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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 to another Tax Q&A episode of Welcome to the Retirement Tax Services Podcast! Steven’s guest Monday was Frank Murillo of Snowden Lane Partners. One of the questions Frank is most frequently asked is, “I’m not a business owner. What can I do to lower my taxes?” Many want “write-offs.”
Steven is often asked the same thing. As a result, today’s episode is devoted to his answer.
Have you been asked to make someone’s taxes go away? The question illustrates why CPAs and financial advisors sometimes disagree.
For example, advisors complain about an accountant’s tax-time changes to a shared client’s strategies. At the same time, Steven has often heard CPAs complaining, too.
They hate fixing tax returns that advisors have changed—and in the process, incurred more taxes. The advisor may have meant well, but it’s frustrating.
Let’s assume good intent on both sides. Believe it or not, both scenarios sometimes have a common root: The client is asking their advisor one set of questions… and then asking their tax preparer a different one.
This means the advisor is preoccupied with long-term planning. Meanwhile, the CPA is focused on keeping the clients’ taxes as low as possible. If they knew to coordinate, everybody would win.
Remember that most financial professionals want the client’s best outcome. Nevertheless, wires do get crossed and communication issues happen.
When someone asks about tax write-offs, that may not be what they really want. Beware the common misconception that deductions are free pots of gold.
For instance, while business expenses can be written off, they aren’t free. In other words, the money still has to come from somewhere.
For example, if you spend $1,000 on business travel, you’re still spending $1,000. The only difference is that it comes from your business income. Consequently, this will save some taxes based on your marginal rate.
There are multiple planning strategies available for business owners. Nevertheless, explain the truth: Tell them that having a business isn’t a pay-no-taxes pass from the IRS. There is no such thing.
Help them understand things in the easiest terms possible. Never assume that they already grasp the important factors. Complexity is not a value add.
Start simple. For example, spend time covering opportunities like maximizing retirement plan contributions. Help them understand employer matching and other incentives, while you’re at it.
Discuss their eligibility for an HSA account, too. Last but not least, relate the value of doing lifetime tax projections. That’s where the real savings start, in most cases.
Often people asking about write-offs really mean, “How do I save money on taxes right now?”
Don’t try to do this in March or April. Obviously, that’s a dead end. Instead, take a multi-year approach: There are nearly always ways to lower someone’s lifetime tax bill this way.
Tax planning opportunities are incredibly situational. Learn to ask open-ended questions. As a result, you’ll get better at identifying a client’s best options.
The Augusta Rule is an extremely unique opportunity. It can be great—if you qualify for it. It’s named after Augusta, Georgia, the site of the PGA Masters golf tournament.
Because of the tournament’s popularity, houses near the course can be rented for large sums of money. Meanwhile, thanks to the Augusta Rule, property owners’ rental income doesn’t get taxed.
Note that every taxpayer won’t qualify for this. Nevertheless, be thorough. The Augusta Rule is just one of multiple opportunities to consider.
Steven has more on making genuine tax reductions happen in today’s Retirement Tax Services Podcast. You can reach him at firstname.lastname@example.org.
Thank you for listening.
Hello everyone, 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. Today’s episode is the next tax Q and a Friday edition at our question today was provided by our guests from Monday’s episode, Frank Murillo, a CFP in Miami and partner at Snowden Lane Partners, an independent RIA firm. When I asked Frank for a question, he gets frequently from his clients, his first rather immediate response was, ‘I’m not a business owner, what can I do to lower my taxes?’ I had to laugh a little bit because this is one of the most frequent questions I get asked when people find out I’m a CPA. But it’s definitely a question worth addressing. We talk about it on here, and I’m sure you have your own conversations about money.
