Some financial advisors have come to dread Tax Day. Although not every client may be required to file income taxes depending on their financial situation, for some advisors, Tax Day has become synonymous with anxiety, frustration and high-stress, professional “fire drills.”
In advance of April 18, which is the deadline for filing 2021 tax returns, there are a few ways financial advisors can prepare clients and staff to avoid last-minute fire drills. The sooner advisors start preparing, the better set they’ll be for this tax season and future seasons.
Here are seven ways to prepare your clients and staff to avoid (or reduce) Tax Day fire drills:
— Find time to help clients organize paperwork.
— Create an annual tax discussion checklist.
— Have a copy of clients’ most recent tax returns.
— Start preparing clients for Tax Day six months in advance.
— Identify contributions or distributions earlier in the year.
— Talk with your clients about filing an extension.
— Generate necessary cash early for any tax bill due.
Find Time to Help Clients Organize Paperwork
Tax time can involve a mountain of paperwork. Before your clients are ready to file, help them organize important documents related to their investment accounts. Those specific documents may include:
— Forms 1099 and other tax forms showing earned income
— Records of charitable contributions
— Copies of previous tax returns
— Proof of payments made from their investment accounts
Your support staff can be a great help here, working with custodians to access the reports. Also, work with the client’s tax professional to see if there are any other documents you may be able to provide on behalf of the client. Finally, schedule a “let’s get organized” call to help your clients be prepared.
Create an Annual Tax Discussion Checklist
If you’re wondering what should be discussed, you can create a checklist of top tax priorities and use it as a guide. This proactive step can help take the edge off of the conversation and put your client at ease.
Take a look at the IRS website for a list of possible topics. Your client’s account complexity will determine what topics are most important.
Have a Copy of Clients’ Most Recent Tax Returns
Tax Day fire drills can happen for a variety of reasons. Don’t let a missing tax return be one of them. Setting important client onboarding reminders in your client relationship management, or CRM, software can avoid this one altogether. As you’re onboarding clients, request a current copy of their tax return. For existing clients, add a reminder to your CRM to capture it in late spring or late fall, when most have either met the tax-filing deadline (annually in April) or requested an extension to file (annually in October).
Start Preparing Clients for Tax Day Six Months in Advance
Tax Day is inevitable, but it’s an annual event you can talk to your clients about in advance.
Generally speaking, if you’re, at minimum, scheduling review meetings with clients twice a year, you can reserve one of those meetings to talk about Tax Day priorities and recommendations, so your client has ample heads up. Many experienced advisors reserve “tax prep meetings” with clients along their client journey to make sure everything is covered. It’s also a good time to revisit any upcoming contributions or distributions on the horizon.
Identify Contributions or Distributions Earlier in the Year
Here’s where your staff can help out in a major way. Ask a staff member to generate a report that contains a list of all individual retirement accounts. It will save even more time if you can generate a report that has your client’s date of birth included to calculate any required minimum distributions, or RMDs. You may also be able to generate or obtain this report from your custodian directly.
In the report, note those who should be making IRA contributions and those who are in line for distributions. There are deadlines for making both, depending on the account type, so plan far enough in advance to begin prepping any IRA contribution or distribution paperwork.
Talk With Your Clients About Filing an Extension
If your client has been radio silent for weeks and time is running out, you may consider telling your client to file for an extension. This decision should not be made in isolation, and you should consult with the client’s tax preparer. There can be a few factors at play, including possible penalties or fines the client should know about.
Generate Necessary Cash Early for Any Tax Bill Due
Clients who will need to liquidate assets to cover a tax bill should do so as far in advance as possible. In some cases, a physical check needs to be requested, or the cash should be available for a direct debit from their bank account.
Depending on the asset being liquidated, there’s a specific settle date before the cash can be withdrawn. The last thing you want to create for your client is a nonsufficient funds situation. Read: possible penalties. Keep your client informed of how long it will take to receive the funds, so the right expectations are set from the start.
When it comes to avoiding Tax Day fire drills, a little preparation can save both time and headaches. Prioritize the moves you can make today and throughout the year to make tax season for your clients (and staff) as painless as possible.
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