March and April are when you hear from your accountant the most. Whether that is them asking for your tax documents, asking clarifying questions regarding those documents, or sending you your return, your accountant is more top of mind in the beginning of the year then at any other point.
We are not accountants here at Mullooly Asset, nor do we prepare tax returns for our clients. But we do find it beneficial to work closely with our client’s tax preparers. And we are often asked to recommend accountants for our clients to work with.
We are happy to do so, because we know that tax planning is an essential part of a sound financial plan.
The Best Way to Work With an Accountant
Believe it or not, the best time to do tax planning, or establish a relationship with an accountant is not during tax season. The beginning of the summer is a great time to touch base with your accountant, or to find a new one.
Your options are quite limited if you wait until the beginning of the year to make adjustments to your tax situation. Accountants can’t change what has already happened. Nobody can do that. While corrections can be made in some instances, and extensions can be filed, the more time and communication you have with your tax preparer, the less likely the chances of a tax surprise come March and April.
Accountants can help you plan better throughout the year to avoid an unwanted situation come next tax season.
It will take time to implement their recommendations, however. So if you have issues or unwanted repercussions during tax season this year, don’t wait until tax season next year to make a change. Discuss what you can do differently throughout the year. Or make a change to a new accountant right after your 2021 taxes are filed in May or June, not January or February next year.
An accountant that’s crunched for time can’t be as effective as one that understands your situation completely. It takes time for them to understand the in’s and out’s of your situation.
The mark of a good tax preparer is being thorough, communicating effectively throughout the year, staying up to date on the ever-changing tax laws and thinking long term. They should not necessarily be judged on the amount of refund, or lack thereof you receive. The numbers are the numbers. And again, they can’t change what’s already happened.
We’ve encountered situations in the past where folks will contribute more than they otherwise should to a retirement account per their accountant’s recommendation. While that may lower their taxable income in the short term, it ties their money up in the long-term. Which may not be what is best for the client.
We know that accountants don’t usually take a client’s cash flow into account, but we certainly do. We’ve seen too many instances of folks taking early-withdrawal penalties to pull money out of retirement accounts. These folks usually have good intentions because they know that saving for their future in a tax deferred account and having less taxable income is a good thing. But saving unsustainably in the name of lower tax bills is short sighted at best and potentially punitive at worst.
Accountants should help you balance tax planning for today vs. tax planning over a lifetime. We’ve talked repeatedly about the importance of having a diversify tax base to draw from in retirement. A thorough accountant will help identify those goals ahead of time, and recommended strategies that point you in the right direction.
To summarize, making drastic tax planning changes during tax season is a recipe for frustration. Accountants don’t want to jump through hoop at the last minute. Give them time to understand what you want to accomplish. And give yourself time to implement their recommendations as we move past 2021 tax season and further into 2022 tax season.
And don’t forget that optimizing your tax situation today could handcuff you in the future. So be sure to strike the right balance!