Money is emotional. It really is, and taxes even more so. And so I would imagine that many of our listeners have clients asking the same question on a pretty regular basis. A quick side note: this question is a pretty great explanation of why CPAs and financial advisors don’t always get along. I hear stories all the time from financial advisors complaining about changes to their strategies that tax preparers make come tax time. These typically are not advisors who are practically working with the tax preparers, by the way. And I talked to CPAs who complain about having to fix tax returns because of things that advisors have done that create more tax for their clients. Now, if we assume good intent on both sides, one of the reasons this happens is because the client is asking different questions of their advisor as compared to their tax preparer. Typically, the conversation with the advisors is more focused on long-term planning and the conversation with the tax preparer is more focused on, ‘how do I not write a giant check to the IRS right now?’
Okay, so back to Frank’s question, there are several important points to discuss with this question. The first one that jumps out at me is that it can be really helpful for clients who ask questions like this, to explain what exactly a tax write-off is, because kind of implied in this question is, ‘if I don’t own a business, so that means I can’t write everything off as a business expense.’ So often this misconception, that tax write-off somehow means free money, which of course we all know is not true. Being able to write something off for tax purposes, usually refers to being able to claim something as a business expense, which will lower your business income, and therefore can reduce how much you pay in taxes. But, it does not make the expense free. Spending a thousand dollars on travel for your business costs you the same thousand dollars it would, if you were taking a personal trip, it’s just that the thousand dollars on business travel comes out of your business income and will save you in taxes, whatever your marginal tax rate is.
There are definitely a lot of planning strategies that are available to people who have businesses, but having a business is not a free pass from the IRS to avoid taxes. Talking to your clients about ways to pay less in taxes is certainly a situation where complexity is not the same as value. Start simple… As an advisor, you are around these things every day, but for your client, having a conversation about common opportunities can be hugely beneficial. Don’t take for granted that your client already knows something just because you think it’s simple. Spend a few minutes talking about topics like maximizing retirement plan contributions, understanding employer matching, or other incentives, exploring eligibility for an HSA account and the value of doing lifetime tax projections. Again, just because it’s simple, doesn’t mean there’s not value there. And just because it’s simple, doesn’t mean your client already understands whether they’re taking advantage of that opportunity. Don’t confuse something being available on Google with something being already implemented by your client.
Sometimes when people ask this question, what they really mean is, ‘how do I save money in taxes right now.’ In March or April while the tax return is being filed is usually not a time where there are a lot of options to lower how much you pay the IRS, right now. But if we take a multi-year approach, there are nearly always ways to lower a person’s lifetime tax bill. Whether a client owns the business or not, which planning opportunities are available to them are incredibly situational. The better you as an advisor are at asking open-ended questions and really understanding your client’s situation, the better you will be at being able to identify tax planning opportunities they wouldn’t otherwise have been able to take advantage of.
So let’s give a really specific example to this question that Frank gets from his clients. So, is your client a homeowner? Now we all know that that’s part of the big American dream. So I would bet that most of you have a lot of clients who are in fact, homeowners. Did you know that anyone who owns a home can get up to 14 days of tax-free rental income every single year? This opportunity has been around for years and is commonly known as the Augusta Rule. Technically the rule comes from IRS code section 280-a – which I’ll make sure is linked in the show notes – but was named after Augusta, Augusta, Georgia that is. So it’s called the Augusta Rule because it was essentially made for the people who own homes at the side of the Master’s PGA tournament, because of the popularity of the Master’s, homeowners near the course are able to rent out their homes during the tournament for huge amounts of money. And because of this Augusta rule, they don’t pay tax on any of that income.
Now, Augusta is where the rule gets its name from, but it does not limit it to Augusta, Georgia or to the Masters or to sporting events at all. If a taxpayer owns a home in an area with a wildly popular annual event, they might be able to charge higher rents, but this rule can be applied anywhere and for anyone who owns a home. There are of course, several important factors to consider before you try and apply this rule. And it’s likely something you will want to discuss with your client and their tax preparer if a client decides this is something they want to implement. However, just a couple of key considerations: the rental income has to be at a fair market rent. So if you aren’t using an agency to rent out the property, you still have to substantiate that the income you are claiming is based on market rents of similar properties.
With the advent of AirBnB and BRBO and other such websites, this is typically really easy to do, but it is highly recommended you print or keep something for your records that shows that what you charged to rent out your home was at a market rate.
