Tax Projection – The Real Value of a CPA

Tax Projection - The Real Value of a CPA | Josh McAlister

In last week’s blog – we discussed the four uses of money. Simple and powerful, and so many of us would create a positive change in our wealth going through this simple exercise. The majority of our clients are ultra-high net worth – and we routinely walk through this exercise with them. They see the value, as this is the foundation for constructing a sound financial structure.

As a reminder, below are the four categories where every dollar can go:

1. Taxes – Our discussion for today

1. Charity  

1. Savings  

1. Lifestyle

Taxes – this time of year the thought is on our return: Will we get a refund? How much? What if we owe money? Everybody is focused on the tax return – and yet we all should be asking about our tax projection.

Why should you be concerned with a tax projection? For starters, taxes are most likely the single largest cash out-flow item for the year. Given this, the appropriate question should be, why wouldn’t your CPA be delivering you a tax projection?

Tax return preparation is vastly different than tax planning. We reduce the value of our CPA to be how big of a refund he/she can obtain for us – allow me to debunk this backwards line of thinking.

Your tax return is based on historical events – essentially everything that financially occurred that impacted taxes already happened. By handling your taxes under this shoot from the hip methodology, the only item keeping you from getting you the largest refund is the communication between your CPA and you. The most troubling fact about this – most CPAs do not ask the necessary questions needed to file the return appropriately. They simply acquire the client, file the return, and move on.

What if you had a discussion on how to lower your taxes before tax time? Before 12/31? Wouldn’t that make sense? Unfortunately, many of the big financial advising institutions, (Wells Fargo, UBS, Merrill Lynch, Morgan Stanley, Northwestern Mutual, and many others) cannot legally provide tax advice, and thus real dollars are lost. They most likely have never mentioned the value of a tax projection to you, and they most likely have said something to the tune of ‘That’s your CPAs job’ as it relates to taxes. What a waste.

The true value of the tax projection is to understand the dollar amount of money saved by contributing to a tax deferred retirement plan. Assuming a reader is in one of the highest tax brackets, it usually makes sense to do one or both strategies below:

1. Employee Sponsored 401k (W2 Income)

1. The classification as an employee limits the amount of money you can contribute to tax-advantaged retirement plans. Most of our clients have a 401K Plan held at Vanguard through the MLB, and regardless of your salary, $19,500 is the limit in 2020 to contribute on a tax-deferred basis.

1. Individual (Solo) 401k (1099 Income)

1. This is almost always missed – if an individual has 1099 Income or Self-Employed income, there is an opportunity to setup an additional tax advantaged retirement plan. You can contribute up to 25% of your net self-employment income – which can defer big dollars on a tax return.

There are many other advantages for the client to take advantage of, including paycheck withholding adjustments, tax-loss harvesting, and IRA/Roth IRA contributions. Bottom line – if you do not know how much you are going to pay for 2021 taxes, you are not creating the best financial structure.

Conclusion:  

My challenge to you is this – seek out an advisor who plans through a tax savings first lens. Ask for their office to prepare a tax projection - these are real dollars earned in any given year and give the household more flexibility for growth of their entire financial structure.

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