Click Here To Listen To The Retirement Tax Services Podcast


  • How to ensure you’re client is confident and comfortable with their taxes. (1:30)
  • What clients can do help the situation if they’re receiving penalties on their taxes. (4:00)
  • How you can help clients who want additional withholdings throughout the year. (6:35)
  • The importance of clearly communicating with your clients about the steps they need to take, without using jargon. (9:45)
  • The most common thing that is done wrong when it comes to withholdings. (11:45)
  • The importance of having an intentional plan. (13:45)
  • How to help our clients understand the tax implications of different types of income. (16:30)


Throwback: “Tales From Tax Season- Withholdings And Loses

Clear communication around the topic of tax refunds and payments with clients is essential whether you’re the one doing the tax preparation or you’re an advisor doing tax return reviews. So, how do you gauge how much information your client is truly understanding during your meetings? And how can you be certain that they are comfortable with the amount they’ve paid or have had refunded? The answer is simple; ask them. In this episode, I will be sharing how to have these types of conversations with your clients to ensure everyone is feeling confident and happy around tax season.

Listen in as I explain what you can do for your clients if they want to have additional withholdings throughout the year in order to not have to pay such a large lump sum at tax time as well as what you need to know about penalties. You will learn the importance of avoiding the use of jargon when speaking with clients, the most common mistake made when it comes to withholdings and how to deliver massive value during tax season planning.

Ideas Worth Sharing:

If we owe less than $1000 at tax time then there won’t be any penalties. - Steven Jarvis Click To Tweet Most of us don’t think in terms of percentages and your clients definitely don’t think in terms of percentages. - Steven Jarvis Click To Tweet There are all sorts of reasons why withholdings are more advantageous to a client. - Steven Jarvis Click To Tweet

About Retirement Tax Services:

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Read The Transcript:

We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.

Steven Jarvis: Hello everyone, and welcome to the next episode of the Retirement Tax Services Podcast, Financial Professional’s Edition. I am your host, Steven Jarvis, CPA. And in this show, I teach financial advisors how to deliver massive value through tax planning.

This week I’m going to once again, be sharing experiences I had through this last tax season. And really what I want to start with today, is a question that I ask and I’m doing tax preparation and is also a question that advisors can ask when they’re doing tax return reviews. And that is around, how the clients felt about the refund or payment they made at tax time?

That is how I start the conversation. I don’t get into specific dollar amounts as far as what I think they should be doing. I bring up their tax return, again whether we’re working on this year’s filing, we’re just doing tax review for a recent year, so applicable to advisors say, “Great, Bob and Sue at tax time, you had to make a payment of $10,000 or you got a refund of $7,000.” Whatever that dollar amount is, I’m going to say, “How did you feel when you made that payment of $10,000 at tax time? Or how did you feel when you got that refund of $12,000 at tax time?”

And then I’m just going to kind of gauge their response. I’m going to let them kind of share what their experience was, so that I make sure that I’m only spending time on things that are going to be meaningful to them, and that I’m not just running over the top of, whatever their experience has been by whatever magic number, I think a tax return should be.

Because for me personally, I shoot for getting a refund of less than a thousand dollars. In my mind that’s the ideal, but that’s not set in stone. There’s no magic to that. And I definitely work with clients who want something very different than that, and I’m completely supportive of it as long as what we’re accomplishing is in line with their goals.

One example of that, I had a client who received a very large refund, tens of thousands of dollars. So I said, “Hey, how did you feel about that?” And if I don’t get much out of the initial response, I will start, kind of leading them down, “Okay, would it be all right with you if we dialed that in and had more flexibility over your hard earned money during the year, or if we let the IRS hold on to less of your money during the year?”

And so for this client that had this, refund of tens of thousands of dollars, they actually shared an experience with me. Where in the past, they had gotten burned pretty bad by underpayment penalties, because they had a year where there a bunch of things had changed and didn’t even realize they needed to make estimated payments in that particular year, and so they still felt the sting of those penalties. And it was a few thousand dollars, so it wasn’t small for penalties. So I completely understood that. And so while with a lot of clients, I might try to dial that in a lot more specifically.

With them, we essentially landed on, let’s shoot for a refund of about $10,000, because they even accepted, “Hey, that’s probably a little bit more than we should leave with the IRS, but that’s what’s going to help us feel good about the situation.” So it’s great let’s make it happen.

On the flip side of that for clients who are making large payments. What I discovered several times this year, is that for clients who are making those big payments at tax time, that weren’t happy about that situation or were into penalties, which is definitely when we want to do something about it.

What I was finding is that, those clients just didn’t really understand what, if anything they could do to change the situation? One client in particular that comes to mind, Bob and Sue, both are working, both have W-2s and they just really kind of felt like withholdings was something that happened, and they didn’t know how to dial it in.

