Transcript

SJ(00:32):

Hello everyone. And welcome to the next episode of the Retirement Tax Services Podcast: Financial Professionals Edition. I am your host, Steven Jarvis, CPA. And in this show, I teach financial advisors how to deliver massive value to their clients through tax planning. Really excited to have on the show with me today, Jim Young, who’s the VP of wealth management at Trilogy Financial and is someone who has been doing tax planning for a long time, but has seen an evolution in what that looks like. So Jim, welcome to the program!

JY (01:01):

Thank you, Stephen. Thanks for having me. I appreciate it. Looking forward to it.

SJ (01:04):

Yeah. And so Jim, let’s just dive right into, you know what we were talking about as we were getting ready for the show of tax planning has been something on your radar for, for years, but, but you’ve seen a clear change in what that actually looks like. So, talk about how this kind of started and where you’re at today with how you approach tax planning for your clients.

JY (01:21):

Yeah. So that kind of goes back to the founding of Trilogy Financial in 1999 by Jeff Matzke. He saw that there was something missing in financial planning. It was really just investing. And so he created Trilogy, the trilogy of the intersection of financial, tax and estate planning. So I joined the firm about 20 years ago and, um, it was a career change for me. And one of the things I was taught is, always pick up the client’s tax return. This is something you talk about in your, in your podcast all the time, but this is something that we’ve been doing for 20 years. But what was I doing with those tax returns? Was I really doing tax planning? And the first thing I would do is I pick up the tax return and I’d look at the bottom of the first page of the 1040 and look at their AGI, to see if they qualified for a Roth IRA, because we were doing tons of Roth IRA.

JY (02:15):

We had a lot of startup clients at the time. The next thing I’d look at would be, you know, did they, did they get a refund or did they pay, they got a refund, we’d have an opportunity to maybe redo their withholding. So they didn’t, you know, get that big refund or if they paid, to go back and see why they owed taxes. And then I kind of look at, you know, back then, if there was some interest income that they had, because cash was paying something at that point, did they have a pile of cash sitting somewhere that they didn’t tell me about that I didn’t know about? And I could talk about also look at, you know, dividends and interest income, talk about potentially doing some tax deferral with <inaudible>, and that was essentially it, but that was really, we picked up that one tax return when we met with them the first time to do the onboarding or to do the data gathered.

JY (03:09):

And we really didn’t do that on an annual basis. A lot of it had to do with the compensation structure back, you know, 20 years ago, is it, most of it was upfront commissions. So as time went by, we met with them on an annual basis, and we talked tax. We didn’t necessarily do a deep dive in their tax return. Fast forward to today. I pick up my client’s tax returns every single year. I run an analysis on them. I use Hollistiplan. I know that you use something else that you have, but it really allows me at a quick glance to really see what their tax return looks like. Things like looking at possibility for Roth conversions, talking about, uh, you know, selling non-qualified assets, such as stock options, looking at things like charitable giving, talking about charitable giving, and I know that’s one of the topics that we’re going to talk about today is really looking at their tax return in a deeper dive, not just looking backwards, but looking forwards as to how we can help them save money on taxes, going forward.

Delivering Genuine Value after picking up Tax Returns (4:15)

SJ (04:15):

I really like  your description of how that’s changed over time. Because, you know, we do talk about getting clients tax returns all the time on this podcast, really any of the content that we put out, that’s one of the things we highlight, because it can be such a powerful tool. But you know, in the industry, you see this theme around a lot of tax related themes that are especially the topics that people will mention on their website or they’ll talk high level about them. But just because someone says, ‘Hey, I do tax planning’, doesn’t mean that they’re consistently delivering value through that tax planning process. I think there’s a lot of advisors out there who are still kind of in that bucket you’re describing of  ‘great we’ll, we’ll talk about it when they first come on board, or maybe we look at that tax return once, but what’s the, what’s that ongoing value that you can deliver to clients.’

