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What You'll Learn In Today's Episode
  • Many clients/prospects are completely unaware of how much they control the amount of their next tax refund. Therefore, ask how much they would like to get back and then work with them.
  • Delivering value doesn’t mean encouraging bad decisions. At the same time, as long as no penalties are incurred, allow people autonomy with their money.
  • Help clients stay within the guidelines of the IRS’s Safe Harbor Rule: If they owe < $1,000 after withholding payments for the current year (or they’ve paid 90% of the amount assessed), they’re clear. If they’ve paid 100% of the prior year’s liability, the same applies. However, for high-income earners, 110% avoids penalties.
  • Be careful using software to make estimated payments: most brands focus solely on the current year that you are filing for (2020). This means an income shift (higher or lower) in 2021 won’t be reflected. Meanwhile, if someone missed making estimated payments and wound up with a year-end penalty, beware of the same pitfall.

Executive Summary:

Welcome back to the Retirement Tax Services Podcast! For this week’s Tax Q&A Friday, Steven is tackling the question, “How much is the right amount of tax refund to get every year?” The answer involves the Safe Harbor Rule.

How Much of a Tax Refund Do You Want?

To start with, ask the client how much they would like to get back. Don’t leave it completely open-ended. At the same time, as long as you avoid any penalties and maintain clear expectations, stay flexible.

Some people will want a $5,000 refund back every year. In fact, that sometimes serves as a forced piggy bank from which to pay property taxes later.

That’s not an ideal approach from an investment standpoint. Regardless, if they feel good about it, it’s their call. Let them make it.

However, make sure whatever they choose is ultimately in line with their goals. Be ready to speak up, respectfully, if something would significantly conflict.

Meanwhile, other clients will want to pay the maximum possible at the end of the year. They don’t want the IRS holding onto their money any longer than absolutely necessary.

Distractions happen. So does refund fever. The latter is all some prospects or clients may believe that they care about.

On the other hand, others obsess, fretting over how much they could wind up owing. Disarming fears as a value-add is part of the job at times. However, once they’re calmer, bring them up to speed.

First, they need to understand how much they’ve paid in taxes most recently. Second, they need a sound idea of how much they’re likely to pay next.

The Safe Harbor Rule: Docking Tips

The IRS doesn’t expect perfection. Nonetheless, avoiding penalties means staying within the guidelines of their Safe Harbor Rule:

  1. If someone owes less than $1,000 after withholding some payments for the current year, they are clear. Similarly, if they have paid at least 90% of their total current year tax liability, the same applies.

  2. If they’ve paid 100% of the prior tax year’s liability, that clears the hurdle, too. Likewise, high-income earners who have paid 110% (if their AGI for 2021 was $150,000 or more when married but filing jointly or $75,000 or above for single filers) incur no penalties.

  3. There are also some unique provisions for farmers and anglers. However, for today at least, we’re avoiding red herrings.

Make note of the first two. Especially if you have a client whose income changes from year to year, keep an eye on the thresholds.

Software’s Slips

Most tax preparation software will prepare forms for you. However, if you are making estimated payments, most brands base calculations solely on the current year that you are filing for.

In other words, they currently only consider 2020. As a result, any income shift (higher or lower) in 2021 won’t be reflected in their estimated payment figures.

Similarly, if someone missed making estimated payments and wound up with a penalty at the year’s end, the same applies. For best results, don’t trust software results blindly.

Your Action Items

  • Make sure to review Line 38 of clients’ and prospects’ 2020 Form 1040. See if they paid any penalties in the prior year.

  • Ask clients how much of a refund they would like to receive. Work with them yearly to make it happen. In all honesty, they may not understand their degree of control over this.

  • Get tax returns from prospects and clients annually. It’s the only way to see what’s really happening in their financial lives. In other words, they will actually lose value if you don’t.

  • Follow us on Facebook and LinkedIn. We’ve got content to help you improve your tax planning. Likewise, if you’re about to begin, we want to ensure that you start well.

Steven has more on the IRS’s Safe Harbor Rule in today’s Retirement Tax Services Podcast.

Thank you for listening.


Steven Jarvis:

Hello everyone! Welcome to the next episode of the Retirement Tax Services Podcast: Financial Professionals Edition. I am your host, Stephen Jarvis. And in this show, I teach financial advisors how to deliver massive value to their clients through tax planning. We are once again, back to Friday, which means tax Q&A Friday. The question I want to address this week is how much is the right amount of tax refund to get every year? Now, the accountant side of me, of course, immediately goes to however much you want it to be. One of the only accounting jokes I regularly tell is if you ask a mathematician, what two plus two is, they will, of course say ‘four’, if you ask a lawyer, they will say ‘that depends on the definition of two’. And if you ask an accountant, they’ll lean in real close and whisper ‘two plus two is whatever you want it to be!’

