9 Questions Clients Should Ask CPAs at Tax Time

By Elaine Floyd, CFP and Richard J. Koreto

As the quarterback of your clients’ advisory team, you need to prepare them for the rigors of tax season. Talk to clients about their tax situation this month and send them off to their CPAs with these nine questions and your business card. Not only will your clients feel taken care of, but you may cultivate a great new referral source.

Sometimes we may sound like a broken record when we say “Check with your client’s tax advisor” in connection with some investment or financial planning strategy we are writing about.

But we have to say that. Financial advisors are not allowed to give tax advice. Even if a strategy you are recommending is designed to reduce a client’s taxes, it can’t be construed as tax advice.

One reason for this is that you do not always have access to a client’s entire tax picture. Last year’s 1040 can be revealing in many ways, but it could paint an inaccurate picture for planning next year. A lot can change from one year to the next, and when you are recommending investment and financial planning strategies, what counts is how the present tax year is likely to wrap up.

So before your clients go off to their CPAs to have their 2013 taxes done, tell them not to leave the meeting without asking about 2014. If your clients can obtain an estimate of their 2014 tax picture from their CPA and then share it with you, you’ll be in a much better position to help them manage their finances throughout the rest of the year.

Before clients meet with their CPAs this tax season, give them the following list of questions, along with your business card to give to the CPA, and set an appointment sometime after tax season to discuss strategies and plans for 2014.

Some CPAs may be too busy to do comprehensive tax projections as part of the tax-preparation appointment, but that should not preclude clients from asking the following questions:

1. Will a life event or major purchase affect my taxes?

Remind clients to tell their CPAs about any births, adoptions, marriages, separations, divorces, or deaths. Have the clients’ children reached a milestone age like 18 or 21? Have they left school and started jobs, possibly changing their deductibility status?

Death in the family is especially important: Does an inheritance trigger a federal or state estate tax? If an inheritance includes an IRA or 401(k), the tax rules are strict, and failure to properly manage the inheritance could have major tax consequences.

Major purchases can also have a big effect. A second house may mean another set of home-related deductions. But probably not a third house, as homeowners can typically get deductions from only two residences.

2. What will my tax bracket be in 2014?

A tax bracket is the rate at which the last dollar of income will be taxed. Knowing your client’s tax bracket helps you calculate the tax efficiency of various investment or financial planning proposals.

A paycheck change is only one factor, so don’t make immediate assumptions: Tax brackets can change for many reasons, including changes in tax law as well as changes in tax filing status. Tax filing status depends on whether your client is married or single and whether there are dependents to claim on the tax return or not. A change in income or an increase in interest and dividends or even gambling or lottery winnings could also change a tax bracket.

3. Can you help me estimate my income for 2014?

Go beyond salary. Bonuses, freelance assignments, investment income, alimony winnings, and more all play a role. And it’s not enough to know gross income. It’s also important to have an estimate of adjusted gross income, modifications to adjusted gross income, and taxable income. Each of these types of income is dependent on various deductions or credits that need to be estimated in order to come up with projections for the new year.

Why is this even important? An accurate estimate of 2014 income allows you to properly manage retirement savings plans, for example. Plus, it makes sure that you and the CPA are on the same page as far as the client is concerned.

In order to estimate the various forms of income for 2014, clients will need to provide their tax advisors with certain information so the numbers can be crunched. For example, the CPA will need to know if the client plans on making approximately the same amount of charitable contributions this year as she did last year. And if there was a one-time or unusual event last year, such as a sale of an asset, the CPA will need to adjust the estimate accordingly.

4. Do I have any remaining loss carryforwards going into 2014?

Loss carryforwards are tax losses as a result of selling investments at a loss. The IRS only permits deducting investment losses to the extent that they are offset by gains of up to $3,000 a year. Any losses in excess of this can be carried forward to future tax years, hence the name “loss carryforwards.”