And if you’ve looked at a form W-4 recently, it’s pretty understandable why this could be confusing or unhelpful for clients, especially clients where both spouses are working. The form is not the simplest to figure out, “Okay, here’s how much I make and here’s how much this is going to get withheld in taxes. We have to fill in our filing status and whether there’s multiple jobs involved and are there additional deductions or other income, do we want extra withholdings?” There’s all these different things.

In a perfect world it would say, Bob’s paycheck is going to be $10,000 and he wants to withhold a certain percentage or a certain dollar amount. But it’s not that simple. So whenever you’re working with a client to adjust their withholdings, I highly recommend that you make sure the pay stub immediately after the change, that they are taking a look at and potentially even sending to you to take a look at. So, however you filled out the W-4 gets reflected on their paycheck correctly.

This particular client that I’m thinking of, as I’m talking about this. They were in a situation where they had to pay a bit over $20,000 at tax time, which they were more than happy to pay their share of taxes. They had done a great job earning that year, but they want to be able to spread that out more during the year and so we got in and looked at that together.

Now in their situation, this has been happening for years to them. Best I can tell of what had happened because it’s the first year I worked with them, is that their W-4s, their withholding forms had been filled out as if they each were the only one working. And so in that case, as the payroll department is figuring out how much to withhold, they’re looking at each client, as if they’re each separately filling up those lower tax bracket buckets and so less is being withheld.

When in reality, Sue’s paycheck is taking them all the way up to the 24% bracket and then Bob’s paycheck is just getting stacked on top of that. And so we got in and took a look and said, “Okay, here’s how much you owed at tax time, we’re already into April and May so here’s how many pay periods you have left and here’s what we could do to kind of spread this out and have some additional withholdings from each paycheck.”

And as we talked through that, while they didn’t want to have to make a huge payment at tax time, they also didn’t want the pendulum to swing too far back the other way and now have a huge refund, which I completely understand.

So the question they brought up, and this question comes up from taxpayers fairly often is, “How close do I have to get? How spot on do I need to be, for the IRS to not charge me any penalties, for me to not get in trouble?” Which I did have a client this year, not because of anything I did, just the way it worked out. They had to make a payment at tax time of just $2, which that is the smallest. That’s the closest I’ve ever seen, that they were within $2 of their actual tax liability. But we don’t have to get that close.

The IRS has what they call safe harbor provisions, that we got some parameters, as long as we’re under those, that we won’t be subject to any underpayment penalties as long as we are talking about withholdings. It’s a little bit different of a conversation, if we’re making estimated payments, because we have to make sure we’re making those throughout the year.

But if we’re talking about withholdings, there’s a couple of things we look at. If we owe, less than a thousand dollars at tax time, then there won’t be any penalties. Now, especially for higher earners, that can be very hard to get that precise, but that’s the first one. If we owe less than a thousand dollars, there won’t be underpayment penalties.

The second piece, is if we’ve paid 90% of the current year’s tax liability. And quite often, when I’m working with clients on adjusting withholdings for employment income, this is the provision that I focus on of, “Okay, can we get to 90%?” And so, there’s going to be some estimating here, but this will allow us to get a lot closer, but not have to worry about swinging too far back into, “Let’s now we’re going to have a big refund.”

And the other thing I’ll do along with this is, we’ll work on withholding together right after tax filing time and then we’ll revisit this again in the fall. Something we do with all of our RCS premier members to say, “Great, now we know what the actuals for most of the year was. Let’s take a look in September and October,” and say, “Okay, is there any adjustments we need to make right here at the end of the year?” Also, a lot of other great planning opportunities that can come up, as part of that conversation.

So as long as we get to 90%, we’re going to be good to go for the current year. The alternative is that we can look at what the prior year tax was, and then use that as to determine our safe harbor for the current year. These provisions are in either, or we don’t have to meet all of them. So we can either get to 90% of the current tax liability, withheld throughout the year, or we can owe less than a thousand dollars, or for married filing jointly couples who made less than $150,000 in adjusted gross income. We can get to a hundred percent of the prior year liability.

This can be especially impactful in years where our income is going up and can help out a lot with avoiding underpayment penalties. And I made that distinction of married filing jointly, who have less than $150,000 in AGI, because if you are over that $150,000 in AGI, it goes to 110% of the prior year liability.

Now, you may be listening to this and thinking, “Okay. Great. Percentages. I got it.” Most of us don’t think in terms of percentages and your clients definitely don’t think in terms of percentages. For them, it just sounds like marshmallow, marshmallow, marshmallow. And so when I’m having these conversations with clients, if I actually throw out the percentages, I will then turn it into real numbers for them.

