End of Year Tax Planning: The BKFi Experience
John Owens,
CFP®, EA, ECA, CPWA®
MANAGING PARTNER
When other advisers say NOPE to tax advice and preparation, we say YEP!
We recently kicked off our year-end planning (YEP) season here at BKFi and it’s truly the most exciting time of year for our financial planners. It’s one of a handful of things that makes our client experience truly unique.
Now there are a lot of players in our industry – from big banks and brokerage firms that aren’t allowed to provide any sorts of tax advice, to planning firms that can do some tax planning. But there are very few who do financial planning, portfolio management, tax planning, and tax filing as part of one cohesive service offering. In what could be 2-3 cooks in the kitchen – on different teams, with different fee schedules, we’ve simplified this under one (virtual) roof.
What makes year-end planning different is that it’s not merely some recommendations on a couple things to do before the ball drops on new years eve, but rather it’s the culmination of all the work we’ve done so far this year, a crystal ball for your taxes, and an outline for what’s to come. It’s designed to encompass both the quantitative hard numbers that will drive your tax bill and the qualitative goals that you’ve communicated to us about your ideal life.
Year-End Planning: Let’s walk through the process
First, long before you get any checklists to upload your documents, our team is working behind the scenes to update our internal tax dossier with your latest information. If you’ve told us about a pending inheritance, a new fund you invested in with your old boss, some consulting income you had back in February – we want to track all of that so nothing slips by.
Our team then starts gathering your information – we request paystubs, details on your latest stock options and equity compensation grants, life updates like a big bonus this fall or a planned sabbatical. Sharing this information with us kicks off a multi-step, multi-review process to ensure we have an accurate view of your tax situation.
We don’t simply want to make some high level tax recommendations – we want to predict as well as we reasonably can – what your tax return is going to look like. Part of this involves the data you provide, but a key input is what assumptions we should make. Your planner – the person on our team who knows your situation and goals the best – will outline those assumptions for our CPAs on staff.
And while assumptions are key to getting your status-quo right, we also have your planner map out any hypothetical scenarios that are either in line with your goals, potential income or deductions, or that could provide tax optimization opportunities.
Tax Projection Example: Pam & Jim
Here’s an example. Let’s say Pam and Jim are a married couple and clients of ours that work in sales at Dunder Mifflin. Here are some of the scenarios we may have for their YEP tax projection:
Chris Haston/NBCU Photo Bank//Getty Images
1. Their base tax projection has their income for the rest of this year – extrapolated from their paychecks.
2. A hypothetical that includes a $20,000 sales bonus that Jim may receive if he hits his target by November 1st on top of the base scenario.
3. Another hypothetical that includes some capital gains they may have to take if they want to do a renovation projection project on their patio.
4. A scenario that combines both the bonus and the capital gains.
We also spend time updating our inventory of stock options and equity compensation. For many clients, this is a significant driver of income and can create volatility in earnings and withholding—AKA tax surprises. By updating that data and forecasting out the rest of the year, we can be dialed in.
Our tax team then takes those inputs – paystubs, assumptions, equity forecasts – combines them with relevant carryover numbers from last years taxes – adds in details from our portfolio team on capital gains and losses, changes to portfolio income – and develops a projection for what we think your tax return will look like next spring.
Once that projection goes through a couple levels of review – both from our technical tax experts – and your planner that provided the relevant inputs – to ensure its accuracy, we shoot a short video going over the results and send that to you to watch.
While many firms wait until the meeting to share the results, we recognize that throwing a bunch of numbers at you without an opportunity to digest them before we discuss makes for a less efficient meeting. Our process gives you time to review the numbers, write down any questions, and then book a call with your planner to dive into the results and our strategy for this year.
Tax Planning Plan of Action: Process Chart
The process goes from dream to reality when our planners meet with you to go over the scenarios and outline a plan of action. What’s in that plan of action? It can be a variety of things:
In this meeting we’ll outline your customized cash flow plan and outline deadlines for various payments and actions. For accounts we manage, we can even process the funding for (like implementing your Backdoor Roth IRA or funding your Solo 401(k)).
We also take time to review your financial plan, portfolio, and anything else that is top of mind.
After our meeting, we’ll send you a copy of your tax projection, cash plan, and a detailed outline of next steps. And we’ll follow-up on items to help ensure they’re implemented in a timely manner.
The culmination of all this work is a having a crystal ball for your tax situation well before April 15th, and because we also file you taxes, there’s an accountability factor in ensuring our planning is as close as possible to reality.
So in a world where many advisors say NOPE when it comes to doing detailed tax projections, and actually preparing your tax return – our team of advisors and CPAs say YEP! – and want to be a one-stop shop for your needs.