Now is the time to build relationships with CPAs

At this point, it seems safe to expect some form of tax reform will pass in the next several months. The House has already passed H.R. 1, the Tax Cuts and Jobs Act,” which includes a variety of changes to the personal income tax system and significant changes to corporate taxation. The Senate has released its proposal, which doesn’t reduce the number of brackets, but does smooth the progression with level steps between each new proposed bracket. Both bills increase standard deductions, eliminate some itemized deductions, eliminate personal exemptions, and provide some sort of child/dependent tax credit. Regardless of the compromises that emerge through the political process, it is clear that there will be a need for members of the general public to understand the changes and how those changes impact their personal situations. Financial advisors will be faced with a choice – either take proactive steps to first become educated on the new laws, and then identify specific opportunities for their clients, or risk losing clients to other proactive advisors who choose the first path. 

Introducing: the proactive advisor

Let’s discuss the proactive advisor, we'll call him Thomas. Thomas probably read our article, "Will adjusted gross income continue to be important in a Trump Tax World," and probably many others. As proactive advisor, Thomas has been watching to see what elements of President Trump’s proposal would make it into actual legislation. He is likely watching to see if any of the proposals impact the provisional income formula for taxation of Social Security benefits. As advisors who specialize in retirement income know, this interaction is broadly applicable and, as we pointed out back in March, if there is a new higher standard deduction and no changes to the provisional income formula, there will be significant opportunity for all advisors to revisit their mass-affluent client plans and determine new harvesting patterns. We fully expect that even if the Roth re-characterization disappears, as is proposed in the House bill, an increase in the standard deduction coupled with no changes to the provisional income formula would create significant opportunities for larger Roth conversions among middle-income people. 

Our proactive advisor, Thomas, is probably also paying attention to the specific rules around the state and local income tax deduction (SALT) and the mortgage interest deduction. These are just two examples of the items that are likely on Thomas' short list of changes that may have a high impact on his clientele. He knows that when a bill is signed by the President, he will be the first in his area to be out educating clients and potential clients. Because the new tax proposals are actually very similar to current tax rules, as our article here explains, our field-tested consumer presentation and client brochure will be updated shortly after the bill becomes law, allowing Thomas and other proactive advisors to begin to reach prospective clients right away. 

Thomas has probably also identified which of his tools will be most applicable to show the impact of the new rules. As our users will attest, Tax Clarity is the only advisor software in the market today that provides a landscape view of a client's tax situation, allowing for a quick triage to identify opportunities for proactive planning of retirement account contributions or distributions, Roth conversions, and tax loss or gain harvesting. We’ve already programmed the essential aspects of the House tax bill and expect to be able to provide an updated version of Tax Clarity shortly after a combined bill is signed into law. 

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Using tax reform to build relationships with CPAs and EAs

With a well-founded expectation that he will have insights, communications materials, and an up-to-date software program to help analyze individual client situations, Thomas, the proactive advisor, will look for additional ways to plant seeds now, so that when a final bill is enacted, he's started important conversations with centers of influence such as Certified Public Accountants and enrolled agents. Financial advisors need to understand that personal tax returns are not generally where these professionals make their living. For most of them, the majority of their income is derived from businesses and business owners with more complex and time-consuming concerns than the average middle-income retiree. Yet who will be calling them? All of their clients, including the middle-income retirees. When will they be calling? Early next year – during tax season. As a well-equipped advisor, Thomas can suggest to the CPA that he can help with middle-income clients.  

A conversation with a CPA might go something like this:

Thomas: Janet, as a CPA with tax reform likely late this year or early next year, do you expect to have clients asking you questions about how it impacts them?

Janet: Of Course.

Thomas: Do you have many middle to upper middle-income clients who are either retired or on the verge of retirement? 

Janet: I have some. 

Thomas: Are they the largest part of your business? 

Janet: No. The largest part of my business is made up of other businesses, business owners, and their families. 

Thomas: Janet, my practice is focused on retirement income planning for middle and upper middle-income people in retirement transition and beyond. We have a pretty significant focus on tax-efficiency in our planning process and we’re paying especially close attention to tax reform because it will likely have a big impact on the strategies we use for our clients. I’m fairly certain I can save you some significant time this next tax season, freeing you up to give your bigger clients the attention they’ll need through these changes. I’d like to stop by and meet with you for 30 minutes  in the next few weeks to show you our process and see if my guess is right. Will that work for you?

When he meets with the CPA, he’ll provide a copy of his personalized version of “The Elephant and the Snowball,” which is a white paper that discusses a financial advisor's role in (not giving) tax advice, yet being critical to a strategic tax planning process. He’ll walk through the interactions that happen for clients with middle-income tax returns, such as the 55% effective marginal tax rate, or the double-dip IRA contribution.  He’ll use a Tax Clarity report to demonstrate that he has processes in place that the CPA can be confident will serve her clients well. The proactive advisor will also want to mention that the organization he works with provides a two-hour CPE event on tax-efficient retirement income planning, just in case that CPA happens to be an active member of a local CPA society, which can open up even further integration with the CPA community. 

When tax time rolls around, and the CPA is working 50-80 hours per week, which advisor do you think they’ll send clients to – the really nice advisor who drops in occasionally or buys lunches, or the specialized, professional advisor who can save them time and deliver a specific, high value to the client during a time when the CPAs resources are stretched?

We’ve built all of our resources with this proactive advisor in mind. We expect to update them as soon as a bill is final and will be communicating on our blog throughout the process. 

Here are the resources we have developed for current law that are being used successfully across the country right now:

  • Client brochure
  • Client seminar
  • Tax Clarity software
  • CPA continuing education (CPE) seminar (covering Social security, tax, retirement income strategies)
  • White paper for use in referral discussions with CPAs

Take a free trial today, if you want to be the proactive advisor.

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