TaxGPT Use Cases for Financial Advisors

Tax planning plays a crucial role in comprehensive financial advisory services, yet it remains underutilized by many advisory practices. According to a recent survey by Herbers & Company, 90% of households with over $250,000 in assets expressed a desire for tax planning services, while only 73% of advisory firms currently provide them. This disparity reveals a significant gap in the market, where clients are seeking more proactive and integrated tax strategies, but many advisors are not yet equipped to meet this demand.

Traditionally, financial advisors have concentrated on investment management, retirement planning, and wealth building, often leaving tax planning as a secondary consideration or referring clients to external tax professionals. This fragmented approach can lead to missed opportunities, unforeseen tax liabilities, and less-than-optimal financial outcomes for clients. As tax laws grow increasingly complex and clients seek more personalized, year-round guidance, there is a pressing need for a more cohesive solution.

TaxGPT presents an innovative approach to bridging this gap. Leveraging advanced AI, TaxGPT offers real-time, customized tax advice across a range of scenarios, enabling financial advisors to enhance their clients' tax outcomes proactively. From addressing the tax impacts of major life changes to navigating the nuances of state-specific laws and responding to IRS inquiries, integrating TaxGPT into advisory services can transform tax planning from a sporadic, reactive task into a continuous, strategic advantage.

The following sections will explore various scenarios where TaxGPT can be utilized, demonstrating its potential to elevate the value of financial advisory services and meet the growing demand for effective tax planning.

Annual, Periodic, and Comprehensive Tax Planning

Proactive and continuous tax planning optimizes financial outcomes and ensures that clients remain compliant throughout the year. Traditional tax planning often takes a reactive approach, primarily focusing on year-end activities, potentially causing missed opportunities to adjust strategies throughout the year. 

Tax planning has been recognized as a “key component” of client retention, alongside other critical services like risk management, trust services, and estate planning, according to Suzanne van Staveren, Chief Financial Officer and Chief Operating Officer at Edelman. This highlights the importance of integrating comprehensive tax planning into financial advisory practices to build stronger, long-term client relationships.

With tools like TaxGPT, financial advisors can shift towards a comprehensive, year-round tax planning model that leverages AI-driven insights to provide more frequent reviews, adjust client strategies in real-time, and identify tax-saving opportunities well ahead of the tax season.

For instance, TaxGPT enables financial advisors to conduct comprehensive annual tax reviews to assess their clients' overall tax positions and identify opportunities for optimization. It also supports mid-year reviews, allowing adjustments to withholdings, identification of applicable tax credits and deductions, and the formulation of customized strategies based on changing financial circumstances. 

Key Advantages of Using TaxGPT for Annual, Periodic, and Comprehensive Tax Planning:

• Staying Compliant: Helps clients navigate complex tax laws and stay up-to-date with ever-changing regulations.
• Avoiding Surprises: Reduces the likelihood of unexpected tax bills by allowing for ongoing adjustments and proactive management.
• Optimizing Tax Outcomes: Identifies opportunities to maximize deductions, credits, and other tax-saving strategies continuously.
• Being Prepared for Tax Season: Ensures clients are well-prepared for tax filing, minimizing stress and potential errors.

Guidance on IRS Audits and Notices

Navigating IRS audits, inquiries, or notices can be challenging for many clients, often resulting in stress and anxiety about potential penalties or fines. Financial advisors are crucial in helping clients respond effectively to these situations, but the process can be complex and time-consuming. 

TaxGPT tax co-pilot offers a streamlined solution by providing advisors with AI-driven guidance customized to each client’s unique circumstances, ensuring a more effective and efficient response to IRS communications. It assists advisors in offering step-by-step guidance on how to handle various types of IRS inquiries, audits, or notices. It can generate customized responses based on the specific nature of the notice and guide clients through the necessary documentation requirements, response timelines, and potential strategies for resolution. 

Key Advantages of Using TaxGPT for IRS Audits and Notices:

• Reducing Stress: Provides clear and structured guidance, alleviating the anxiety associated with dealing with the IRS.
• Minimizing Potential Penalties: Helps clients respond correctly and promptly to notices, reducing the risk of incurring fines or additional charges.
• Enhancing Efficiency: Streamlines the audit response process, saving time and effort by providing precise instructions and templates.

