Teach Clients to Be Tax Smart Year-Round

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Read more articles by Alexandra DeFelice here.

This filing season may have left many Americans with sticker shock when it comes to their tax returns. While it’s too late to change the past, accountants can help their clients prepare better for the future by encouraging them to make smart decisions in the coming year. Instead of bemoaning their financial fates, taxpayers should be proactive now to make sure they get better news next year.

Chad Smith, wealth management strategist for HD Vest Financial Services, offered some tips for tax planning with clients during a presentation at AWEBLive!, the 12-hour marathon CPE event last December. What his message boils down to is clients often make poor choices throughout the year, and they can fix some of them in December. But why not take the opportunity now – or at the very end of busy season – to ask some more probing questions of your clients in hopes of saving them from suffering diminishing returns this time next year?

Taxpayers continue to plod along throughout the year not paying attention to taxes because it’s an automatic payroll deduction and they don’t think about what they need to do to mitigate those expenses, Smith said. “CPAs and accountants need to pay attention to this,” he added.

If CPAs truly are trusted advisors, they need to feel comfortable asking about family dynamics. Have there been or are they expecting any births, deaths, divorces, or other life-changing events, and how do these affect their overall wealth management plan in terms of retirement? Clients will be willing to answer these questions once they understand that taxes affect nearly every decision that involves money, Smith said.

“Taxes have an impact on how we save, where we buy property, how we invest, when we sell investments, when and where we retire, how we plan for death, how and how much we save, where we establish a business. Taxes even impact when we give to charities, when we make gifts to our family, and how we plan for college,” he continued.

A nightmare example for an accountant is a client showing up and telling them they left their previous job, received a big check, and purchased a new boat. That’s a tax conversation best prevented, Smith said.

“Be proactive, provide good guidance, and act as a defensive tool,” Smith encouraged. If you notice multiple W-2s, inquire whether the client changed jobs, if they've considered what to do with rollovers, and what their options are to be tax smart.

Beyond that, provide debt reviews, estate reviews, insurance reviews, strategic planning related to the timing of charitable donations, and other expenditures. For example, could a client increase a donation to reduce tax liability, or are they better off making the contribution until the following year? Inquire about your clients’ risk aversion, and encourage them to maximize their 401(k) contributions to their ability when they have employee-sponsored plans to avoid leaving money on the table.

Accountants who are going to have these more in-depth conversations with clients should prepare them in advance. Tell them you’d like to conduct a comprehensive review to look for opportunities for them to be more efficient with their tax dollars, Smith advised.

Following is a list of documents Smith suggested asking clients to bring to the review:

  • Investment accounts: Current statements showing value and positions.
  • Bank accounts: Current statements showing value and positions.
  • List of other assets: Homes, personal property, rental property, collectibles.
  • List of liabilities: Debts, mortgages, loans.
  • Social Security and other retirement information: Statements you may have received with an estimate of earnings at retirement, current contributions, 401(k)s, IRAs, savings accounts.
  • All sources of income: Salaries, pension plans, annuities, trust funds, rental income.

Such conversations can prove the old adage correct: An ounce of prevention really is worth a pound of cure.

About the author:
Alexandra DeFelice is senior manager of communication and program development for Moore Stephens North America, and a regional member of Moore Stephens International Limited, a network of more than 360 accounting and consulting firms with nearly 650 offices in more than 100 countries. Alexandra can be reached at [email protected].


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