SJ (05:01):

And, you know, I very strongly believe that there are things that you can do each and every year to help add value to your clients. You described several great opportunities that we can be looking for. You know, part of it is also just being able to help deliver on that peace of mind that your clients are looking for when they come to you as an advisor to say, ‘Hey, you know, obviously they want specific strategies, but they’re also just saying, you know, who’s in my corner? Who’s a resource for me?’ And so some years even just going through and saying, ‘Hey, here’s the, here’s the 20 things we looked for and great news. You’re set on all of these and we’ll look at it again next year.’ There are a lot of different ways to add value to clients. If you’re taking the time and you have an intentional process around getting those tax returns and looking at them every year.

JY (05:45):

And looking at differentiating ourselves from other advisors, whether it’s someone else that they’re talking to or someone else they’ve been working with for years and they say, ‘well, my current advisor never looked at my tax return.’ Well, that’s a huge red flag and you need to talk to them. It’s like, well, I just don’t pick it up for, you know, as an exercise, I actually do something with it once I get it. And here’s what I’m going to do. And clients, all of a sudden become accustomed to that. My clients know that at our May meeting, I’m going to ask for the tax return. Many of them, already upload it. We use eMoney. Many of them are, as soon as the tax plan, the taxes are done. They uploaded into their vaults and eMoney. So I have access to it. And so they’ll get used to that. And again, there’ll be years like, ‘Hey, I just looked at it. There’s nothing to report.’ But I also let them know – because I’m not a CPA – that if I see anything that I think we should change. And if, especially, if it’s a major change, I let them know that I’m going to run this by your CPA, whoever it is, you’re using your tax preparer to get their blessing. And any of these changes that we are going to do before we do that.

SJ (07:00):

Yeah. Partnering with other professionals is huge. It’s a great way to make sure that the client is really getting as much value as possible. The other reason it can be so important to review client returns on an ongoing basis is that it helps you as an advisor really stay at the top of your game when it comes to tax planning. You’re going to see patterns, you’re going to see themes. You’re reviewing a hundred clients’ tax returns every year or however many it is. You’re going to pick up on things that you can then share with other clients. Right now, we’re working on our next newsletter for our RTS members talking all about social security and some other things like that. And so, just before we started this podcast, I finished a tax return review and the client I was looking at, we call them all Bob and Sue.

SJ (07:42):

In this case, Bob and Sue still had a lot of taxable income. And they, they had started pulling social security and they were making a, to your point before about looking at payment versus refund, they have, you know, tens of thousands of dollars in a refund, mostly because of estimated payments. And they weren’t withholding anything from the social security, which is really common because the social security doesn’t really point you to here’s how to withhold taxes. The IRS gives preferential treatment to withholdings and so here, it might seem like a small thing, but here’s an opportunity to go to Bob and Sue and say, ‘Hey, listen, instead of you having to write this huge check every quarter, what if we withhold some more from your social security, uh, and make sure that we’re getting this dialed in and not giving the IRS such a huge interest free loan.’ And so, as we take the time to review these tax returns, our list of things that we can, that we can notice and help clients with just gets longer and longer.

JY (08:32):

You brought up a very good point about by picking up tax returns, you will start learning more about the US tax code. And as you say, it’s written in pencil, the ever-changing tax code that we have to deal with. We’re seeing changes for next year already. We’re seeing that the contribution limits for 401(k)s are going up. IRAs they’re not, which is unfortunate, but these are the things that the more you pay attention to taxes, the more you’re going to get involved in these things. And it just seems, Steven, I don’t know if it’s me, but over the last five years, they are making lots and lots of changes. I think it goes back to tarp or whatever, you know, and COVID, and all the different changes that we have. It’s very difficult to keep on top of this stuff, even if you’re paying attention to it on a regular basis, but if you never pay attention to taxes, guess what your clients are reading these stories, your clients are hearing these things, and they’re not sure what is reality and what is the government talking about certain things. And if you meet with your clients and you say, ‘okay, this is what we’re hearing. We’re not sure what’s going to happen. Uh, but this is what we’re hearing. And even if this does become reality, it won’t affect you, or it will affect you. And if it does have to become reality, we’re going to make sure that we’re on top of this.’

