The pass-though profit and tax deduction for self-employed medical health insurance can boost financial advisor income.


Many independent wealth advisors who practice what they preach — a holistic view of monetary planning through all stages of life — can boost their take-home pay almost mechanically.

That’s since the tax code accommodates two deductions that may add as much as tens of hundreds of dollars in “extra” money every year. The 2 advantages are a boon to advisors confronting lower income this yr as Wall Street’s stock market slide cuts into the fees they charge clients based on their assets.

“Anyone who’s in an AUM structure might be going to see their revenue drop this yr, so anything to assist reduce their taxes is definitely going to assist,” said Amit Chopra, the founding father of Forefront Wealth Planning & Asset Management in Ramsey, Recent Jersey. Charging fees for assets managed is the dominant model for the greater than 77,000 independent advisors.

The primary tax profit is a 20% deduction on business income. Available to independent and self-employed business owners, it reduces overall taxable income by one-fifth. While it phases out at certain income levels for wealth managers, financial planners and brokers, together with doctors, lawyers, accountants, consultants and other employees in service professions, the brink at which it goes disappears is high enough to not snare most advisors.

“It’s a big deduction,” said Scott Beaudin, the founding father of Pathway Financial Advisors, an RIA in Burlington, Vermont, and, an authorized financial planner and accountant. “I might hope most advisors find out about it.”

The complete 20% break, referred to as the pass-through deduction, is out there to individuals making as much as $170,050 ($340,100 for married couples) and phases out for income above those limits. Once earnings reach $220,050 ($440,100 for couples), it goes away entirely. The profit is for individuals who run a business through a partnership, limited liability company or other “pass-through” entity that doesn’t itself pay taxes but as an alternative “passes” its taxable income to its owner. It’s set to run out in 2026.

The deduction is a boon for owners of restaurants, retail shops and other small businesses at the center of the American economy. Advisors and brokers who’re salaried employees at Wall Street or regional brokerages, including people who also operate at independent advisory firms, aren’t eligible for the perk. That provides advisors who’ve ditched the W-2 life and restrictions of wirehouses to strike out independently and work for themselves, even when allied with a big broker-dealer, a bonus.

Take a senior wealth advisor who makes an annual $238,000, the industry average in 2020, based on a Schwab Advisor Services report in February 2022. She’s within the 35% tax bracket and might shave $47,600 (20%) off her taxable income, a tax savings of $9,520. What’s more, the savings push her income into the lower 32% bracket. 

A couple of advisor in an independent practice? Each can take their pro rata share of the firm’s total income and claim the deduction on it. The profit is for what the IRS called qualified business income, meaning income from running a business. It doesn’t include income from investments or wages.

Chris Bowman, a partner at Skilled Wealth Advisors in Downers Grove, Illinois, a registered investment advisor firm (RIA) that’s affiliated with broker-dealer LPL Financial, said that removed from all eligible advisors were clued in to the deduction. 

“It relies on how tax-aware the advisor is,” he said. “In the event that they’re only a wealth manager, versus a holistic financial planner, then perhaps not.” said Bowman, who took the profit last yr. “I even have an excellent accountant.”

But even advisors who tackle all elements of wealth planning, from college and homebuying to retirement and estate planning, can have blind spots. 

“Some advisors have an ego and think that because they’re a CFP and have some basic tax knowledge, they will do their taxes themselves,” said Chopra. “I feel like advisors fall into two categories: ‘well-versed in all the pieces but miss things like this, and advisors who use accountants.”

The deduction will be particularly helpful this yr if the stock market, now down roughly 20% from its January record, doesn’t rebound. That’s because most independent advisors charge a fee — typically around 1% — based on the worth of the client assets they oversee. On average, fees based on assets under management (AUM) make up 70% of compensation for all of an advisor’s compensation, based on Cerulli Associates. But as Wall Street flirts with bear market territory and popular stocks in client portfolios lay battered — shares in Google parent Alphabet are down nearly 27% this yr — many advisors may take home smaller fees, a success to compensation that makes the 20% deduction much more helpful.

The second big tax profit for independent advisors is the deduction for self-employed medical health insurance. Those premiums are 100% deductible.

Unless an employed spouse is on company-sponsored medical health insurance, working for oneself means ponying up for coverage, typically a big cost. Average annual premiums last yr were $7,739 for a single person and $22,221 for a family,  based on the Kaiser Family Foundation. Whether for themselves, their spouses, their dependents or nondependent children not older than 26, those sums come off the taxable income line, reducing the filer’s tax bill. Premiums for long-term care and dental work are also deductible.

Beaudin said it was common for business owners, not only independent advisors, to overlook that deduction: “I’ve seen people miss a $10,000-$30,000 deduction—sometimes $40,000.”


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