RTS#048 Nobody likes tax surprises

You’ve probably noticed it too, but no one likes surprises on their tax return. Yes, big surprises are worse (especially when they are the “you owe the IRS a lot of money” kind), but any surprise can be unsettling for a taxpayer. How confident are you that you aren’t creating unwelcome surprises for your clients?

Maybe you have it all dialed in, but here are a couple of areas we see clients get surprised that you may want to think about:

• Foreign taxes – A taxpayer we worked with this year had a $200k Roth conversion on their return and a payment due of over $25k, which they were expecting and were not concerned by. What they were concerned about was the $17 of foreign tax credit on their return. “I don’t have foreign income; this is a mistake!” It’s an easy enough clarification to make on how foreign taxes get paid on taxable brokerage accounts all the time, but if the tax preparer has to explain it after the client has already panicked, an opportunity to deliver value has been missed. Make sure your clients know what the planning you are doing will mean at tax time.
• Qualified Business Income (QBI) Deduction – Similar story, different client. Large amounts in other areas on their return, they were concerned by the $28 QBI deduction and form 8995 when they did not have a business of any kind. For non-business owners, the most common culprit is certain types of REITs within a taxable investment account. Make sure your clients know what the planning you are doing will mean at tax time.
• What name goes on the 1099 – The most common example of this might be Fidelity 1099s that come “from” National Financial Services. Make sure you know how your custodian names their documents so you can set great expectations. This ideally will be communicated when you are setting up accounts AND included in your annual 1099 letter with the correct names.
• Taxation of dividends, capital gains, and capital gains distributions – this one bears repeating to clients even if they’ve heard it before. Any source of income that doesn’t naturally have taxes withheld needs clear expectations set so there are no surprises or frustrations or moments of pure anger (we’ve seen them all) come tax time.

This is one of those areas where an ounce of prevention goes a LONG way. And yes, this selfishly makes the CPAs life a bit easier but it adds tremendous value to your clients and reduces the likelihood of the tax bus being backed over the top of you.

Happy Tax Planning!