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Are you trying to learn how to deliver massive tax value to your clients? Then look no further. Retirement Tax Services Podcast, Financial Professional’s Edition is a show hosted by Steven Jarvis, CPA. Steven aims to bridge the gap between tax professionals, financial advisors and their mutual clients in their quest for reducing tax expenses in retirement.
Welcome back to the Retirement Tax Services Podcast! Steven’s guest on Monday was James Pollard, the host of Financial Advisor Marketing Podcast. James mentioned the usefulness of evergreen content. That is to say, content that isn’t time-sensitive. For example, most people loathe paying taxes. Some may even fear the IRS. They lack someone to demystify taxes for them.
Psychologist Dale Hartley has even proposed a new clinical term: Forosophobia, or the fear of taxes and the IRS. This is probably an extreme reaction. However, most of your clients probably do experience confusion, anxiety, and more. That’s why Steven’s focus today is de-fanging the experience.
Believe it or not, there are people who view tax forms, codes, and the IRS as almost other-dimensional. They consider these things utterly beyond their ability to grasp. You know this is misplaced awe, but they lack your familiarity.
Become the one in your clients’ lives who helps eliminate these tax-related mysteries and concerns. Don’t bury them in 100% of the tax code. At the same time, walk them through their Form 1040 line-by-line.
This makes the seemingly unknowable easier to understand. As a result, their tax return becomes less intimidating. That, in turn, is a value-add.
Don’t just run down the list; “Line 1 is wages,” “Line 2 is interest…” et cetera. Instead, help them understand the areas that are meaningful to their specific situation. That’s where the larger value is.
For example open with, “, I want to take a few minutes and highlight a few things on the 1040 that are important for your situation. Here on Line 1: This is the money you’ve earned this year from your job at .”
Explain that the amount that gets reported is not their full salary. Mention that pre-tax amounts like their retirement plan contribution and their portion of health insurance premiums get subtracted first.
Next, move to Line 2: Explain that this is the interest they’ve received during the year. In fact, refer to the two buckets. Perhaps they just had taxable interest from a savings account.
Make your way to Line 3 (dividends): In Steven’s example there’s probably no balance here, based on their investment portfolio. Nonetheless, indicate that the present amount is exactly what should be expected.
Afterward, proceed to Line 4: Indicate that this is where distributions from IRAs are listed. If the client(s) are working, explain that it’s normal to report no activity for 2020. Consider telling them they’ll see distributions from their qualified accounts here when they start drawing from them.
Next comes Line 5; pensions and annuities: Even if you can quote the form text forward and backward, explain to them. At least mention that their 401K plan’s activity will be reported here later.
Similarly, Line 6 may be a nonevent until they start drawing Social Security. On the other hand, if they don’t know why, they need to. Add value by taking a minute to explain why. What seems obvious to you probably isn’t commonplace to them. Demystify taxes and you’ll instantly deliver value.
Hopefully, you have the idea by now. The point is to talk about these in terms of each individual client’s income.
Tailor it to the tax-planning strategies you’re considering with them, specifically, too. This builds a foundation that will help you implement other strategies in the future.
Steven will cover the second page of Form 1040 in a future episode.
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Thank you for listening.
Hello and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals Edition. I’m your host, Steven Jarvis, CPA, and in this show, I teach financial advisors how to deliver massive value to their clients through retirement tax planning. On Monday’s episode this week, I had a great conversation with James Pollard, the host of the financial advisor marketing podcast. James came on and shared some really valuable insight on marketing tactics and we talked specifically about how taxes can be a perfect topic for financial advisor marketing.
