Would You Rather: Tax Edition

Published April 22, 2022 

Reading Time: 6 minutes

Zoe | Incentives of IRAs

Written by:
Christy Matzen, CFP®
Director of Financial Planning at Zoe

Would You Rather: Tax Edition

Published April 22, 2022 

Reading Time: 6 minutes

Zoe | Incentives of IRAs

Written by:

Christy Matzen, CFP®
Director of Financial Planning at Zoe

When was the last time you played “Would you rather?” It’s probably been a minute unless you have kids or an exceptionally youthful friend group. Playing “would you rather” is an entertaining, enlightening, and expedited way to learn about a person’s opinions and preferences in typically outlandish situations. The brilliance of this game is that there are no right or wrong options, only choices.

As a wealth advisor, this concept can help you add value to your clients by tapping into a judgment-free understanding of how they may prefer to prepare for their tax liability. While taxes are usually entirely black and white, navigating the preference areas for each client on what they can choose is where the real insights can come into play. 

Right after tax season is the best time to understand your client’s tax preferences. The emotions that may have arisen from this tax season are still raw, which will allow you to understand them more honestly rather than hypothetically. Here are three “would you rather” to help you understand their preferences and set a strategy for what comes next.

1. Would you rather owe $1,000…

Some people may not want to pay a cent more than necessary throughout the year, causing a larger bill due in April. Reasons for not wanting to pay during the year include that they don’t want to give an ‘interest-free loan’ to the IRS or want to earn interest in their savings. For others, it might be that they want to control their money as long as possible, or they genuinely need the money to cover expenses. 

74% of Americans owe money when they file their taxes. Do you know how many of your clients owed when they filed this year?

…or get $1,000 refunded?

Others would instead prefer receiving consistent refunds. This can be a strategic way to save for people who struggle with spending habits or can even be perceived as a nice reward for getting their taxes filed. 

While the tax refund itself may not surprise, most people don’t realize they can plan for this throughout the year. For example, 85% of Americans were expecting a tax refund this year! Out of that group, 45% said they will save them money, and that’s music to financial planners’ ears.

With a client’s shiny new 2021 tax return, you can determine the best strategy to set them up for the least required withholding or the best refund strategy for their situation. First, though, you need to know if this is what they prefer.

2. Would you rather make consistent payments…

We all know that tax planning goes beyond harvesting losses in a client’s investment account. It also includes projecting their income and withholding to confirm if they need to make estimated payments to the IRS throughout the year.

When income is consistent, so is withholding. But nowadays, with more variable wages, equity compensation, and commission-based positions, the increasing unevenness of a client’s income brings exciting opportunities to help with their income tax strategy. 

However, it is key for you to understand each of your clients. For example, the pattern seekers may prefer to pay $1,000 every quarter to keep things consistent. Meanwhile, the routine adverse may rather pay $4,000 earlier and not think about it again the rest of the year.

…or pay varying amounts as you go?

Sending money to the IRS is pretty low on everyone’s list of favorite activities. But understanding if they instead make several payments throughout the year will be insightful for you. In addition, as their advisor, you can help prepare for what payments may be needed and when they should be made. 

Have a quarterly conversation you will get to master for self-employed clients. Then, formulate a plan and consistently adjust it based on what happened each quarter will highlight the natural tendencies of Type A clients.

3. Would you rather learn about the tax code…

While I know that I am in the minority of people who enjoy learning and talking about taxes, there are at least a few more people whose interests are piqued by the inner workings of the IRS. 

As an advisor, you have an exceptional ability to explain complex topics in a digestible way for clients to understand their financial situation better. While the tax code is inherently intricate, simplifying it into the key “pull-able” levers empowers clients to take more control over their tax situation. For example, they may not be interested in the mechanisms of the alternative minimum tax system but may want to recognize how to reduce their tax liability practically.

…or outsource taxes altogether?

While clients like learning about investments and how their money will grow, the requirement of taxes takes wide-eyed wonderment. 

There is a common thread of fear of messing up with taxes in general. So much is uncertain from an individual perspective; people don’t know what they don’t know. Thus, some clients may prefer just to see that you’ve got a handle on what to do and execute the actions necessary without much further detail. 

Whichever is the case, it will be crucial for you to know what your clients prefer to know the best approach for each of them.

Setting up the Game

The effectiveness of the “would you rather” approach relies on how comparisons help people to understand abstract concepts better. This is how it helps them reveal (without knowing) their core values around the action. 

You can either highlight trends with their peer groups or introduce your clients’ tax outcomes into your conversations. For example, rather than asking, “Are you happy with the refund that you received?”, try repositioning it to “60% of the clients I work with were in a tax refund this year, similar to you. In your particular case, would you like to adjust your planning to alter this?”. 

Having this information at hand will help you start and guide the conversation:

  • __% of your clients owed money in April
  • __% of those clients were satisfied with this result
  • __% of your clients were in a refund in April
  • __% of those clients were pleased with this result

The key to the success of the “would you rather” game with your clients is to keep dissecting, using data, and being curious!

Time to Play

As an advisor, you know that there are areas individuals can control when it comes to their taxes beyond just how much to pay. However, they might not know it.

While preferences may vary, the core similarity is that clients need reassurance that the right thing is being done regarding their taxes. Now that they have filed their returns, use your understanding of their preferences to set up a tailored preparation and strategy. Doing so will ensure you relay the additional value you provide as their advisor. 

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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