How Advisors Can Help Clients Embrace Proactive Tax Planning

We live in a society, and the social contract requires us to occasionally give something up to benefit the common good. A prime example is taxes. They do great things - parks, schools, the Portland Airport. What’s not to love? But the taxation system is complicated and sometimes it is hard to tell if we are paying what we owe, or overpaying. In addition, there are many decisions to be made in any given year that result in changes to our tax liability come April, whether you know it or not.

As advisors, this is a huge opportunity to help our clients. True, we don’t study the details of the tax code every year like tax preparation professionals. But while the client’s CPA is the final authority on the tax implications of various decisions, advisors are the ones that implement structures that often determine tax liability: whether it’s opening new retirement accounts, processing stock donations, or building periodic tax payments into a client’s cash flow management plan. Advisors can also act as translators for the inevitable dose of jargon involved in tax-related conversations.

Come Together

Holding at least an annual meeting with each client’s CPA is a great way to answer all of these questions and identify changes that could benefit the client. It’s a total no-brainer for clients whose CPAs work on an annual retainer, but even for those with hourly CPAs the tax savings (and the peace of mind) will likely be well worth it.

Much of the success of tax planning meetings lies in the preparation. It is a great idea to send your clients’ investment income numbers (year-to-date and projected) along with financial statements for their business (if they have one) to the accountant. You may also want to share some topline goals from the client’s financial plan - such as retirement or college savings, upcoming real estate purchases, or charitable giving plans. This will give them enough time to work up projections for the client’s tax bill as well as start thinking about potential ideas for changes. Lastly, you should share a draft agenda for the meeting with both the client and CPA so that everyone feels prepared for the conversation and has an opportunity to add their topics of concern to the list.

Structuring Your Agenda For The Client’s Benefit

Once in the meeting, focus on helping the client understand the “why” behind their tax planning strategy. As with much of the financial industry, the tax code is opaque and intimidating. By empowering your client to own their tax planning decisions, you will not only help them build financial self-efficacy, but you will also ensure that they don’t drag their feet when it’s time to implement the recommended changes.

Consider structuring the agenda to allow the client to lead the meeting as much as possible. At the beginning of the meeting, ask the client to review a summary of their financial plan and let the other participants know what is most important to them in this conversation. It can be particularly helpful to have a narrative plan that describes the vision for their financial future.

Then you can have the client describe how they see their current tax situation and highlight any areas of concern. Can they name the sources of their income and the various tax treatments they receive? Do they know why they have the retirement accounts they have? You and the accountant can fill in relevant details and answer questions, but the goal is for the client to walk away having a clear understanding of the big-picture dynamics that affect their income, savings, and tax liability. You could even work together to draw a diagram of their tax situation.

If your client is a business-owner, it is a great idea to have them review the company’s financial statements in the meeting to make sure they can pick out the key pieces of information. For example, they should understand how the net income number on the Profit & Loss statement interacts with the items on the Cash Flow statement, and how those drive the numbers they see in their bank accounts.

From Projections To Strategies

Once everybody is on the same page about the client’s goals and overall tax situation, it is time to break out the tax projections their CPA so helpfully prepared. Once the projection is understood the team can dive into evaluating specific tactics.

Decisions should be much clearer at this point in the meeting. For instance, if the client has a high cash flow solo business and little retirement savings, perhaps a Solo 401(k) or defined benefit plan is a good idea. If they are thinking of going to graduate school, they may be well-served by opening a state-sponsored 529 account. If they are having a hard time managing cash flow in their business, quarterly tax payments or payroll in an S-Corp may help. Between your financial planning expertise and the CPA’s knowledge of the tax code, there is bound to be a bounty of creative solutions to help your client effectively meet their goals.

Accountability Is Queen

Don’t forget to end the meeting by identifying everybody’s follow up items and creating an accountability structure. Have the client add their to-do items to their calendar and schedule check-in calls with you or their CPA, if that will help them drive results. Decide whether the three of you should hold a quick call before the end of the year to make sure there were no major changes to the client’s financial situation.

This little bit of housekeeping will ensure that the brilliant tactics identified in the meeting will find their way to real-world implementation. All of this taken together should add up to some major improvements to the client’s tax reality and stress level.

Liliya Jones is the Director of Operations at Modernist Financial, a B Corp RIA based in Portland, Oregon. Follow her on LinkedIn or connect via email at hello@modernistfinancial.com