One of the things that James brought up was evergreen content or content that can be used over and over because the principles are consistent over time, even though tax laws continually change, there are certain ideas around taxes that stand the test of time. A great example of this is the fact that people in general do not like taxes – that of course, is putting it mildly; in February of this year in an article for Psychology Today, Dale Hartley proposed a new phobia because of extreme cases of taxpayer’s feelings about the IRS, while not widely accepted quite yet, Forosophobia is the fear of taxes and the IRS, at least according to Dale Hartley, I’m sure in no time you’ll be able to get prescriptions to help with this particular phobia. The majority of our clients or the majority of your clients probably do not have strong enough negative feelings about taxes to really warrant calling it a phobia that’s a little bit extreme, but they are also very unlikely to have positive feelings about taxes or the IRS. For the most part, rather than crippling fear, for many people, it’s confusion, anxiety, uncertainty, and at times potentially irritation and even anger.
The good news is that these symptoms are generally treatable without seeking medical attention. Joking aside, there is a lot of confusion and anxiety for many of your clients around taxes and there’s plenty that you, as a financial advisor can do to help. The starting point is being the person in your client’s life who starts to pull back the curtain and help them understand areas of taxes that most directly impact them. The tax code is a mystery to most people, and it’s not just that people don’t know the tax code, it can feel unknowable, it can be overwhelming and feel like it’s impossible to even make progress on understanding, how it is that a person comes up with how much they owe in taxes each year, it really illustrates the trade-off with huge amounts of widely available information, because you can — anyone can go Google the whole tax code and lots of articles on all the different areas of the tax code, the trade-off is that someone has to sort through all of that, all those mountains of data and figure out what is relevant to a specific situation and your clients aren’t doing this on their own, that’s why they come to you.
We’ve talked about different proactive tax planning strategies on other episodes of this podcast but there’s tremendous value to your clients and what may seem like simple things to you, like walking them through their tax return line by line, so they know what goes into these different line items and how this all contributes to their ultimate tax bill. Now, rookie advisors might go down the 1040 explaining that line 1 is wages, line 2 is interest, line 3 is dividends and so on and so on and so on. That’s not value – value to your client is walking them through their return and helping them understand the areas that are meaningful to their specific situation, whether that’s the current year or for future planning opportunities. So feel free to grab a 2020 1040 and follow along because I’m going to walk through what this sounds like for great financial advisors, for some imaginary clients named Bob and Sue.
I would recommend you go through something like this with a client’s own tax return and just point at each line as you go down this. So this is what I would do if I was sitting down with Bob and Sue, more importantly, most of this comes from me talking to financial advisors who are crushing this with their clients. So these are the types of conversations that are meaningful to clients for an advisor to go through. And like I said before, help pull back that curtain and provide just a little bit more clarity on what goes into all of this. So here’s what this might sound like:
“Bob and Sue, we get a lot of questions from clients on just what it is they’re looking at when they see their tax return every year. So I want to take a few minutes and highlight a few things on the 1040 that are important for your situation. So here on line 1, this is the money you earned this year from your jobs at ABC company, the amount that gets reported to the IRS is not your full salary, there are certain pre-tax amounts like your retirement plan contributions and your portion of health insurance premiums that are subtracted before this is put on your tax return. So that’s why there’s a difference between what you agreed to be paid and then what ends up here on the IRS’ forms. Line 2 is interest you received during the year, its split into two buckets, but this year you just had taxable interest from your savings account at Hometown bank, it’s a small amount, but it’s what we would expect based on the investment allocation we’re currently using. Line 3 is dividends and based on your investment portfolio, we would not expect to see a balance here, so this is right in line with what we expect. Line 4 is where distributions from IRAs are reported, you are both still working, so there is no activity here for 2020, but this is where you will see distributions from your fidelity account reported, when you start drawing from that account during retirement. Line 5 is labeled pensions in annuities.