A CPA can help clients determine your client’s loss carryforwards by looking at past tax returns. The answer can help you and your client better understand how investment activity affects their tax situation. Occasionally, you may want to suggest selling some assets to absorb some of these previous losses for precisely this reason. “Tax loss harvesting” is traditionally a year-end activity, but it really should take place throughout the year as investment opportunities present themselves.

5. Am I eligible for a Roth conversion? Is it recommended?

A Roth IRA conversion allows workers to convert traditional IRA assets to a Roth to avoid taking required minimum distributions in retirement and avoid paying tax on any distributions taken. A Roth conversion also involves paying taxes on the assets converted, since contributions to traditional IRAs are made on a tax-deferred basis. A CPA can estimate the tax that would be due on a Roth IRA conversion.

Clients should also ask their CPAs for an estimate as to what the tax liability would be on a partial Roth conversion—such as one that might bring them up to the top of their current tax bracket. The CPA’s estimate of the “bracket-completion” amount is likely to be the most accurate estimate of the tax clients might pay in the event of this type of partial conversion.

The CPA is likely to have an opinion on whether a Roth conversion is a good idea or not. Definitely encourage your clients to discuss the option with their CPA as well as discuss it with you before making a decision, as any conversion will have investment and retirement implications, as well as tax consequences.

6. Should I increase my retirement plan contributions?

The IRS hasn’t increased the contribution amounts for most types of retirement plans in 2014, so there’s no incentive there for making contribution increases.

Retirement Plan Contribution Limits
Type of retirement account Additional 2014 contribution Maximum contribution
401(k), 403(b), most 457 & federal govt. thrift savings None $17,500
IRA None $5,500
IRA catch-up contributions None $1,000
401(k) catch-up contributions None $5,500
Source: IRS

However, that doesn’t mean clients should just leave it as is. Phase-out limits for various plans have increased, so even if a client’s income is up, he or she may still be able to put away more. This is a good conversation to have this time of year.

7. Do you have any recommendations for reducing my 2014 taxes? What about 2015 and beyond?

CPAs can recommend a number of strategies that might help reduce tax liability in the future. A variety of laws, such as ACA, have changed the playing field. Some of the strategies may be complex and may need your input as well as the CPA’s. Others may be within your control.

For example, if your clients are small business owners, they may have the ability to accelerate expenses into a new year. Trusts and estates may be able to take advantage of “do-over” provisions if they act early enough in the year.

8. Should I change my tax withholding for 2014?

Various situations may mean that clients need to change the amount they withhold from their paycheck. If they’ve gotten married, divorced, or had a baby, they’ll need to make changes on their W-4 form. Also, if they’ve been getting large tax refunds, it may make sense to increase the number of exemptions they take on the W-4 to match up what they pay in tax with their actual tax obligation.

Most CPAs note that it’s better to evenly match withholding with tax obligations rather than aim for a large refund. That’s because the funds that make up the refund could be invested, saved, or used to pay down debt rather than accumulating in the U.S. Treasury Department only to be returned back to clients in the form of a refund. In 2012, the average tax refund was $2,803.

And don’t necessarily consider a state and federal lock-step. There may be reasons for separate withholding forms for state and federal—another good question to have clients ask their CPAs.

9. Is there anything my financial advisor can do to help my tax situation?

There’s a close relationship between financial planning and taxes. That’s why it’s good for clients to ask this question of their CPAs and then pass the CPA’s answer back to you. The better informed the client’s advisors are about the client’s situation, the more effective you can be in planning and managing your client’s investment and financial affairs. This is the perfect opportunity for three-way communications between you, your client, and your client’s CPA.

Of course, as always, you should counsel clients to seek professional tax assistance in making important decisions.

As director of retirement and life planning for Horsesmouth, Elaine Floyd helps advisors better serve their clients by understanding the practical and technical aspects of retirement income planning. A former wirehouse broker, she earned her CFP designation in 1986.

Richard J. Koreto has been a journalist covering tax and finance for 20 years. He is the author of Run It Like a Business: Top Financial Planners Weigh In on Practice Management and is a past president of the New York Financial Writers’ Association.

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