off debt; 27% will invest; and 23% say they will buy something special for themselves or someone else.

“Of those who plan to invest their refund, nearly half say they’re most likely to invest in equities (stocks, mutual funds or exchange-traded funds), 16% point to bonds or CDs, and 8% will hold their refund as cash in their portfolio,” the research shows.

Approximately two-thirds of investors surveyed use at least one tax-advantaged retirement account. Sixty-five percent have one or more individual retirement accounts (IRAs), and 63% have one or more 401(k) accounts.

Charles Schwab collaborated with Koski Research on the survey.