7 Financial Decisions to Discuss With Your CPA Before You Make Them

Your CPA can do a lot to help you understand the tax consequences of a financial decision. But there is one important limitation:  The conversation is much more useful before the decision has been made. 

Once an investment has been sold, a retirement distribution taken or a transaction completed, many planning opportunities may no longer be available.  You don't need to call your CPA every time you make a financial decision. But when significant dollars or major changes are involved, a conversation beforehand can help you understand the potential tax consequences and avoid surprises later. 

Here are seven situations when it may make sense to call your CPA before moving forward. 

1. You’re Planning to Sell a Significant Investment 

Selling stocks, mutual funds or other appreciated investments can generate capital gains. 

Before selling, it can be helpful to understand your cost basis, potential gain or loss, how long you've owned the investment and what else is happening in your tax picture that year. 

Your CPA and financial advisor may also want to coordinate. Investment strategy and tax strategy are related, but taxes shouldn't be the only factor driving an investment decision. 

2. You’re Buying or Selling Rental or Investment Property 

Real estate transactions can have tax consequences that aren't always obvious from the purchase or sale price. 

Your original basis, improvements, depreciation and prior use of the property can all affect the ultimate tax result. Depending on the transaction, there may also be planning strategies worth evaluating before a sale is completed. 

If you're considering a significant real estate transaction, involve your CPA early enough to understand the potential tax implications before you sign on the dotted line. 

3. You’re Considering a Large Retirement Account Withdrawal 

Taking money from a traditional IRA, 401(k) or another tax-deferred retirement account generally creates taxable income. 

A large withdrawal could potentially affect more than your income tax bill. Depending on your circumstances, additional income can interact with other elements of your financial picture. 

Before choosing how much to withdraw, consider asking your CPA to estimate the tax impact. Sometimes spreading withdrawals across tax years or coordinating them with other income may be worth considering. 

4. You’re Thinking About a Roth Conversion 

A Roth conversion can be an effective long-term planning strategy for some taxpayers, but it generally creates taxable income in the year of conversion. 

The question isn't simply, “Should I convert to a Roth?” 

It's also: How much should I convert? What other income will I have this year? What could the conversion do to my overall tax position? 

This is a good example of a decision where your CPA and financial advisor may provide different but complementary perspectives. 

5. You’re Exercising Stock Options or Receiving Equity Compensation 

Stock options, restricted stock and other forms of equity compensation can create complicated tax issues. 

The tax treatment can vary depending on the type of compensation and what action you're taking. Timing can matter, and withholding may not always cover the ultimate tax liability. 

Before exercising options or making a significant equity-related decision, understand both the investment implications and the potential tax consequences. 

6. You’re Planning a Significant Charitable Gift 

Generosity may come with tax-planning opportunities, particularly when the gift is substantial. 

Writing a check isn't always the only way to give. Depending on your circumstances, donating appreciated assets or using other charitable-giving strategies may be worth discussing with your CPA and financial advisor. 

The charitable organization still receives your support, but advance planning may help you structure the gift in a way that works well with your broader financial and tax goals. 

7. You’re a Business Owner Making a Major Financial Decision 

For business owners, the line between business taxes and personal taxes can become surprisingly thin. 

Changing your compensation, taking a significant distribution, selling part or all of your ownership interest, changing the company's structure or making other major decisions can affect your individual tax situation. 

This is particularly important for owners of pass-through entities, where business income may ultimately be reported on the owners' individual tax returns. 

Business planning and personal tax planning need to talk to each other. 

A Short Conversation Today May Prevent a Surprise Later 

You shouldn't make financial decisions solely for tax reasons. 

But you also shouldn't make a significant financial decision without understanding the tax consequences. 

One of the advantages of having an ongoing relationship with your CPA is being able to ask questions before the transaction rather than discovering the result months later when your return is prepared. 

Sometimes the answer may be, “You're fine—go ahead.” Sometimes there may be an alternative worth considering. Either way, you'll be making the decision with better information. 

Julie Moran, CPA works with individuals, families and business owners in Massachusetts and across the country to provide proactive tax planning and clear guidance throughout the year. 

Considering a significant financial decision? Talk with Julie about the potential tax implications before you move forward. Schedule a call with Julie. https://calendly.com/julie-juliemorantax/30min 

Frequently Asked Questions About Tax Planning Before Major Financial Decisions 

When should I contact my CPA before making a financial decision? 

The earlier the better when a transaction involves significant income, investments, real estate, retirement assets, business ownership or another potentially taxable event. 

Should I talk to my CPA or my financial advisor first? 

Often, both. Your financial advisor can evaluate the investment or financial-planning considerations while your CPA evaluates potential tax consequences. Coordinating the two can be especially valuable for major decisions. 

Can my CPA tell me whether I should sell an investment? 

Your CPA can help you understand the potential tax consequences of a sale. Whether selling is the right investment decision should generally be considered with your financial advisor based on your broader goals. 

Is a Roth conversion always a good tax strategy? 

No. Whether a Roth conversion makes sense—and how much to convert—depends on your current and expected future income, tax situation and broader financial goals. 

Why should I contact my CPA before a transaction instead of at tax time? 

Before a transaction, there may be opportunities to evaluate timing, alternatives and potential tax consequences. After the transaction is completed, your CPA may have fewer planning options available. 

This article provides general educational information and is not intended as individualized tax, accounting, investment, financial or legal advice. Tax laws and individual circumstances vary. Consult your professional advisors regarding your specific situation.