Today is April 1, also called April Fool’s Day by some. For many years I mailed clients an April Fool letter, but have gotten out of the habit of writing them. So today, I want to talk about something we do not do with clients that challenges reality, and by introducing it, we can offer clients a huge value and also generate some additional revenue for ourselves.
Income tax payments are one of our clients’ largest expenditures, yet the only way they measure it is through the refund or balance due they pay every April 15. The reality is a refund or payment is a function of the inefficiency of the withholding or estimated tax payment methods. If too much is withheld or paid in, a refund results. If too little, an extra payment is due. It is our job as tax preparers to explain this to clients and to also explain how their taxes are computed and what their total taxes are, including state and local taxes, Social Security and Medicare payroll taxes. If this were done, then perhaps clients would understand it better and then be better able to participate in an effective tax reduction plan for themselves.
A problem with this is twofold: the preparer has no time during tax season to sit down and carefully explain it to the client, and such a meeting would result in an extra charge to the client that many would not want to incur.
We cannot change the reality of the time pressure during tax season, but we can quantify the benefits and value of a tax-planning meeting afterward. Let’s assume the client pays a total tax of $25,000. Let’s also assume the extra meeting would cost about $1,000. Question: Is it worth $1,000 for a client to know they cannot pay any less tax? A better question is if there's value in reviewing a $25,000 expenditure to determine if it can be reduced with a cost of $1,000.
I have been doing this a long time and there is value in that four-percent, one-time payment. I can tell you that my clients do not pay more tax than they need to; that’s a fact. I understand clients and know how to communicate with them, and I do save them money.
I can also tell you that I do not know everything there is to know about my clients. I know a lot when it comes to their taxes and what will help me do their returns and hopefully save them some taxes. A one-on-one meeting to review their tax return presents an opportunity to ask them many questions that are not necessarily limited to their tax preparation. For example, looking at the interest and dividend income allows questioning the client on how they feel about risk, particularly with their investments, and what their short-term and long-term goals might be. It also is a segue into whether they allocated their 401(k) or IRA investments in the best way for them.
Going over the tax return line by line presents a wonderful opportunity to help clients get a better perspective on their personal financial situation in addition to taxes. Some of these meetings can also help clients understand why they should participate in their companies’ 401(k) plans or flexible spending medical benefits plans.
If your clients are sufficiently high in the ranks at their employer, discussions can also center around whether they qualify for stock options or restricted stock, or if they should, or the tax advantages of working abroad for a year.
A line-by-line tax return review is actually a financial planning meeting, and the potential benefits far outweigh the costs. These meetings present opportunities for clients to talk about, and even articulate, their longer-term goals, how they feel about their present career track, and even household finances. I’ve had many such meetings turn into discussions about clients’ parents, how they can afford to help them financially, how the parents are managing their own finances, and even about their own life insurance coverage that will go to their children or be used for the comfort of their spouse.
Some clients have hidden desires to start a business. When they express that desire, it opens up the door to helping them accomplish it when we explain financing methods, cash flow needs and actual lost cash flow from a job they might quit, how to engage a partner, the uses and benefits of a business plan, and a step-by-step process of starting (see the checklist in my
These meetings are open-ended in that there is no set agenda and everything is on the table for discussion. All that is needed is the venue and opportunity, and these tax planning meetings provide that. This column started out with a suggestion of the absurdity of some clients not fully understanding one of their major expenditures and ended up with the potential for helping clients with life-changing planning. As far as I am concerned, it doesn’t get much better than that.
Edward Mendlowitz, CPA, is partner at