SJ (09:57):

Yeah. There’s so much value in doing things hands-on, there are a lot of great tax resources out there. Um, I’m a big fan of what they put out at kitces.com, especially some of the things that Jeff Levine writes and that those are great resources, but there’s a difference between reading an article and seeing on a tax return where these things come through and you often need both, but that hands-on experience is going to do wonders for the amount of value you can deliver to a client. So, and then, then instead of it just being a headline or an idea, you can show, okay, here’s where this comes through on your return, or here’s where we can make a decision. Here’s where we can be proactive and do just a little bit more to not leave the IRS a tip.

JY (10:36):

You bring up another good point, as I mentioned, I use Hollistiplan. So I just upload the tax return, it spits out a report. I don’t even really look at the tax returns that much anymore. Well just the other day I had a client’s tax return and I’m going through it and looking at it. ‘Oh yeah. That’s where this stuff comes from. That’s where that line item comes from,  really to see back when I was new in the business, I really, I would go through tax returns and find out where these numbers came from, what schedules they came from, how do they, you know, where do these numbers actually originate from? So you can have a better idea. You don’t have to go into that deeper detail with your clients. It’s just really for your brain, so you know where these numbers are coming from.

SJ (11:19):

Yeah. And whether you use Holistiplan, which is a great product, or, you know, we’re getting ready to roll out some tax software to our members. You gotta keep in mind that these, these softwares are a support tool. They don’t replace you as the advisor. And so taking the time, even if they can help, kind of do some of the legwork, taking the time to look at the actual tax return is still gonna be incredibly valuable to your clients and to your process. Maybe someday they will replace all of us with software, but I’m really not too worried about that.

JY (11:46):

Well, I’m older than you are. So I, you know, I’ll be sitting on the beach when that happens.

Why Asking Why is Important – Charitable Intent (11:52)

SJ (11:52):

Perfect. Perfect. That’ll be, that’ll be, that’ll be lovely. Um, okay. So Jim, let’s, let’s pivot just a little bit, and you mentioned it already, that kind of, one of the evolutions of how you look at tax returns is going beyond just, ‘Hey, what’s that at that point in time, what are some options to them, to the client, but, okay. What are proactive things we can do?’ And you, you mentioned charitable giving. And so you and I have been talking about a scenario that really illustrated how we need to make sure that when we’re talking about charitable giving, regardless of the tool we’re going to use, that we really start with what’s the client’s goal. What’s the taxpayer’s goal? Why are they doing this? And then is there a tax advantage that we can find, but we’ve got to start with that ‘Why’, so maybe talk a little bit more about this, the scenario that we had mentioned.

JY (12:35):

Yeah. The ‘why’ is huge. I had a mastermind meeting this morning and we talked about the ‘why’s’, why people work with financial planners? Oftentimes they don’t understand the work that we do and the ‘why’ people give, it’s a great question to ask. And you know, now with the holidays coming up, and this is a great time to be bringing this up with your clients, because it’s all about giving at the holidays to ask your clients, why do they give right? You know, first off, find out if they have charitable intent because not everybody does. Find out if they have charitable intent on the tax return, because most people are not itemizing anymore. They’re, they’re taking the standard deduction. So you don’t often times don’t see what their charitable giving is, but you want to ask them first off, do you have charitable intent?

JY (13:20):

And if they say yes, ask them why? Why do you like to give? And you’ll find that the majority of the time, the first thing out of the mouth isn’t – ‘because I want those tax deductions’. It’s really, the tax deduction is an afterthought. They give because it makes them feel good. They want to give back. They’ve had some success in their lives financially, and they want to help those that are less fortunate than they are. I have a client that gives a lot to his church, so he feels that he’s gotten a lot from the church, so he wants to give back to the church. So really first off, find out why, because it’s a question that they probably don’t get asked a lot by an advisor or anybody in general is to know why are you giving and, and what, what do you do with that? That ‘why’. Really nothing more than to let them hear themselves answer that question because oftentimes, once they start answering it, the light bulb goes on. If they’re thinking, wow, I didn’t even realize that that’s why I do give and, uh, may prompt them to give more, or given different ways.