Stephen’s Personal Journey with Tax Refunds [01:21]


Now, while that’s a little bit facetious, there are some cases where it holds true, and this is one of them. Literally, we can make your refund however much you want it to be, because this is just really a reflection of how well did you estimate how much tax you would owe. So, if you want a $10,000 refund, it’s simple pay an extra $10,000 in during the year. And the IRS will gladly give you back that $10,000 at the end of the year after they’ve held onto it without giving you any interest.

I actually have personal experience with this phenomenon. Thankfully, this was at the very beginning of my career shift, so should not be a reflection on how I approach taxes now. But my first year out of school, I had been in school for part of the year. I had done an internship, which thankfully in accounting was paid, but I had also just had my first child. There are a lot of life changes and the two tax classes I had taken, hadn’t really spent a lot of time on what you should elect for your exemptions. When we’re talking about withholdings. I had been told once that you should just claim zero exemptions so that you just make sure that the IRS isn’t going to ask you to make a payment at the end of the year. So, even though I didn’t have a whole lot of income, I still qualified for a lot of education credits. I had just had my first child, married-filing jointly. I still was claiming zero exemptions.

So, I get to the end of the year and I got an $8,000 tax refund. And when I first finished putting my taxes together and saw that it was going to be an $8,000 refund, I thought, ‘oh, this is so great!’ But I had learned a thing or two from my degree in my first year in public accounting and quickly realized, ‘wait, that’s, that’s the wrong attitude.’


All that means is that I did a terrible job of how much taxes I would owe. And I gave the IRS an interest free loan all year. Since then, my goal every year has been to get a refund of less than a thousand dollars. Personally, I prefer not to have to write the IRS a check at the end of the year, but I also want to make sure I’m not giving that interest free loan. So my personal goal is that I owe, or that I’m getting that refund of less than a thousand dollars. And with a little bit of effort, that’s really not too hard to do, but really we want to talk about this question from the standpoint of, for your clients, how much is the right amount of tax refund? And this really should start with a question to them of Mr. and Mrs.


Client, how much of a tax refund would you like to receive each year? And there’s some things we want to keep in mind. We don’t want this to just be completely open-ended. Our clients are coming to us because we’re professionals and have advice to give them. But like we talk about so often on this show, money is emotional and taxes even more so, so we don’t want to get hung up on some sort of target number. Even as I share what my goal each year is from my personal return, I don’t try to enforce that on other people, as long as we’re avoiding any penalties, and there’s clear expectations. If there are clients that want to receive a $5,000 refund every year, because they use that to pay their property taxes, or it helps them have some extra emergency cash. That’s kind of a forced savings, while that’s not the best approach from an investment standpoint, if that’s what makes them feel good at tax time, great, let’s do that!


We really want to make sure whatever they’re doing at the end of the year is in line with their goals. Now, we do want to make sure we understand those other things we need to consider so that we completely avoid paying penalties because we’ll also have clients that are very adamant that they don’t give that interest free loan to the IRS. And, we’ll even go so far as to say, I want to pay as much as possible at the end of the year, just so they don’t hold onto my money.

Safe Harbor Rules [04:45]

So, let’s talk about what the safe Harbor rules are for our tax withholdings to make sure we don’t get ourselves into trouble and end up paying penalties on our taxes in a given year. So, safe Harbor works in a couple of ways, and this is related to our total tax liability. Now, as we’ve talked about before on this show, a lot of taxpayers will get hung up on whether they’re making a payment at the end of the year, or they’re getting a refund and may not have as much understanding of what their actual tax bill is.


So, that’s what we need to start with is making sure they understand how much they paid in taxes in the most recent year and how much they might expect to pay in taxes in the coming year, because the IRS doesn’t expect us to get it exactly right. But to avoid paying any penalties, we need to make sure at a minimum we’re following the Safe Harbor provisions, which the first is that if we owe less than a thousand dollars after withholdings and payments for the current year, or if we’ve paid at least 90% of the current year’s total tax bill that falls under Safe Harbor, and we won’t have any penalties. The alternative is that if we’ve paid a hundred percent of the prior year tax liability or for high-income earners, this goes to 110%. If AGI for 2021 is $150,000 or higher for married filing jointly or $75,000 or higher for single filers.


So, if you’re above those thresholds, you’ve hit the safe Harbor and you won’t be subjected to any penalties. There’s also some unique rules for farmers and fishermen. If you happen to work with anyone in those professions, but we won’t get into the details of that. So we want to make sure we understand those Safe Harbor thresholds, especially if we have clients whose income changes significantly from year to year, so that we make sure we’re watching that and adjusting that as we go along. An important thing to note on that point is that most tax preparation softwares, if you’re making estimated payments, or if you should have made estimated payments, because you ended up with a penalty in a given year, the software will actually prepare forms for you to make your estimated payments for the coming year. But it’s going to do that based on the tax return you’re filing.