Tax Implications of Major Life Events

Major life events such as marriage, divorce, childbirth, relocation, or changes in employment can significantly impact an individual's tax situation. These events often require careful tax planning to optimize outcomes and avoid unexpected liabilities. Financial advisors are crucial in helping clients navigate these changes, but the tax implications can be complex and challenging to manage manually. 

TaxGPT provides an innovative solution by offering real-time, tailored guidance to help clients adjust their tax strategies in response to significant life changes. It assists advisors in understanding the specific tax impacts of life events and provides actionable insights on how to adapt to these changes. 

For example, when a client gets married or divorced, TaxGPT can analyze the optimal filing status, calculate changes in credits and deductions, and help with estate or gift tax planning. In the case of a job change or relocation, it can provide guidance on state-specific tax implications, assess potential changes in tax brackets, and identify any eligible moving expense deductions. 

Key Advantages of TaxGPT for Managing Tax Implications of Major Life Events:

• Making Informed Decisions: Provides personalized guidance that helps clients understand the tax implications of their life changes, ensuring they make well-informed decisions.
• Strategic Tax Planning: Offers tailored strategies to optimize tax outcomes, such as selecting the best filing status or maximizing applicable credits and deductions.
• Avoiding Penalties and Surprises: Ensures compliance with changing tax rules and deadlines, reducing the risk of penalties and unexpected tax bills.
• Adapting to New Circumstances: Provides ongoing support and adjustments to tax strategies as clients’ circumstances evolve, ensuring they remain aligned with their financial goals.

State-Specific Tax Planning

Tax laws differ significantly across states, affecting everything from income tax rates to property tax deductions and credits. For financial advisors, managing these variations can be a complex task, particularly when clients are relocating or managing assets across multiple states. 

TaxGPT offers a valuable solution by providing tailored advice that takes into account the nuances of state-specific tax laws, allowing clients to optimize their tax strategies based on their unique circumstances.

For example, TaxGPT can guide advisors in handling residency changes, such as when a client moves from a state with high income taxes to one with no state income tax. It can also help clients navigate state-specific property tax rules, understand local surtaxes, and identify retirement income exclusions unique to certain states. 

Your overall tax liability heavily depends on where you live. For instance, New York has an income tax rate from 4%-10.9%, whereas Wyoming has no income tax. This variation highlights the critical need for state-specific tax planning to ensure clients are well-informed and compliant, regardless of their location.

Key Advantages of Using TaxGPT for State-Specific Tax Planning:

• Optimizing Tax Strategies: Provides customized advice to minimize tax liabilities in accordance with specific state laws.
• Navigating Residency Changes: Helps clients understand the tax implications of moving between states, including adjustments in income tax obligations.
• Maximizing Deductions and Credits: Identifies state-specific deductions and credits, such as property tax relief programs or unique retirement income exclusions.
• Staying Compliant: Ensures clients are aware of and comply with varying state tax laws, reducing the risk of penalties.

Self-Employment and Gig Economy Taxes

According to the IRS, self-employed individuals are required to pay a self-employment tax rate of 15.3%, which covers both Social Security and Medicare taxes. This rate applies to 92.35% of their net earnings from self-employment, making effective tax management critical to avoiding financial strain.

For freelancers, consultants, and gig workers, managing tax obligations can be particularly challenging due to the unique requirements they face. Unlike traditional employees, these individuals must handle their own tax reporting, including self-employment taxes, estimated quarterly payments, and the identification of deductible business expenses. 

TaxGPT simplifies this process for financial advisors by providing tailored tax advice that helps their self-employed clients stay compliant and minimize their overall tax burden. It assists advisors in identifying eligible business expenses, such as home office deductions, supplies, travel, and other costs that can be deducted to lower taxable income. TaxGPT also helps optimize quarterly tax payments by estimating how much should be set aside for taxes, thus avoiding underpayment penalties. 

Key Advantages of Using TaxGPT for Self-Employment and Gig Economy Taxes:

• Managing Cash Flow: Helps clients estimate tax liabilities accurately, preventing cash flow disruptions caused by unexpected tax bills.
• Reducing Overall Tax Liability: Identifies all eligible deductions and credits to minimize the amount of taxes owed.
• Avoiding Penalties: Assists in calculating and making timely quarterly tax payments, reducing the risk of penalties for underpayment.
• Navigating Complex Tax Rules: Provides guidance on specific tax rules applicable to freelancers, contractors, and gig workers, ensuring compliance with federal and state tax laws.

Business Tax Planning

Financial advisors play a key role in guiding businesses through complex tax rules and identifying opportunities for savings. TaxGPT enhances this process by providing detailed advice on choosing the optimal business structure, maximizing deductions and credits, and making strategic decisions regarding purchases and sales.

For example, TaxGPT can help small business owners identify tax-saving opportunities such as utilizing Section 179 deductions, which allow businesses to deduct the cost of certain property as an expense rather than capitalizing and depreciating it over time. It can also guide businesses in leveraging Research and Development (R&D) credits, which provide incentives for innovation and development activities. 

Key Advantages of Using TaxGPT for Business Tax Planning:

• Enhancing Cash Flow: Identifies opportunities for deductions and credits, such as Section 179 and R&D credits, that can immediately improve cash flow.
• Minimizing Tax Obligations: Provides strategies to reduce taxable income and optimize overall tax payments.
• Guiding Business Structure Decisions: Recommends the most tax-efficient business structure based on the client's specific circumstances.
• Optimizing Purchases and Sales: Advises on the timing and nature of purchases and sales to maximize tax benefits.

Retirement Account Strategies

A report by PwC indicates that only 36% of the US workforce feels confident that their retirement savings plan is on track, with the average retirement account balance for those nearing retirement providing less than $1,000 per month over a 15-year period. This underlines the importance of proactive, strategic planning to ensure financial security in retirement.

Financial advisors can leverage TaxGPT to provide tailored strategies that help clients manage their retirement accounts more efficiently. By determining the most tax-efficient mix of withdrawals from Traditional and Roth IRAs, SEP IRAs, 401(k)s, and other retirement plans, TaxGPT can guide clients through various scenarios to achieve the best possible tax outcomes.

For example, TaxGPT can analyze the client’s financial situation to recommend the optimal timing and amount for withdrawals from a Traditional IRA versus a Roth IRA, considering factors like current tax brackets, expected future income, and potential changes in tax laws. It can also assist with planning required minimum distributions (RMDs) and help clients make informed decisions about contributing to retirement accounts in a way that maximizes their long-term tax benefits.

Key Advantages of Using TaxGPT for Retirement Account Strategies:

• Minimizing Tax Liability: Offers strategies for tax-efficient withdrawals and contributions to reduce taxable income.
• Optimizing Withdrawal Timing: Helps clients determine the most beneficial times to withdraw from various retirement accounts to minimize taxes.
• Ensuring Compliance: Assists with managing required minimum distributions (RMDs) to avoid penalties.
• Maximizing Retirement Savings: Provides personalized advice on contribution limits and tax advantages for different types of retirement accounts.

Estate and Gift Planning Strategies 

With recent changes in the federal estate and gift tax exemption amounts, there are new opportunities to optimize estate tax strategies and reduce tax burdens. TaxGPT assists financial advisors by providing insights into utilizing these new exemptions effectively, helping clients leverage gifting strategies, trusts, and GST tax planning to minimize taxes and maximize the value passed onto future generations.

According to the IRS, the federal estate and gift tax exemption amount increased from $12.92 million to $13.61 million per individual, which provides a significant opportunity for individuals to transfer more wealth without incurring estate or gift taxes. 

Additionally, the GST tax exemption amount has also increased to $13.61 million per individual, allowing for tax-free transfers to grandchildren, remote descendants, and unrelated individuals more than 37 ½ years younger than the donor. Unlike the federal estate and gift tax exemption, any GST exemption that is not used during an individual’s lifetime is lost and cannot be transferred to a surviving spouse.