The Utility of Donor Advised Funds (14:25)

SJ (14:25):

Well, and as a financial advisor, as a tax planner and anyone working with clients on, okay, what’s the most tax efficient way to give, starting with that ‘Why’ can really help us decide which avenue to go down? Because it’s not just about the numbers. And so one of the things you and I had talked about was using donor advised funds. And from a quantitative standpoint, usually where we start with donor advised funds is looking for clients who give to charity, but don’t consistently give enough that they’re exceeding that standard deduction limit and actually getting a tax benefit from their giving or alternatively it’s it’s taxpayers who are getting close to retirement, they’re getting close to maybe their income dipping for some period of time where they also might not be able to take advantage of their charitable contributions that they wish. So whichever situation they’re in, they’re looking for a way to lump a lot of their giving into one year.

SJ (15:16):

And so that’s the more quantitative way to approach – ‘does a donor advised fund make sense’. And there can be a lot of tax savings if we are very intentional about that. But what I liked about the scenario that you and I were talking about was that this was an individual who was very passionate about giving, but as they’re getting closer to retirement, one is to make sure that they were going to continue to be able to give. And for them, it was, to me, it almost seemed like a donor advised fund was a way for them to make this commitment to themselves. So here, I’m going to set this money aside. I’m going to invest in this donor advised fund so that as I get to retirement, I know that this is my pool of money that I can use to continually give, and that it’s not tied necessarily directly to my income in retirement. And so I really liked that additional layer of this, this isn’t just, ‘Hey, potentially this is more tax efficient, but it’s also at an emotional level. It allows this, this person to, to really demonstrate their commitment to this ongoing giving.’

JY (16:15):

Because I think a lot of us, if we’re doing long-term planning and we’re looking at clients and we’re looking at when they retire, oftentimes their income drops. And one of the reasons is they’re not contributing large sums of money to retirement. They’re doing just the opposite. They’re pulling money out and because their income drops – for whatever reason – in retirement, that line item on their spending during retirement charitable giving oftentimes shrinks because of the, uh, they just don’t have the financial wherewithal to do that. Like they used to, because they’re no longer working. So this allows us to kind of front load that by creating almost a foundation for them to contribute larger sums of money while they’re making that money and let it sit there and let it grow over time, hopefully. So they can actually give more and give more at retirement than that spending plan cash flow that we had put down, because now they’ve got this pile of money for retirement, IRAs, Roth IRAs, whatever that may be to live off of. Now, they could also have another pile of money that this is earmarked for giving during retirement to whatever charity that they want. They don’t have to make that decision upfront, They can make that [decision later], because things change, things change down the road and their value system may change. So it allows them to also change who and what they give to throughout the retirement. It’s a great tool. It really is.

SJ (17:48):

Yeah. And for people listening to the show, I did an episode back in August that really kind of dove into some of the details of donor advised funds. And for RTS members, we’ve put out some newsletters around it because there are some important details you really need to be aware of and know about. I really like this focus on going beyond just the quantitative piece, which can be

Easy to, to kind of get wrapped up in and saying, what does this allow the client, the taxpayer to do from a kind of, you know, a life and legacy standpoint of going beyond, okay, what, what were the hard numbers and what does this really allow them to do that’s going to contribute to those goals.

JY:

Yeah and, if you’ve got someone at retirement and in their cash flow, it’s showing that they’re giving a good amount to retirement. And because of that, it may be reducing their lifestyle. There are a lot of altruistic people out there and nothing against them, but they just like to give, give, give, and they think of others before they think of themselves. And we were taught many, many years ago, pay yourself first. And this allows people to continue to pay themselves first. And as I mentioned, use that pile of money in that donor advised fund to give more during the retirement. It’s just an example of what, how, how it, how it can work for them.

