In the process, advisors can also reduce the possibility that their clients may face hardships that could otherwise be avoided. Providing education on margin investing and the impact of tax reform are two timely examples.

According to The Wall Street Journal and the Financial Industry Regulatory Authority, investors have borrowed a record $642.8 billion in margin debt, or debt that is provided by broker-dealers that is typically used by clients to buy additional securities. The record-high levels of margin are believed to have intensified the approximately 1,000 point drop in the Dow Jones Index in early February.

Needless to say, when markets advance, margin investing can drastically boost returns. But when markets decline, the practice can be disastrous. That is especially true when investors are forced to liquidate portfolio holdings to pay down debt when their equity balances drop below certain thresholds.

Regulation T requires that investors have 50% equity when making initial margin purchases. And, if the value of equity drops below 25%, a maintenance call is initiated. The maintenance call forces investors to either deposit more cash into their accounts or raise cash by selling securities to pay down margin debt, according to Investopedia.

Broker-dealers can require even higher levels of equity in margin accounts.

The result of margin, therefore, is that investors’ losses are magnified because they have increased market exposure and can be forced to sell equities when markets decline. By doing so, investors may be unable to stay fully invested and ride out market dips. In other words, investors may be forced to sell low.

For advisors, the record-high level of margin is an opportunity to add value to clients by helping investors understand the impact of using leverage. Advisors should offer to provide models that can show investors the impact of a market decline on portfolios based on the extent of hypothetical downturns and various levels of margin.

Investors can therefore decide if they want to continue using margin or if they should scale back the amount of leverage that they have in their portfolios.

Tax reform is another timely subject that advisors can address with clients. The legislation that was signed into law in December will reduce taxes for the majority of Americans. Tax reform, however, limits the deduction for state and local taxes (SALT) to only $10,000. Individuals and families that have previously benefited from a substantial SALT deduction, therefore, are likely to see their taxes increase substantially. Indeed, the $10,000 cap on SALT is expected to raise about $36 billion in tax revenue next year, according to Fortune.

In the meantime, the IRS has instructed employers to reduce payroll withholdings, thereby increasing individuals’ take home pay. On one hand, the change makes sense since most Americans will see a tax cut, so decreasing withholdings is appropriate for most taxpayers. Putting more money in individuals’ pockets can also help stimulate the economy.

Yet, for Americans who will see an increase in taxes due to the SALT cap, the decrease in withholdings can be troublesome. It can mean that tax filers are not having a sufficient amount of income withheld during the year and will have to make potentially large payments when they file their 2018 tax returns. That can be an unpleasant and unexpected expense that can complicate budgeting.

Investors who don’t pay a sufficient amount of taxes throughout the year can also be hit with a penalty. According to the IRS, taxpayers must pay the minimum of the following by the end of each tax year:

• 90% of their required taxes
• 100% of the amount of taxes paid in the prior year

Taxpayers that fail to meet the requirement can face a penalty equal to half a percentage point of the outstanding balance. It is calculated on a monthly basis.

The issues involving tax reform make the topic of tax withholding a timely matter for advisors to address with clients. Advisors can start the conversation regarding establishing the appropriate level of withholdings by visiting the IRS withholding calculator with clients.