With the 2018 tax season mostly behind us, now is a good time to reflect on how I often use a car driving analogy to explain how effective financial planners work with clients and their accountants on personal taxes.
When you drive a car, remaining keenly aware of your surroundings and maintaining excellent visibility are key factors to safely arriving at your destination. We use our mirrors to keep track of what’s around us, and we peer out the windshield to see where we are going. My 16-year-old son just took his driving test, and his driving instructor made sure he knew to use all mirrors, rear and side view, and to not rely on merely watching ahead. The instructor knew that on his test he would be graded on whether he observed what was happening around him while he was performing basic maneuvers, such as stopping. Is that car behind you also stopping, or do you need to prepare to be rear-ended?
My analogy is that financial planners are generally watching through the windshield, while accountants are often watching through the mirrors. As planners, we often have a broader view of our clients’ lives than many other associated professionals, such as accountants. We know their destination (goals) in terms of both time and money. We know what route they are taking (current income strategy and sources). As we look ahead, we can make route adjustments if we encounter roadblocks (lost jobs or market downturns).
Personal tax accountants, by the very nature of how tax preparation is structured, are often relegated to looking in the mirrors, observing where you’ve come from and what you’re leaving behind. Think about it this way; the tax year ends, and we patiently wait for our tax documents to arrive. We gather our tax data and hand it off to the accountant. By the time your accountant gets your information, the tax year is over, and very few planning opportunities remain available to exploit, sometimes including missed opportunities for retirement contributions or education plan withdrawals. It’s like getting into a traffic jam just after you pass the exit you could have taken to make an effective detour; it’s too late to adapt, but had you known in advance of the jam, you could have made route changes to your benefit. This isn’t the fault of the accounting profession, it’s just the way tax preparation works.
Newer clients often ask why we ask to see tax returns prior to their being officially filed. Because we have been looking ahead, we know when the car goes off path (the tax return doesn’t look quite right or is missing key information). For example, we may recognize that investment income looks low. Maybe you have two taxable investment accounts, but you only gave your accountant one tax statement, likely because you hadn’t received the second one yet. Sometimes you had a new income source (like Social Security benefits) for which you forgot to provide the tax document. Finally, we may know that some of your IRA distributions were Qualified Charitable Distributions, but the tax documents don’t detail that! Your accountant would have no way to know that information was missing or incomplete, because he’s only looking in the rear-view mirror.
We also ask to see tax returns because, frankly, those poor accountants are driving in rush hour. Unlike truck drivers, they don’t have mandatory rest breaks; they work incredibly long hours during tax season to meet the needs of their clients. With that amount of “traffic” and little rest, it’s easy to take a wrong turn. Good financial planners function as navigators, making sure that the route gets corrected before you end up completely off your route (before you finalize your taxes and don’t pay/receive what you should).
Finally, because we’re in charge of looking at where you’re headed, we can’t spend as much time watching where you’ve been. We rely on the expertise of accountants to file complicated tax returns, especially when related to real estate income.Just like it takes using both the windshield and mirrors to drive safely, it takes financial planners and accountants working together to make sure our client’s highway adventure is as smooth and enjoyable as possible.
Written by Teri Christensen, MBA, CFP®