The $80,000 mistake that didn’t have to happen

 

Here’s a story from an advisor committed to incorporating tax planning that might resonate with you:

 

“Early in my career, I had a client take out a home equity loan to pay for an $80,000 tax bill.

You can already guess where this is going – that tax bill shouldn’t have existed.

 

The client had rolled over a 401(k), but the 1099-R was coded incorrectly. The preparer saw “taxable amount not determined,” assumed it was taxable, and told the client to write a massive check. Instead of calling me, the client borrowed against their house to pay a tax bill that wasn’t real. We eventually got it fixed and unwound, but it’s one of those moments that sticks with you.

 

Now, every time a client starts a new income stream: a pension, IRA, 401(k) distribution, or Social Security, I make sure we slow down and double-check how the taxes will actually get paid.”

 

  • And that’s just one of countless stories I’ve heard and witnessed. Because mistakes happen all the time:
    – A rollover gets reported as taxable.
  • – OPM miscalculates federal employee withholdings.
  • – A client thinks state taxes are automatically withheld when they’re not.

 

  • When you catch those things early, you’re not just saving clients money, you’re saving them from unnecessary panic. That’s why I’m such a believer in collaboration. When I see a new income source and a sudden jump in unpaid taxes, I don’t go straight to the client with bad news. I call the advisor first:

“Hey, I’m working on your clients return. There’s a $50,000 difference this year, can you give me context?”

 

More often than not, we find the problem before the client ever knows there was one. That’s real value.

So next time a client says, “We’re turning on income from my IRA” or “We just started my pension,” take a few minutes to ask:

  • – How will the taxes get paid?
  • – Is withholding set up at both the state and federal level?
  • – Does this line up with what their return will actually show?


That simple check-in is the difference between “I owe $50,000, what did you do wrong?” and “I owe $50,000, good thing we planned for it.”

 

We dive into this (and a lot more) in the course: Help! I Have a New Source of Income… How Do My Taxes Get Paid?

 

It’s all about helping advisors protect their clients from these preventable surprises.

 

Happy Tax Planning,

Steven Jarvis, CPA