Ignorance + Avoidance = Worst Tax Strategy

Common story: Avoid the complexities of taxes and hope for the best. It usually doesn’t end well. Engage, educate, and plan your taxes to build your wealth.

This is a shorter post available to everyone where I want to share a common problem that I see. I’d like to share these insights as situations come up in my work with clients that I think will be relevant to others.

Disclaimer: My goal in these articles is to simplify the complex and help you take the next step in your financial situation. As such, this is not a comprehensive deep dive into every possible nuance or strategy. This article, like all my resources, is intended solely for educational purposes and should not substitute for specific investment, financial, or tax advice. Always consult a qualified tax professional for guidance about your tax situation.

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In the busy days and long nights of tax season, it’s become a recurring theme in my conversations with clients: they are struggling gathering their tax information, and as we review and prepare their returns, we are discovering gaps in their current year’s data or in previous years’ filings with their old accountant.

We give them the choice:

• Invest in delving deeper to solve these issues or

• Proceed with the information as-is and file.

Most opt for the latter.

I understand the thinking - we don’t want to do the work, it’s a headache, it’s annoying, we just want it done. More complexity and higher tax prep fees? Or just get it done? If we ignore it and avoid it, maybe it will all go away.

But the cost… the cost comes when they receive the final return and a tax bill they have already resigned themselves to pay. I’ve had multiple phone calls shortly after we’ve delivered tax returns with clients who are blown away by their tax bill. Why? They just wanted it filed… they didn’t want the underlying details to get ironed out, and they didn’t realize the implications or just hoped it would turn out alright anyway.

The Black Box

Photo Credit: Wikipedia

For many, taxes are like a black box - like a WW2 enigma machine - the inner workings of which are impossible to figure out and the outcomes always unpredictable. Hand over all the numbers, hold your breath, and hope you get lucky. The process feels like a gamble, where the push of a button decides the fate of your finances (and that vacation you were hoping to take?). Refund or liability? It could go either way. But one thing is for sure - you don’t know why or what you can do about it!

This frustration is mirrored on this side of the table as well. We try to illuminate the tax implications of decisions beforehand, but eyes glaze over. The offer for comprehensive tax planning ahead of time or implementing certain tax strategies when filing the tax returns is often declined.

I’ve heard it all

• “Too confusing…”

• “I’ll just pay it and move on…”

• “I don’t think it will be that bad…”

• “I’ll hope for the best…”

This kind of fatalistic, head-in-the-sand approach to taxes helps no one - the client paying more taxes than they should or the tax accountant who becomes nothing more than a middleman between the client and the IRS agent.

But this approach is the norm for the tax industry.

A Better Way

That’s why I’m aiming to do things differently than the norm in the tax and accounting industry. And this is what my writing here on Cultivate CFO is all about. I’m trying to peel back the layers of the complexities of taxes and share real strategies that you can use to save money on your taxes.

We made a policy last year not to bring on any more tax clients who did not want to do tax planning.

1. First, because the old way is crowded. Any old tax accountant can plug in numbers on forms and tell you the bad news.

2. Second, I love the challenge! It takes creativity, design, planning, expertise, deep understanding, and ingenious problem solving to reframe someone’s financial situation and implement tax strategies and open up wealth-building opportunities for business owners and investors.

3. Third, the government is the one footing the bill! My fees are a fraction of the savings, so everyone walks away happy!

4. Fourth, this is big-impact work. We are regularly saving between $25k-$1M in taxes - that moves the needle for most people in a big way!

5. Fifth, I don’t have any of these conversations with my clients where they are devastated by their tax liability. Instead, I get thank you emails and excited discussions about future wealth-building projects.

Key Takeaways

The annual journey through tax season should not be one of passive resignation. Instead, I want you to consider these principles today:

1. Don’t disengage and opt for the simplest path forward. Taxes are complicated and details are important, but it’s not impossible to learn enough to make a big difference in your liability.

2. Find a good tax accountant who will have real tax planning discussions with you. Not just planning to pay your huge liability, but finding real strategies to reduce your liability. (By the way, this article is not an appeal for more clients - we are at capacity right now!)

3. Ask questions! Ask about the implications of your financial decisions and options to reduce your liability. Ask why - then why again, and again, until you get an answer that you understand and a tax bill you are happy with!

4. It’s your money - you earned it - take the final step by keeping the government from taking it from you.

If you engage and are proactive with your taxes, you will put money in your pocket each tax season and lay the groundwork for stewardship and growth of your wealth and a secure future. Whether you figure this out this tax season or commit to this going forward, refuse to accept that taxes are something you can’t avoid.

What do you think? How do you deal with the complex tax issues you don’t understand?

Questions or further thoughts? Feel free to drop them in the comments and we can dive deeper!