These increased exemption amounts present a unique window of opportunity, particularly for individuals who have already used most or all of their previous exemptions. Clients can make additional gifts to remove assets and any future appreciation from their taxable estates, reducing the potential estate tax burden. 

However, these historically high exemption amounts are set to decrease by half at the end of 2025. Therefore, time is of the essence, and clients should consider utilizing their remaining exemptions now to avoid higher taxes in the future. Starting the planning process early allows for thoughtful strategies and ensures that all objectives can be met before these exemptions expire.

Key Advantages of Using TaxGPT for Estate Planning Strategies:

• Preserving Wealth: Provides strategies to maximize the use of increased exemption amounts before they are reduced, ensuring more wealth is transferred to heirs tax-free.
• Ensuring a Smooth Transition of Assets: Offers guidance on setting up trusts and other mechanisms that facilitate efficient asset transfers according to the client's wishes.
• Leveraging Gifting Opportunities: Identifies opportunities to utilize increased gift and GST exemptions, reducing the size of the taxable estate.
• Adapting to Regulatory Changes: Helps clients stay ahead of scheduled tax law changes, optimizing estate planning strategies to minimize future liabilities.

Charitable Giving Strategies

Charitable giving can be a meaningful way for clients to support causes they care about while also achieving tax benefits. However, selecting the most tax-efficient strategy for charitable contributions can be complex, depending on factors such as the client's financial situation, the type of asset being donated, and the client's philanthropic goals. TaxGPT assists financial advisors by providing insights into optimal charitable giving strategies, helping clients maximize their tax deductions while fulfilling their philanthropic objectives.

For instance, TaxGPT can identify whether a client would benefit more from contributing to a donor-advised fund (DAF), making Qualified Charitable Distributions (QCDs) from an IRA, or donating appreciated assets such as stocks or real estate. Donor-advised funds allow clients to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to their favorite charities over time. QCDs, on the other hand, enable clients aged 70½ or older to transfer up to $100,000 per year directly from their IRA to a qualified charity, satisfying required minimum distributions (RMDs) while avoiding taxable income. Additionally, TaxGPT can guide clients on donating appreciated assets, allowing them to avoid capital gains taxes and take a fair market value deduction.

Key Advantages of Using TaxGPT for Charitable Giving Strategies:

• Maximizing Tax Deductions: Identifies the most tax-efficient method of giving, allowing clients to reduce their taxable income and potentially lower their overall tax bill.
• Supporting Philanthropic Goals: Aligns charitable giving strategies with clients’ philanthropic desires, ensuring that their charitable impact is maximized.
• Enhancing Flexibility: Provides options such as donor-advised funds that allow clients to make immediate contributions and decide later how the funds should be distributed to charities.
• Avoiding Capital Gains Tax: Suggests donating appreciated assets to eliminate capital gains tax, benefiting both the client and the charity.

Tax-Efficient Investment Strategies

Creating a tax-efficient investment portfolio maximizes after-tax returns and reduces overall tax drag. Traditional investment strategies often focus on pre-tax returns without adequately considering the impact of taxes, which can significantly erode a client’s wealth over time. TaxGPT helps financial advisors build tax-efficient portfolios by providing insights into optimal asset location strategies and identifying opportunities for tax-loss harvesting.

For example, TaxGPT can guide advisors on how to strategically place assets in taxable versus tax-advantaged accounts. High-growth investments or those generating significant taxable income, such as bonds or REITs, are often better suited for tax-advantaged accounts like IRAs or 401(k)s. Conversely, investments that are taxed more favorably, such as qualified dividends or long-term capital gains, might be better placed in taxable accounts. 

Additionally, TaxGPT can assist in identifying opportunities for tax-loss harvesting, where underperforming investments are sold to offset capital gains elsewhere in the portfolio, reducing the overall tax liability.

Key Advantages of Using TaxGPT for Tax-Efficient Investment Strategies:

• Improving After-Tax Returns: Optimizes asset location to minimize taxes and enhance the portfolio's overall after-tax performance.
• Reducing Overall Tax Drag: Identifies opportunities to minimize the impact of taxes on investment returns, such as through tax-loss harvesting.
• Enhancing Portfolio Flexibility: Provides strategies to manage taxable events and maintain a balanced portfolio aligned with clients' risk tolerance and financial goals.
• Aligning Investments with Tax Strategies: Ensures that investment decisions are closely integrated with broader tax planning strategies to maximize overall financial outcomes.