So, when you file the 2020 return, the software most likely is going to spit out – here’s your four estimated payments that you need to make during 2021, but it’s going to be based on your income from 2020.

Tips to Add Value to Clients Making Estimated Payments/Penalties [07:00]

So, if you know, you’re going to have a significant shift in 2021, whether higher or lower, those estimated payments are not really going to reflect reality. So, make sure you understand that it’s also a good time to just remind us that if we have clients who are making estimated payments a really easy way to add some value is to make sure that those payments are not for the exact same dollar amount, because at times payments do get lost. And if we get partway through the year towards the end of the year, and a payment has gotten lost, it’s going to be a lot easier to see which payment it was if they aren’t all the same exact dollar amount.


So, instead of making four payments of a thousand dollars, each let’s make Q1 $1,001 Q2 $1,002. You can see how this pattern works. So, those are some great ways for us to just pull back the curtain a little bit for our clients on how this all works and help add some additional value. Like I said before, how much of a refund we get really as a function of how much we paid in versus how much we owe that ended up itself doesn’t necessarily mean we’ve made more money or paid the IRS less in the long-term. But, if we can take out some of that anxiety or fear or uncertainty, there’s still value there for our clients in this process.

Now on the topic of penalties, this is a great place when we’ll recap, as we get to action items and penalties is a great place for you to add value as you’re reviewing tax returns. For the 2020 1040 it’s line 38, will show you if the client paid any penalties in 2020, and this can be a great prompt for having this conversation. This can be a great place for us to really get in and add value for our clients. Because even if that dollar amount isn’t large, for as frustrating as it is for your clients to pay taxes in general, it’s going to be that much more frustrating if they realize that they are paying penalties, and you can have situations where you got a refund, but still paid penalties, depending on the timing of when those payments were made. So, just because a client got a refund does not mean we shouldn’t still look at that line 38, to see if there’s a dollar amount there for the most recent year to see if that’s something we need to address with our clients.


Of course, paying a tax penalty for underpayment might be one of the more emotionally painful ways to leave a tip for the IRS. And of course, that’s just not something we do around here. So, we want to make sure that we’re really avoiding any of those penalties, because if it’s something we look at early in the year, it really isn’t hard to avoid those penalties. Another quick reminder that we’ve talked about before the IRS does not look at withholdings and estimated payments the same. We have tax withholdings, whether from our W2 wages or from a 1099 distribution, the IRS treats that as having happened evenly throughout the year, regardless of when we take the distribution, whereas estimated payments are considered received when they’re received by the IRS. So, if we’re getting towards the end of the year, especially if there’s been significant one-time income, we can use withholdings to make sure that we’re also not paying penalties. If we weren’t proactive making estimated payments early in the year. So, it’s another important thing to keep in mind when we’re talking about making tax payments.

Hey, podcast listeners, are you interested in content that provides you with action steps that you can take to deliver massive tax value to your clients? Then you are going to love our powerful training sessions online. At Retirement Tax Services, we meet with the top producing highly innovative financial advisors from across the country. We discuss their most pressing tax concerns and strategies on how they can take tax theory and transform it into tax planning for their clients. Register today at, or click the link in the show notes. Aren’t you ready to start being a part of the conversation? Yeah, I thought so. We’ll see you online.

Action Items [10:42]


All right. So let’s go ahead and go to action items. Of course, you should be already getting all of your client’s tax returns because we talk about that on pretty much every episode, but make sure that you are looking at that line 38 of the 2020 1040, to see if they paid any penalties in the prior year.

The next action item, regardless if they paid a penalty or not, you should be asking your clients how much of a refund they would like to receive each year and work with them to make that happen. This can be an area that clients don’t really understand that they can control. Like I mentioned earlier, I was early in my career… really before I started my career in accounting. Early in life, as I started paying taxes, I was told by someone I knew and trusted that, ‘Hey, just claim zero exemption so, you never have to write that check to the IRS.’ And while yes, that most likely will result in not having underpayment penalties. For me, it resulted in really poor cashflow management essentially because I was leaving $8,000 to the IRS during the year. And so, this is one of those areas we can pull back the curtain a little bit for our clients and help them understand what they have control and influence over. So, making sure we’re asking that question of our clients of, ‘okay, how much of a refund would you like to receive each year’, and then helping them understand the options for having an impact on that.

Last action item I’ll throw out there is make sure you follow Retirement Tax Services on LinkedIn and Facebook to stay up to date on all of the content we are putting out. We’d love to hear from our listeners and get that feedback and questions that we can address here on the podcast or through our other content. Love hearing from all the people, enjoying what we’re putting out there related to taxes. Until next time, good luck out there! And remember to tip your servers, 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.

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