SJ (19:00):

And even though I said, the, you know, the emotional piece, the piece beyond the quantitative is important. You know, what you’re bringing up kind of brings us back to the reason a client is coming to us for help with the quantitative piece at times, because why this is important is that, I mean, there’s limits on the other types of retirement savings we can have, right? I mean, the amount we can contribute to an IRA, to a 401(k), these things get capped. And so maybe we’re doing, or we have a client that is doing a great job saving for their cash flow needs. But to your point, a donor advised fund really is a tax efficient way to set additional funds aside that are specifically earmarked for this charitable giving throughout, throughout our lifetime.

JY (19:37):

Yeah. And you know, there are people that get windfalls, you know, whether it’s a big bonus that they weren’t expecting, you know, their company had a great year and they get this big bonus. Well, that’s a taxable event to them and that could push them up into the next tax bracket. If they’re close to retirement. And we’re looking at Medicare means testing, and it’s two years, you know, that two year look back and we say, okay, well, we don’t want you to be in this high bracket on your, your, uh, Medicare costs in two years when you retire and go on Medicare, let’s carve out some of that big bonus that you got, and let’s put it into a donor advised fund, you know, keep that charitable intent going, but also reduce your income. Cause that’s that forward-looking financial planning, tax planning that we need to be doing for our clients. So a lot of people don’t think about how their income in their working years, their last two years of working is going to affect, but say their Medicare means testing.

SJ (20:31):

Yeah. Which kind of brings us back to where the conversation started of reviewing tax returns, having a good understanding of what line items, these different activities impact. Because, you know, we’ve been talking about donor advised funds, but also we talk about charitable giving, qualified charitable distributions come up. But even though those are both giving to, they impact different lines of the, of the 1040. And so for the advisor to be able to understand where there’s those go. And so as we review returns, we can make sure they’re getting reported correctly because a lot of times tax preparers, uh aren’t as focused on these planning opportunities, uh, and to make sure that we sit down with a client, we can say, Hey, you know, here’s where, you know, last year we set up this donor advised fund and, and here’s where that’s reflected on your tax return and be able to, to kind of bring that full circle for the clients as well.

JY (21:16):

Yeah. Good stuff.

Action Items (21:17)

SJ (21:17):

Yeah. So Jim, we’d like to make sure that everything we talk about can be turned into action for our listeners. So as you think about this conversation we’ve been having today, what are action items you would recommend? So that we really turn this knowledge into value.

JY (21:30):

Yeah you and I talked earlier, that this is a common theme for your show. But yeah pick up that tax return, you know, and anybody who is on the general regular basis, hears that all the time, but it’s so true. And it’s easy. It’s easy to do. Just tell your clients that I’m going to do a review of your taxes to make sure that you’re paying your fair share, but you’re not, as you say, leaving the IRS a tip. So pick up the tax return.

The next – be a student of the game, you know, listen to the podcast or Retirement Tax Services. Yeah. There’s a lot to learn from this. And other podcasts read blogs, you know, uh, Michael Kitces has got some great stuff, so be a student of the game.

And then lastly, we already talked about this, but ask them about their charitable intent, you know, ask them if they have charitable intent, do they give to charity? If they say yes to either of those, the followup question is why do you give? And it really just, it takes them away from the numbers aspect of what we do and really gets us into the emotional aspect of financial planning. The behavioral aspect of what we do, because one of our jobs is to, is to control our client’s behaviors. Whether we like it or not, it’s something that we have to do, whether they like it or not, it’s something that we have to do and they will appreciate these types of questions.

SJ (22:44):

Yeah, Jim, that’s great stuff. Those are great actions for all of our listeners to take. Selfishly, I always like to encourage everyone to follow Retirement Tax Services on social media, on LinkedIn. We love hearing feedback on the podcast. We love hearing about potential topics or guests you would like to see. So feel free to go out and, you know, leave us a review, leave us a comment. We always love hearing from our listeners, Jim. I really just wanna say thank you for being on the show today. It’s been great talking to you.

JY (23:11):

Thank you very much for having me. I enjoyed it!

SJ (23:12):

And for everyone listening and until next time, good luck out there, and remember to tip your server, not the IRS!