Cryptocurrency and Digital Asset Tax Planning

Cryptocurrency and digital assets present unique challenges and opportunities in tax planning due to their volatile nature and evolving regulatory landscape. As digital assets become a more prominent part of investment portfolios, managing their tax implications becomes increasingly complex. TaxGPT can assist financial advisors by providing customized guidance on tax compliance and optimization for cryptocurrency and digital asset transactions, ensuring clients remain compliant while minimizing their tax liabilities.

For example, TaxGPT can help advisors understand and advise on the tax implications of various cryptocurrency activities, such as buying, selling, or holding digital assets. It can offer strategies for tax-loss harvesting by identifying opportunities to offset gains with losses from other digital asset transactions. 

It can also suggest deferral strategies, such as holding assets for longer periods to qualify for more favorable long-term capital gains tax rates, or using like-kind exchanges under specific circumstances to defer taxes on asset swaps. This guidance is essential in an environment where the rules around digital assets are rapidly changing.

Key Advantages of Using TaxGPT for Cryptocurrency and Digital Asset Tax Planning:

• Minimizing Tax Impact: Provides strategies to reduce the tax burden on cryptocurrency transactions, such as tax-loss harvesting or deferral.
• Ensuring Compliance: Helps clients stay compliant with emerging regulations by understanding reporting requirements and tax obligations for digital assets.
• Optimizing Holding Strategies: Advises on the most tax-efficient ways to hold and dispose of digital assets, considering both short-term and long-term tax impacts.
• Navigating Regulatory Changes: Keeps clients informed of any changes in tax laws or IRS guidance related to digital assets, ensuring they are always prepared.

Capital Gains and Loss Harvesting

Capital gains taxes can significantly impact an investor's overall returns, making it crucial to adopt strategies that minimize these taxes and maximize after-tax gains. TaxGPT plays a key role in optimizing capital gains realization and loss harvesting, helping financial advisors guide their clients in strategically managing their portfolios to achieve the best possible tax outcomes.

TaxGPT can provide insights on the optimal timing for selling appreciated assets to minimize tax liabilities, such as by timing sales to take advantage of lower tax rates or offsetting gains with losses from other investments. By identifying opportunities for loss harvesting—selling securities at a loss to offset capital gains elsewhere in the portfolio—TaxGPT helps clients reduce their taxable income and maximize overall tax efficiency. These strategies are particularly valuable in volatile market conditions, where the ability to quickly adapt and make informed decisions can lead to significant tax savings.

Key Advantages of Using TaxGPT for Capital Gains and Loss Harvesting:

• Minimizing Capital Gains Taxes: Provides strategies to defer or minimize taxes on gains, such as through tax-loss harvesting or timing the realization of gains.
• Maximizing Tax Efficiency: Identifies opportunities to optimize the portfolio's tax impact, ensuring that more of the client's returns are retained after taxes.
• Enhancing Portfolio Flexibility: Allows for more dynamic decision-making by providing real-time guidance on the tax implications of different investment strategies.
• Aligning with Financial Goals: Ensures that tax strategies are integrated with broader investment and financial planning goals, enhancing overall portfolio performance.

Final Thoughts 

TaxGPT is revolutionizing the role of tax planning in financial advisory services by addressing gaps that traditional methods often overlook. From year-round tax planning and IRS audit guidance to managing the complexities of life events, state-specific taxes, and emerging areas like cryptocurrency, TaxGPT empowers financial advisors to offer more comprehensive, customized services. By integrating AI-driven tools like TaxGPT, advisors can enhance their practice, improve client satisfaction, and achieve better financial outcomes for their clients.

As the financial landscape continues to evolve, the role of AI in advisory services will only become more critical. Embracing AI-driven solutions like TaxGPT will enable financial advisors to adapt to changing client needs, regulatory environments, and market conditions, positioning themselves for future growth and success in a competitive industry.