So again, for the Bob and Sue that are in mind right now, we looked at their tax return together, and talked them through the idea of what safe harbor provision is. They understood why we were going down that route. But then we got really clear on, for you, here is what this means.

And again, it’s going to be an estimate, but they felt like, their earnings were going to be similar in 2022. So we said, “Great. Let’s use a similar tax amount to what you paid last year. Let’s, 90% of that. Let’s give ourselves a cushion, put real dollars to this, and then great, let’s circle back in September or October, and make sure that we’re still on track. Make sure that, we’re setting ourselves up for success at tax time and not leaving room for surprises.”

Now for our clients who aren’t working or have other sources of income as well. Our employment income is not the only place that withholdings can be taken from. And this is significant because the IRS is preferential treatment to withholdings as compared to estimated payments, because we absolutely could withhold zero from any source of income, and then just make an estimated payment. But then we have to make those throughout the year, or we can be subject to underpayment penalties, estimated payments, get forgotten. They get misprocessed. There are all sorts of reasons why withholdings are more advantageous to a client. It’s very rare that a client can give me a reason, that’s persuasive as to why they should make estimated payments, instead.

Typically, it’s only going to be because they don’t have high enough sources of income where they can make withholdings, or it’s just something they feel so passionate about, that I’m not going to fight them on it. And as long as they actually follow through on making them, that’s totally fine. We’re going to end up in the same place.

So talking about other sources of income, the most common one I see done wrong, when it comes to withholdings is social security. Now, everyone who gets social security can have federal taxes withheld, just federal, but it’s not something that comes up in the application process when you are turning social security on. A lot of people aren’t even aware that they can have taxes withheld from social security.

Hopefully you’ve at least taken this conversation far enough with your clients, that they know that they can be taxed on social security, because I do have to have that conversation with taxpayers at times, getting them past their surprise, that they had to pay taxes on a portion of their social security, but we can also have taxes withheld again, at the federal level.

Now, of course, the W-4 for employment income looks different than form W-4V, which is what we use to adjust our social security withholdings, because why would it ever be easy? On form W-4V we have just four options that we can choose from as far as what percent of social security is withheld for tax purposes. And we can either withhold 7%, 10%, 12% or 22%, which I’m going to assume at some point aligned with tax brackets or typical effective tax rates. I’m not exactly sure. Congress doesn’t ask me for my input on these things.

But we only have those four options, so we don’t need to worry about getting so dialed in, that we have to recommend a specific dollar amount. Actually with social security, especially for clients who have multiple sources of income. I tend to recommend on the high end of withholding from social security, usually up to that 22%, because that allows us to have a bit more flexibility with how we take care of other tax burdens.

Now there’s a variety of opinions on how to approach what gets withheld from social security and other income sources. My recommendation is to make sure that you have an intentional plan. There isn’t one plan that’s going to work for everyone, but it should not be just doing whatever happens by default, because by default social security is going to have $0 withholdings.

So whether you dial it in and say, “Let’s have just, what is actually applicable to social security withheld.” or we ratchet it up a bit and say, “Okay, if we withhold the full 22%, even if that’s going to take out more than is owed on social security, if that help covers taxes on other income sources like IRA distributions, or maybe business income we might have from doing some consulting or something on the side, that gives us just that much more flexibility, of over how we take care of the rest of our tax liability.”

And withholdings, regardless of their source it’s not just employment withholdings. Withholdings have that preferential treatment with the IRS. So anytime we can withhold, something I’m going to work with a client to make sure we are doing that.

Now, when anytime social security comes up, I mentioned it that at times this will come as a surprise to clients that they are taxed on that, it’s a good reminder that we need to make sure, especially as clients have changing sources of income, that we’re helping them understand what the tax implications of different types of income is, because not all income is created equal for tax purposes.

Of course, we’ve got the distinction between ordinary income and long term capital gains income or qualified dividend income, that have different tax percentages applied to them, that’s a whole another episode. But for today, and talking about things that came up this last tax season, I want to talk about how different types of income are treated, just from the standpoint of what can be used to offset different types of income? Because the IRS, places limitations on certain types of losses.

In particular, this came up with a few clients this year, as it related to rental properties and it seemed to be more of an issue with clients who, this was their first year being involved in rental properties.

Now, while I am the tax guy or a tax guy, maybe not the only one, but while I am a tax guy, I really embrace the idea that taxes are a passenger on the bus, they should not be the driver of the bus. We need to make decisions that are right for us, and then understand the tax implications.

And rental properties is a great example of this, because one client in particular, as I’m talking to Bob and Sue, they had just started their first rental property this year. They’re so excited to be involved in rental properties. They have very ambitious plans to be acquiring more, but as we started walking through their tax return, Sue says, “Well, wait a second, why do we have such high taxable income? I thought we spent all this money on our rental property and that would lower our taxable income.” And so we had to have this conversation that unfortunately came as a pretty big surprise to them because they had just heard about all the great tax benefits of having a rental property and how there’s just tax value for days.

