Tax Season Prompts Focus on Financial Planning

Close to half of U.S. investors assess their broader wealth and financial situation during tax season, according to a new survey.

The survey by Charles Schwab of more than 1,000 investors found that 46 percent of them said they focus on their overall wealth and financial situation when having their taxes prepared, while 41 percent of investors with a financial plan are “extremely confident” when preparing their taxes, compared to 25 percent without a plan.  More than half (59 percent) of the investors surveyed expect to receive a federal tax refund this year

Many investors approach tax planning and financial planning as connected activities, with 47 percent saying they believe the two are one and the same, and 44 percent indicating that tax planning plays a “major” role in how they invest and manage their wealth over time. Among affluent investors with $250,000 or more in assets, even more (50 percent) say tax planning plays a major role in informing their wealth plan.

“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,” said Joe Vietri, senior vice president and head of Charles Schwab’s retail branch network, in a statement. “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.”

Forty percent of all survey respondents said they have a written financial plan, and among those with a plan, 52 percent say tax planning is a specific component of their plan. The survey reveals that those with a financial plan are more likely to consider their total financial situation during tax season and more confident in preparing their taxes. Fifty percent with a plan treat tax time as an opportunity to address their overall financial situation, compared to 31 percent who don’t have a plan.

Among investors who incorporate tax planning into their financial plan, nearly half (48 percent) said they feel “extremely confident” as they prepare their taxes.

The survey demonstrates that working with a financial professional also drives confidence for investors come tax time. Among the 59 percent of survey respondents who use a financial advisor to help them with their investments. Forty-two percent said they are “extremely confident” in preparing their taxes, compared to 31 percent who don’t use an advisor, while 66 percent with an advisor believe they’re doing all they can to reduce the tax impact of saving and investing, compared to 48 percent without an advisor.

According to the survey, there is room for improvement when it comes to investors’ approach to tax planning. Over the course of the year, only 29 percent of those surveyed pay attention to the impact of taxes in their investment portfolios; only 15 percent use tax loss harvesting to minimize the impact of investment-related taxes; and just 21 percent include charitable contributions as part of a tax planning strategy.

Although tax efficiency can be a key factor in estate planning, only 19 percent of investors take the opportunity to develop or assess estate plans when reviewing their tax documents for filing.

“Tax planning shouldn’t just be a seasonal activity for investors,” said Vietri. “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.”

Of the 59 percent of investors who expect to receive a tax refund this year, 49 percent plan to use their refund to save, 34 percent will use the refund to pay off debt, 27 percent will invest the money, and 23 percent said they would buy something special for themselves or someone else.

Of those who plan to invest their refund, nearly half (49 percent) said they are most likely to invest in equities (stocks, mutual funds or exchange-traded funds), 16 percent in bonds or CDs, and eight percent will hold their refund as cash in their portfolio.

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

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