Mining the tax return for planning opportunities

Register now

Whether you’re still in the middle of tax season or not, when clients are receiving tax services from you, they feel that this is their time to communicate directly with you. Even the once-per-year tax clients need to interact with you during this compressed season of work. From here, you have two choices. You can be a commodity-like provider of tax preparation services, or you can be the trusted advisor that most accountants claim they want to be.

If you are building a wealth management practice or want to deepen your role as their trusted advisor, take the time to find out what is going on in their life and become more significant to them. This isn’t hard to do, but you need to avoid the temptation to rush them through the process and hear what is on their mind. Furthermore, with just a little thought, it’s very easy, with the information presented to prepare their taxes, to recognize gaps in their financial plan that need fixing.

Family first

While you’ll certainly discover significant gaps in their financial house, clients like nothing more than to talk about their family. So avoid just diving into the numbers; instead, start the dialogue right at the top of the form 1040, and ask about dependents. If there are no dependents on the return, find out if they’ve got mature kids out on their own, and possibly grandchildren. Questions surrounding their adult children and grandchildren may include:

  • How often do you get to see your grandchildren?

  • Have you or your child begun a college savings plan?
  • Does your adult child have a current estate plan with appropriate guardians selected?
  • Are all of your children and grandchildren healthy?
  • Are their marriages healthy?

For your clients with minor children listed as dependents, some of the questions may be the same, such as college savings, health or guardian selection in their estate documents, although other issues such as income shifting or creating a Roth IRA may also be appropriate. If these children are over 18 years old, it is appropriate to ask whether they’ve got a will or properly executed health care documents.

While on the topic of family, take this opportunity to ask about your clients’ parents. Find out whether the parents are healthy and financially independent or if they will be a future financial obligation of your client.

As you move on to the numbers portion of the tax preparation process, take a critical look at Schedule A and search for opportunities to be more helpful. Find out what the rate is on their mortgage or if they should even have a mortgage in the first place. Many clients like a mortgage because they think it gives them a tax deduction. However, you may have to break the news to them that the after-tax cost of their debt is still higher than what they may be earning in a very conservative savings program, or that last year’s tax act significantly reduced their mortgage deduction.

Inspect their charitable giving patterns. A conversation about bunching deductions to maximize tax benefits would be a welcome part of any financial plan.

When getting to interest and dividends, use that Schedule B for more than making sure that the right numbers go on the correct lines. Examine the 1099s and examine the ownership of the account that is cause for the 1099. If it’s held in individual or joint name, that may be evidence that there is no current estate plan or that the plan they paid big money for was not properly implemented. They may need a full estate plan or to simply use the one that they’ve got and change the title of their accounts to the trusts frequently established in a well-designed estate plan. The benefits of that could be a simplified estate settlement process, privacy and ultimate death-tax savings.

Schedule B also gives you a glimpse into their savings and investment style. Too much interest income in today’s environment may appeal to their need for safety, but do they realize that their net returns after tax are significantly lower than the rate of inflation, causing them to lose purchasing power on their money each year that they invest so conservatively? Ask if there is any interest income that should be reported on their Schedule B. You can use this opportunity to explain the concept of imputed interest and asset protection.

Schedule B also gives a good glimpse at their portfolio construction.

Let’s bridge over to Schedule D, and talk about trading, gains and losses. Too much trading or not enough trading is evidence that the investment strategy may be all over the place. While churning is not as common as it once was, it should be addressed for the sake of the client. We still see situations where brokers have taken advantage of unsuspecting investors with aggressive and expensive trading strategies.

The reverse may also be a problem. In these days of fee-based asset management, the Securities and Exchange Commission is now looking at managers for reverse churning. Reverse churning is a nice term for when the advisor is not paying attention and not doing anything but to set the portfolio and forget it — which may not justify the quarterly fees.

For your clients who have a self-employed business, a discussion on risk and choice of entity may be needed.

Schedule E is the Holy Grail of information. There is so much that gets reported there that it alone could be the source of numerous financial planning engagements. Let’s begin with a discussion of the flow-through entities.

Ask detailed questions about the entity. Is there a written agreement among the owners? What happens if an owner dies, becomes disabled, gets sued or divorced? Is the succession language clear and accurate regarding valuation and what happens when? In my experience, 90 percent or more of the time, the answers leave the door wide open to provide significant value from your firm.

For your clients who are landlords owning property in their individual names, Schedule E will reveal all. This warrants a discussion on risk and how one problem in any rental property owned individually can cause contagion risk throughout all of their assets. These issues are magnified if the rental property or properties are owned jointly with a non-spouse. This is common for inherited real estate that becomes rental property.

What’s next

The worst thing that you can say to a client is: “I see issues that may require attention; let’s talk after tax season.” The best thing that you can say is, “I see issues that may require attention; when can you come back for an hour to talk about these significant issues?”

When they come back, you must tactfully discuss some of the gaps that you discovered and why fixing these issues may be significant. In effect, it is like a first financial planning meeting where you should do a deep discovery of their entire financial situation and talk about the issues that you’ve discovered. You don’t need to be armed with solutions, as that may require a little more context and weaving with the rest of their financial goals and issues. But do be prepared to talk about how your firm can help and the scope of a possible engagement. To do this well requires a desire to truly serve as a financial planner. The planning engagement is where you’ll get to show your true colors as their trusted advisor.

For reprint and licensing requests for this article, click here.
Financial planning Wealth management Tax planning Client retention Client strategies Accounting firm services