The best way to help clients pay the highest amount of income tax possible is to do nothing. Letting taxes “just happen” virtually guarantees that opportunities are getting missed. Even for taxpayers who work with a tax professional, the default approach to tax preparation does little to ensure tax planning, and with it tax savings, are actually happening.
This creates a huge opportunity for financial advisors who are willing to be proactive. No, it does not mean becoming a tax preparer. There are steps that an advisor can take every year, regardless of the tax preparer a client is working with.
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Default Tax Process
Let’s start with the typical tax experience for most clients. The typical taxpayer thinks about taxes only during tax filing season, which is February to April, and often working with a tax preparer does little to change that. Tax season often kicks off with a client receiving a “tax organizer,” which is as many as 50 pages of questions and information the client is unlikely to fully understand or accurately complete. The taxpayer then does their best to gather all the relevant documents, which usually includes some guesswork, and sends it all to their tax preparer.
From there the process feels like a black box and at times the return gets filed without a taxpayer ever having the return reviewed with them or explained to them. This is frequently followed by several months of silence from the tax preparer and rarely includes any proactively planning. This process repeats for years with taxpayers unsure what to do or expect, and unaware there exists another way to approach taxes.
Owning Tax Planning
The alternative to simply letting taxes happen is to have a proactive and intentional approach that an advisor can own from start to finish. Below is a step-by-step process advisors can implement to deliver value to clients every year on taxes.
Get copies of tax returns. Effective tax planning cannot happen without the details. Engaging in financial planning without reviewing a tax return is like a doctor prescribing medicine or recommending surgery without looking at a patient’s chart. It’s irresponsible and at times dangerous. For this to be successful advisors need to make providing a tax return a non-negotiable requirement of working together. To increase the likelihood of success, make it easy for clients. A request for tax returns should go out each year, explaining to the clients how the advisor will use the return and including easy ways to provide the tax return to the advisor.
If clients push back, use the medical analogy to give them something to relate to. Alternatively explain to clients that to do the very best work, their advisor needs to have all of their financial information, especially the tax return. They should only want to work with an advisor who insists on doing their best work, so the tax return becomes a condition of working together. This should also be a requirement in the prospect process. The tax return provides a treasure trove of information about the prospect and sets the precedence that all good advisors should be getting the return. The prospect will most likely now hold other advisors to that standard, and most advisors aren’t getting tax returns.
Review tax returns. This may seem obvious, but anytime a document is requested from a client there should be a clear course of action for what happens to it. Reviewing tax returns should be a combination of checking the accuracy of the return (it surprises advisors to learn how often basic information like addresses and Social Security numbers are wrong on tax returns) and looking for planning opportunities. The best way to ensure success and quality is to use a checklist or process. There are resources available to jump-start this process, but a checklist can easily be created by an advisor by taking notes as they review client tax returns and looking for patterns. A checklist also allows an advisor to delegate some of the process to team members.
Communicate tax planning value. Advisors only get credit for work they do if the client knows it has been done. Even if no changes are needed as a result of the tax return review, best practice is to let the client know that an analysis has been completed and that they are all set for this year. Peace of mind is one of the things clients are looking for when they hire a professional and that comes in part from knowing what is being done for them. Some advisors simply share the checklist they use to review the tax returns so their clients can see all of the points that were scrutinized. Taking this approach should include highlighting the top one or two areas for planning or action.
Year-end tax planning. The contrast to what taxpayers are used to when it comes to taxes is most pronounced by having the conversation transition from once a year to a year-round dialogue. Taxes are just one piece of the puzzle, but by having intentional touch points, clients are slowly accustomed to the fact that their advisor wants to be a part of the tax process. The last two months of the calendar year are especially powerful for tax planning because so many opportunities end as the new year starts. The leg work for this can be done in large part when the tax returns are initially reviewed earlier in the year, but now it is time for action. Focus on two or three areas that the client can take action on and communicate how you can help them execute. Again, even if there is no action to take, letting clients know that someone is looking out for them is a value add.
Prepare a 1099 letter. Tax planning is a great asset, but for many clients there is still pain in the tax preparation process. The best way for advisors to have an impact in this area is to set their clients up for success. Tax forms are a mystery to most taxpayers. On top of that, it is easy to forget tax planning that has gone on during the year when February and March roll around. Advisors can help with this by preparing a summary of the accounts they manage for each of their clients and including information about which accounts should expect 1099s and what planning activities went on during the year. This ensures that clients — and their tax preparers — know what forms to be on the lookout for and when things like Roth conversions and qualified charitable distributions need to be reported. The bonus here is that the advisor is setting themselves apart from every other advisor their client’s tax preparer has ever worked with and helps build powerful relationships for serving clients and potentially receiving referrals.
Tax Planning in Action
While taxpayers may disagree, one of the great things about taxes for advisors is that they come back around every year. Advisors committed to tax planning have a built-in, recurring value add through tax planning. For individual clients there will be years where there is no additional action to take, but their return should still be obtained and analyzed to ensure that is the case.
More and more advisors are listing “tax planning” in their marketing materials, but advisors who embrace the process described in this article are still in the minority. Tax planning definitely takes work, but taxes are one of the largest, and most painful, expenses a client has. By helping sand off the rough edges of a client’s tax bill over their lifetime, advisors put themselves squarely in the center of every aspect of their client’s financial life. Everyone should pay every dollar of tax they owe, but there are no patriotic awards for tipping the IRS.
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The Tax Planning Process Every Advisor Can Implement originally appeared on usnews.com
