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This article is the third in a series of the seven most common mistakes financial advisors make on tax planning with clients.
Growing up camping, my Boy Scout leaders would often ask the quasi-philosophical question, “If a tree falls in the forest, but nobody is there to hear it, does it still make a sound?” The corollary for tax planning is, “If you save your client a gazillion dollars in taxes, but it was a giant headache and they were frustrated every step of the way, will they still refer you to their friends?”
If your tax planning makes your clients’ life more difficult, you’re doing something wrong. For example, if they struggle to get all their tax documents each year, you lose. If they forget about the Roth conversion and get angry when the tax bill comes due in April, you lose. If their CPA didn’t get notified about a qualified charitable distribution (QCD) and the return must be amended, you lose. If getting you a copy of their tax return is a hassle (see mistake #7), you lose.
Sound a little too familiar?
Consider the advisors who sent a 1099 letter in January, worked directly with the client’s tax preparer, established a QCD checkbook/debit card, did not wait to pay taxes on gains harvesting and/or Roth conversions, or assisted clients with online estimated payments
That made the client’s life easier.
Any advisor (as well as Google) can tell a client that they need to make estimated tax payments. Those instructions, however, leave the client at the mercy of figuring out how to make the payment, how much to pay and wondering why they need to pay at all. This is better than having your client pay under-withholding penalties, but so much more is possible.
Instead of leaving the client to figure out estimated payments on their own, you can make their life easier by providing a one-page guide to estimated payments, sending a reminder with detailed instructions when each quarterly estimate is due, coordinating with their tax preparer to reduce and/or eliminate estimated payments by increasing withholdings, or even sending a distribution from their account each quarter to cover the cost of the payments.
Taking the example of estimated payments one step further, the best advisors will walk their clients through the process of making online payments and advise them that the last digit of each payment should correspond with the respective calendar quarter (April 15th estimated payment of $10,001 vs. just $10,000) so that if the IRS losses a payment, it will be easier to track it down.
Another great example of making a client’s life easier is assisting them in deciding how much to withhold from their income sources (e.g., paycheck, IRA distributions, Social Security, pension, etc.). Using Social Security specifically, a client’s four withholding options are 7%, 10%, 12% or 22%. Instead of leaving it for the client to decide (or deferring to the tax preparer), you can make their life easier by telling them, before they claim Social Security, exactly which option to choose. This might sound like the following:
Mr. & Mrs. Client, when you start your Social Security, you will have five options. The first is to not have any taxes withheld, in which case you would need to pay the full tax bill in April. The other four options range from 7% to 22%. After reviewing your financial situation, I recommend you choose the 22% option so that you are more likely to get a refund in April. To make your life easier, I’ve printed the form which you can sign, and I’ll mail it for you.
My last example (for which I did an entire podcast episode) is making the tax preparer’s life easier. If you are calling or otherwise bothering a tax preparer during the thick of tax season, you’re not helping. Instead, communicate with the tax preparer in January by making sure they got your 1099 letter and letting them know you are always available to provide any documents the client may have missed. After that, leave them alone until mid-May, at which point you can offer to pay for an hour of their time to review together your shared clients.
Action items
Whatever you are doing around taxes, consider if it is making the client’s life easier or harder. Contact your clients who are making estimated payments and provide them with a step-by-step guide (I include screen shots of the website in mine) to make these payments easier. Review the tax withholding for all of your clients to see if you can eliminate the need for estimated payments. With all this focus on making the client’s tax life easier, make sure it doesn’t distract you from mistake #4 “Focusing on only the current year’s taxes” (which I will discuss next week).
Come back next week for part four in this seven-week series. Until next time, happy tax planning!
Steven A. Jarvis, CPA, MBA, is CEO and head CPA of Retirement Tax Services. Want more on the most common mistakes advisors make on tax planning? Join Steven for an online session on April 27th and use code "AdvisorPerspectives" at checkout for an exclusive discount.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