Now the next key consideration is that since you are not including the income for renting out your home in taxable income, you are not allowed to claim any expenses against that income. When you think about it, it kind of makes sense if your income is already zero for zero rental, why would the IRS allow you to deduct property taxes or a cleaning service or anything else related to having or renting out that property? That would just make your income be a negative number.
The next key consideration is that the income from renting your home still has to be reported on schedule E as rental revenue. So you still have to let the IRS know that you went ahead and did this. So you would add the income to schedule E and then under the line that’s labeled other deductions on schedule E you would offset the full amount of the rent income, so the total at the bottom of the form is still $0. So that’s what comes through to your taxable income, or in other words, nothing comes through your taxable income on the 1040.
Okay, I know Frank’s question was about non-business owners, but since we’re talking about the Augusta Rule, real-quick, we’ve got to talk about how, if do own a business, which now advisors, you might be thinking about yourself and not just your clients, because it could apply in both situations. So if you do own a business, there is a way to take the Augusta rule really to the next level, because you can actually rent your personal property to your own business and deduct the expense on the business’s return while still not claiming the income on your personal return, and this is still all under the Augusta rule. The considerations I’ve already mentioned still apply, and there are some added hoops to jump through to make sure you are doing this correctly. For this to work for your business, it has to be for normal operations of the business and not purely for entertainment. So, this could be board meetings, it could be company strategy sessions, or company retreats, but not the company Christmas party, as an example. In addition to still needing evidence that you charge a fair market rent, you also need documentation that the meeting was in fact for business purposes. So having an agenda, some meeting minutes, a list of attendees, including their titles and roles are all really helpful ways to document that.
So effectively answering Frank’s original question really comes down to you as the advisor, understanding your client base and the opportunities that are going to be most applicable for them. If you have to find your niche really narrowly, you could turn answering this question into a value add that you send out to your clients. Something along the lines of ‘top three ways my clients have saved money in taxes this year’ or something similar, and really focus in on those things that are applicable to your niche. It gets a little bit harder to boil it down to just two or three things if you haven’t really specifically defined your niche. So, maybe this is as simple as providing an update on contribution limits for retirement plans, tax qualified accounts, or HSAs. Maybe it’s a worksheet on Roth conversions or QCDs, or maybe you’re sending out a value add onto your clients on the Augusta rule. But this is a great way outside of your regular meetings with clients to continue to add value through tax planning, to continue to add value to your clients in general, and to make sure that your clients know that they’re being taken care of. None of your clients are going to read a newsletter or an email or anything else that attempts to cover every tax planning opportunity in existence. I wouldn’t want to read that either. It would be way too long, but if you get really specific, you can keep adding real value to your clients.
All right, so let’s talk about action items. First action item, make sure you have opportunities for your clients to ask you questions built into your process. One advisor I work with does this in their pre-meeting email confirmation to their clients. This is a great way to make sure that clients really feel heard, and it’s important to how you ask, because instead of saying, ‘do you have any questions?’ Where they can say yes or no? Say, ‘what else do you have questions about?’ Make sure it’s, it’s just pushing them to, ‘okay, what else? What else?’ Because these are complicated issues, likely your clients have plenty of questions to help, you know, how to best deliver value to them. And back to the advisor, I mentioned, who sends us out in an email ahead of the meeting. What makes this even better is that that gives the clients an opportunity to send in the questions before you even meet with them and then it’s that much easier to come prepared and to come with your a-game.
So the next action item I would have is to create a value add that you can send to your clients answering this question. You can, and absolutely should be providing value outside of your actually actual meetings with your clients. If seeing you face-to-face is the only time that clients feel like you’ve added value, there’s something you need to change.
And of course the last action item is to make sure that you’re getting tax returns for all of your clients and as you look to define what those opportunities for your niche are, this might be a great way to look for those similar things, specific to your clients. All right, really appreciate everyone listening. Please take a minute to go out and leave us a five-star review and provide us any feedback wherever you get your podcasts. Good luck out there, and remember to tip your server and 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.