Now, Bob and Sue for your situation, this is where activity from your 401k plans at ABC company will be reported when we get to that point. The IRS defines pensions a little bit differently than most of us commonly think about it. Line 6 is social security benefits, which again is not applicable for you, but here’s where we will see it come through when you start drawing social security in retirement. Line 7 is where capital gains are reported; now we love capital gains because they are taxed at preferential rates and when we plan ahead, we can do things to strategically take advantage of those rates. Capital gains come from selling assets that have gone up in value like securities or property; so for you, when you are ready to sell your rental house, this is where the gain on that sale will be reported. Line 8 is a bit of a catch all for a lot of other income sources; right now, the amount on this line is showing the net income from your rental property, that is shown in more detail on schedule E and we’ve gone through and reviewed your return to make sure there isn’t anything else applicable and nothing stood out this year. Line 9 is your total income and I just want to say congratulations to both of you really, this shows the amount of hard work and dedication that you’ve put in this last year, and you should be proud of yourselves. Line 10 is a variety of adjustments to income, you did not have any this year, but as part of our review of your return, we went through to make sure there weren’t any that should be included and again, nothing stood out to us. I just wanted to make sure you knew that we took a look at that for you. Well, line 11 takes us down to your adjusted gross income, or AGI, this is a number that gets talked about a lot because the IRS uses it in so many places to determine your stability for different credits and deductions; for 2020, you weren’t close to any of the thresholds that would change your tax situation but this is something we look at every year, as we make recommendations for you to make sure that we understand any potential impacts of strategies that we recommend.”
Okay? So that was basically the entire first page of the 1040 line by line, if we were talking to Bob and Sue. Now, of course, there’s all sorts of assumptions that I made in there that you can’t see, but the point is that for this to be helpful, it needs to be specific to your client’s situation; for people who don’t spend every day on tax, just going through and abstractly, talking about what these lines mean is not going to stick, that’s really not going to have any lasting meaning for your clients but if you can talk about these in terms of the income they generate or tax planning strategies, you’re considering with them, you’re going to have this foundation for them to keep coming back to.
So, okay, going through all those lines only took a couple of minutes and when you do this with your clients for the first time, it likely will take a little bit longer just cause they’ll have questions, but this is a great quick way for you to help reduce that anxiety and confusion and add value for your clients. So in addition to immediately taking away some of that anxiety, you’re building this foundation, that’s going to help you as you implement other strategies with your clients. So you’re going to have that context already place so that you can reference back to that conversation and let them know how new strategies or changes in what you’re recommending correlate with other things that you’ve discussed in the past.
So this is a great way to set yourself up for those planning conversations down the road, even if right now there aren’t opportunities to have a significant impact this year on their tax situation. So like I said, we covered most of everything that’s on the first page of the 1040, but I did skip right over the personal information at the top of the return. In part, that’s because the information is a bit more self-explanatory and so maybe you don’t spend a lot of time on it with your clients either, but you should be reviewing that for your clients every year and letting them know that you do that, just to double check, to be on the safe side, because mistakes do happen. Now I’ll come back in a future episode and we’ll go through the second page of the 1040 and cover some other forms as well later on down the road so that we can keep having these conversations of what does this sound like when you’re in front of a client.
In the meantime, let’s talk about action items just from today’s conversation. The first action item is to get started — if you’ve never gone through or return with someone, it can be a little bit intimidating, so start with your own return or better yet, Adobe has a great tool for redacting information and PDFs, finding an advisor in your network and practice together with actual client tax returns. You’ll get to practice before getting in front of a client and you’ll get to learn from watching someone else as well. Another great approach is to make sure you are requesting the returns before your client meetings, so you can take a few minutes to prepare without the client sitting in front of you. The next action item is naturally to make sure you are getting those tax returns every single year. You won’t be going into the same depth that I described today with the client every single year, but there will always be things you can do to help lessen their anxiety around taxes by helping them better understand what impacts their situation in a given year. The last action item is to choose one client communication during the year to emphasize tax in your messaging, whether that’s content you write or just content you share — provide value to your clients by cutting through the mountains of information they can Google, to get right to something that is relevant and timely for them.
All right, thanks for listening today everyone! Please take a minute and leave a five-star review wherever you get your podcasts. So we know this content is valuable for you and feel free to send feedback or requests for topics for future episodes, to email@example.com. Good luck out there and remember to tip your server, not the IRS!
The information on this site is for education only and should not be considered tax advice. Retirement Tax Services is not affiliated with Shilanski & Associates, Jarvis Financial Services or any other financial services firms.