RTS #051 “It’s all in the hips”
Why are we quoting Chubbs in a tax newsletter? Aside from him being an absolute legend (and us only being able to keep our immaturity in check for so long), this quote is a great reminder of how important the foundation is to being great at anything. It’s so enticing to want to skip ahead to the fancy stuff, but at the end of the day, the bulk of the results come from really nailing the basics.
So what’s the tax equivalent of it being “all in the hips”? It’s all in the tax return.
Tax planning only counts if it’s reported to the IRS correctly. You’re only going to know if it was reported correctly if you are getting and reviewing tax returns. Of course, you have to take it one step further and make sure that you understand what you are reviewing, but any financial advisor can learn that with practice. That last sentence isn’t meant to make this sound easy or common; it’s a tremendous source of added value when it’s done right.
And don’t kid yourself; there is a lot of great tax planning that gets screwed up in the reporting phase if someone isn’t taking responsibility for making sure it’s done right. Just like great tax planning, great tax preparation is not the default. Anytime you are making a financial planning recommendation with an impact on a client’s tax return (which is A LOT of them), you should be able to explain in crayon what that impact will be.
That might mean being able to explain how different taxable income buckets work and where they come through on a tax return. You might be surprised at how many of your clients don’t know which lines of their return are potentially eligible for the preferential long-term capital gains rates, which also means they aren’t realizing how much certain investment income is saving them in taxes compared to ordinary income.
It might also mean reminding a client that it’s your “fault” that their tax bill is higher in a given year if you are working on income acceleration strategies like capital gains harvesting or Roth conversions. Even when you help them get the taxes paid when the income is generated, the client experience will be superior if they clearly understand what to expect at tax time.
It definitely means communicating the impact of the planning on their tax return MULTIPLE times. Ideally, you are reinforcing the tax impact when the planning happens, in a year-end 1099 letter or tax planning letter, AND when you review their completed tax return. This stuff is complicated. Casually mentioning it once just isn’t going to cut it.
Happy Tax Planning!
Resources that can help you transform the tax return review process:
