Working with a Tax Expert

Who do you talk to when you need to make a financial decision? My guess is most of you have one of three responses to that question. It’s either; nobody, your spouse, or a specific name of a relative or financial professional that you trust. If your married, you should be talking with your spouse. Almost as important, you should be discussing it with someone who has expertise in taxes. You could be married to a tax expert when every conversation relates back to taxes. My wife can tell you many horror stories about this. But let me explain why it’s important have a trusted relationship with a tax expert.

Notice: I say tax expert because not all CPA’s specialize in taxes. There are other financial professionals who can have tax expertise.

My fellow tax nerds and I talk. One of the most painful experiences we all encounter is a client who does something that has a significant tax impact that can’t be undone. It’s gut wrenching. The most rewarding part of working in the tax business is when we can put money back into our client’s pockets. We cringe hearing about missed opportunities to save on a tax bill.

A couple examples:

401k Rollover – John is 40 and switches jobs in the middle of the year. He talks to his Uncle Pat who always enjoys talking stocks and finances at family events. Uncle Pat tells John to rollover the 401k to an IRA to have better investment options. Perfect! John completes the paperwork. He receives the check in the mail and goes to open an IRA. Unfortunately, he doesn’t get around to depositing the check until 65 days after he received it. Big mistake. There is a 60-day rule for depositing a rollover IRA and now he must pay income tax and a 10% penalty. Had he talked to a professional, he could have been warned about the 60-day rule and been informed to do a direct rollover in order avoid the chance of missing the deadline.

Retirement Withdrawal – Steve is retiring in November. He is receiving a large 401k bonus as part of his retirement package. He decides that he wants to use the bonus to buy himself a boat as a retirement gift. He withdraws $80,000 from his 401k in December to buy his dream boat. He celebrates his 60th birthday on the boat in July the following year. Whoops. What would a tax expert have told Steve? He should have waited until January for two reasons. First, he could have avoided the 10% early withdrawal penalty. Steve turned 59 ½ in January which is when retirement accounts can avoid this penalty. Also, assuming Steve did not retire to find a new job, his income will be much less in the current year. The withdrawal would probably have been taxed in a lower tax bracket if he would have waited a month.

How can you prevent these things? Find a tax expert that you trust.

There is a big difference between a tax preparer and a tax planner. Tax preparers are reactive. You bring in your information. It is typed into the system. The form populates the numbers and voila, you are finished. Tax planning is proactive. It starts when you review your prior return to see what options are available. You plan for the year. Then you adapt and review throughout the year and again before you file your tax return. When you have a financial transaction that may have a tax impact, you discuss it with your tax planner. This prevents any items from causing major tax issues. It’s not to say that you will be able to avoid taxes. It’s knowing that you are making decisions that minimize your overall tax liability.

You may be reading this and thinking I am just trying to convince more people to do business with me. While it would be great to gain more clients from this post, that’s not what is important. I want everyone to have more money in their pockets. I want to convince you that you need to be proactive when it comes to your taxes. Find someone that knows the tax law and can walk you through situations to understand all your options. A good tax planner can make sure you pay the minimum amount each year. It’s much more than plugging numbers into a computer.

Mike Zeiter, CPA/PFS