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Written by: Matthew Jarvis
No one walks into a doctor’s office excited for a colonoscopy—especially after being poked and prodded during an annual exam.
Your clients feel the same way when it comes to dealing with taxes.
Gathering tax documents and tax returns is unpleasant for your clients. If your clients are anything like mine, they initially think it’s already been taken care of. They don’t want to go through that process again.
Besides, taxes are very personal, and most people haven’t shared them with anyone outside of their tax preparer.
However, you can’t do your due diligence as a financial planner without a tax return. So, how do you overcome this hurdle?
Let’s break it down.
Getting client tax returns
If your clients aren’t bringing their tax returns to you in full, it’s usually because you haven’t shown them why it’s vital for their financial success.
You don’t need to shame or order your clients to bring in their tax returns. Instead, you overcome that hurdle by demonstrating your value:
Mr. and Mrs. Client, I noticed that you have about a million dollars in your retirement accounts. The IRS is not waiting patiently to take somewhere between zero and half—maybe even more—of that retirement account.
My job is to get the IRS’ cut closer to zero than half. And the way we do this is by looking at your tax return and making plans based on that. So, to do this, I need this year’s and last year’s tax returns.
You can mail it to us, drop it by the office, or send it as a PDF. You can even call your tax preparer to send it over to me, but you’ll need to sign a form.
Which sounds easiest to you?
I seldom have any issues using this script, as I’ve communicated to the client the value they gain by providing the information.
Who doesn’t want to keep as much of their life savings as possible?
Tax planning in a nutshell
Tax return value
One of the easiest aspects of delivering value to a client using a tax return is to look at their taxable income and identify their tax bracket.
This may seem useless, but the client doesn’t know this tidbit of information or why it matters.
But because I have the Retirement Tax Services Tax Guide, I can quickly figure out how much wiggle room the client has in their tax bracket for Roth conversions or capital gains harvesting.
Usually, I’m the first person in a client’s life to walk them through their tax return—few other advisors do this, and neither do tax preparers or CPAs.
By spinning the tax return around to face the client, I can move line by line through the entire return and explain to my clients how it works from an income and deduction standpoint.
We’ll start with their wages: how much money came from retirement accounts, Roth conversions, and Social Security, and how this all adds to their gross income.
From there, we’ll walk together through their deductions and how the money they paid in taxes relates to their income and tax bracket. Most clients are only concerned with their refunds and are astonished by how much they paid in taxes over the year.
I don’t expect my clients to become tax experts, but I want them to understand what’s happening. Spending time breaking down their tax returns plants seeds for why tax planning is so important.
Here’s an example of a conversation I had with a client:
Mr. and Mrs. Client, one of the reasons I like to go through this with you is because it’s your money. I need you to understand what’s happening with it.
And I want to be sure you’re not overpaying the IRS.
We need to start looking at your taxes from a ten-year timeline instead of one year at a time. Because if we take the $38,000 you spent in taxes by ten years, that’s $380,000 stacked up to pay the IRS.
What I want to see is how we can make this lower. Even if it’s only down to $320,000, that’s still $60,000 in savings over the next ten years. That’s why it’s essential to look at this.
Paying the IRS will be your client’s most significant expense in retirement—you must help them understand what’s happening with their tax return and how to minimize damage to their nest egg. Creating tax projections can help with this.
What is a tax projection?
A tax projection is a value-add, following value-add rules: it must be unique to each client’s situation and provide specific, actionable advice.
Sending out a letter that says, “A tax plan is really important; you should think about having one,” doesn’t constitute a value add. It’s not personal, helpful, or actionable.
Instead, you need to talk about their income, share future changes in their taxes, and then discuss action items.
Don’t forget to let your clients know if no action is needed—that’s still valuable because it falls under the dishwasher rule. And it alleviates any worry that they may have missed taking action.
Tax projection basics
When I create a tax projection for a client, I first want to ensure their withholdings are on track for their current income. My benchmark for clients is for their withholdings to be within a thousand dollars over or under.
If a client doesn’t want to owe the IRS, I ensure that the client is on the plus side of getting a refund. We set up an account through the custodian to pay all the taxes at the end of the year so the client doesn’t have to write a check.
The money still comes from their accounts; we’ve just earmarked it into this separate account.
Next, I’ll look at which tax bracket they’ll land in over the next three years and going into retirement time. I’ll make notes if we need to do any Roth conversions between now and then.
Medicare income limits will also be checked, and I’ll want to know their RMDs and if anything will push the client into a higher schedule.
Where advisors get stuck
Most advisors get stuck thinking they can tackle tax projections for clients in an afternoon because it’s basically napkin math.
However, one afternoon isn’t enough time—not even Micah Shilanski, CFP®, can make tax projections that effectively.
Action Items
- Set a realistic timeframe and streamline as much of the tax projection process as possible.
- It might be helpful for you to group your clients by fixed-income wage earners, variable-income wage earners, and retirees and work inside a massive Excel spreadsheet.
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