I don’t know exactly where they were reading that. I’ve seen plenty of it on the internet too and on social media and all sorts of places. I can imagine what they were reading. They kind of got off on this wrong track of this idea that, “Well, great. Yep. It’s going to cost me all this money to get this rental property. Purchased and renovated and all these different things, but great, I can deduct all that.” And that’s just not the case.

The IRS has very specific rules around limiting, what they call passive activity losses and rental properties for most of us, there’s some exceptions for real estate professionals, but for most of us, rental losses are going to be limited to offsetting rental income.

So if we have multiple rental properties, there can be some offsetting that goes on, but what happens more often than not, is these losses get reported on the tax return, but they don’t reduce our ordinary income and we have to… They get carried forward to be used in a future year, either in a year where we have rental income, we have passive income, or in a year where we sell the property for a gain, those losses can be used to offset that gain.

But that comes as a really nasty surprise for taxpayers, if they weren’t anticipating that. And so being able to help our clients understand the tax implication of different types of income as they’re getting into these things, can make a huge difference on their experience overall. It absolutely won’t change how much tax they owe, and it might not even change their decision to get involved in the rental property. But part of the way we can deliver massive value through tax planning is, helping them have those clear understandings, set those clear expectations and take some of the pain and uncertainty out of the process.

We love it, when we can deliver massive value by finding ways to not tip the IRS, but there’s values to the client in both places. So we want to make sure that we are covering that for our clients.

Another question that came up related to rental properties, was whether it’s better, this the way it was worded at least the first time it came up. Whether it’s better to report a rental property on Schedule C as a business, or on Schedule E as a rental property.

Now to start with, it’s not that simple as I can just pick where it goes, but specifically this was coming up for taxpayers who had properties they were using on Airbnb or Vrbo or whichever site you want to pick. But for short term rentals was the distinction that they were, making was that, “Oh, I heard somewhere that for a short term rental, I can put it on Schedule C.”

Now there’s a lot more nuance to this, but the general idea is that for a rental property to be considered, a Schedule C or business income, think of it in terms of, am I providing additional services similar to a hotel? Right? This isn’t a matter of how long is it being rented out for, it’s are there other services that would make this a business as opposed to just a rental property? And that’s not even to say that, there automatically be some advantage or that we should, that if we can, that we would want it to be a Schedule C, income as opposed to Schedule E?

Part of where the question was coming from was, well, great if it’s Schedule C income, it’s business income, then it can offset other things on my tax return. But when we get to years where there is positive income, now we’re paying self-employment tax on our rental property, as opposed to, if we have rental income on Schedule E, it’s not going to be subject to self-employment tax.

So, like so many things with taxes, it’s not just as simple as one is always going to be better. General takeaway from, as this question came up, was that it’s really not as simple as I can pick where it goes. And that’s going to be an area where you’re probably going to want to make sure you’re talking to somebody who spends a lot of time in this space, before you make a decision on how this gets reported.

All right. So as always, we want to make sure we talk about action items. First action item, as we have this conversation is of course, get all of your clients tax returns. And in addition to that, since we were talking about withholdings, make sure you’re requesting pay stubs or W-2s as well. There’s more we can learn, from getting that additional detail. Love to have as much data as we can, because it’ll just help us with our understanding of the client’s situation and give us the ability to make more impactful and more relevant recommendations. So we want to make sure that we’re getting those.

And to go along with that, if you are working with clients, especially on adjusting withholdings, consider adding that fall review. And this is something that you can have your team help with, as far as requesting those year to date pay stubs, we can do a pretty simple calculation of that point of how much of the year has gone by, as long as we expect it to be consistent through the end of the year. Where does that put us from total taxes withheld, that can be a huge value add to clients and something that they really, really appreciate.

Next action item is that, as you’re reviewing tax returns with your clients, one of the things that should be on your checklist is looking at whether they got that refund or payment, and then asking them the question of, “Were you happy with the $5,000 payment you made or the $10,000 refund you got?”

Make sure you’re getting their, learning their experience and making recommendations accordingly, because that can, while it might seem like a small thing, it’s something that clients just appreciate all day long. I’ve seen, tons of great feedback as we work with clients in that area.

Of course, last action item is if you’ve made it this far through the episode, you clearly are getting value out of this. So please take the time to leave us a five star review, leave a comment, we love to hear from our listeners and it helps our reach keep growing. It helps us reach more advisors. So thank you everyone for listening, until next time. Good luck out there. And remember to tip your server, not the IRS.

We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.


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.

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