Tax Alpha: How Discussing Tax Strategies Empowers Clients

Apr 3, 2019 / By Ed Fulbright
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What’s Working Now: This advisor gives multiple real-world examples of how discussing tax implications during planning conversations allows his clients to feel peaceful about the fully informed financial decisions they are making.

Editor’s note: In this edition of What’s Working Now, an AdvisorRADIO feature in which Horsesmouth members tell us about recent success they have had running and growing their businesses, we hear from advisor Ed Fulbright, who acts as tax preparer and financial advisor for his clients.

The following article includes edited excerpts of Fulbright’s story and advice. Or you can listen to the full interview by clicking the audio file below.

Quick Overview

Advisor: Ed Fulbright
Durham, NC

Years in business:35

Firm: Fulbright & Fulbright CPA, PA and Fulbright Financial Consulting, PA

What’s working now: Discussing and implementing tax-efficient strategies with clients

I’ve been an advisor for 30+ years but it really depends on which aspect of the business you look at. I started out as a CPA firm primarily because I couldn’t figure out how to make money any other way. Then as things progressed we figured out how to start offering fee-only financial advisory services.

It was difficult when I started out, being only 30 years old. Most people that I knew were between 10 years younger than me and 10 years older than me, and those people didn’t necessarily have large amounts of money. But as we started to bill for the CPA practice, we started adding people who had more wealth and income. It worked out pretty well. We’ve been doing the financial planning part for more than 20 years.

Taxes—part of everyone’s life

I find that taxes are a big part of everyone’s life no matter what income level they’re at—unless it’s very low income or low wealth. But the higher the wealth becomes the more taxes come into play. When I was searching for methodologies and strategies to implement I ran into an organization now called the Alliance of Comprehensive Planners. They had a tax-focused planning system which worked very well for me.

Initially I had problems convincing clients that I should be their financial advisor because they knew me as a good tax guy and general finance guy. But I needed to educate people on the other things that I could do, convince them that this was something they should take advantage of. And that’s what we did. One of the issues I find with all clients is that if you inherit any accounts and exchange better planning for only somewhat decent planning, you will have embedded gains for the client.

I think it’s only fair that if you’re going to sell something to the client, you tell them exactly what their tax liability is going to be so that they can understand and be prepared, so that they don’t shoot their tax preparer when they get their return filed.

I think any tax preparer who does not offer tax planning as a service to clients is weakening his competitive advantage. It is one of our competitive advantages. Think about it. A client comes to us, he has got $1 million invested and he’s saying, “I need about $60,000 a year.” Well that’s $5,000 a month. The big question is always, “How much in taxes should you take out?” If you take out too much, that means the client gets too big of a refund. And if they are receiving Social Security but not having taxes withheld, then that money has to come from somewhere.

I mean, sometimes we have to spend hours convincing the client that they can retire simply because they don’t understand where their paycheck is going to come from. For 30 or 40 years they’ve been getting a paycheck from various employers and now they’re no longer going to have that employer. Instead they get checks from the government, maybe an employer pension plan, and maybe an IRA. The income coming from different sources adds up to a pretty good lifestyle.

But retiring is such a big idea that it makes it a lot easier for them if you have a nice program that simulates a tax return they can look at. They’ll see, “I’ll have this much money withheld. And I would like to get a $1,000 refund.” You have to help your clients figure out this tax situation that could sometimes become a nightmare for them because it’s just different.

There’s really no way a good financial advisor can avoid giving tax advice. You’re giving tax advice almost every day of your life, maybe indirectly. If you do one tax withdrawal or distribution from an IRA and you ask the client to withhold some taxes, you’ve given tax advice. If they ask you, “should I roll this over or should I keep it out?” you’ve given tax advice. You may want to loop in the tax preparer, but the client has to be willing to pay that person for their advice and that can create challenges if the client doesn’t value that extra piece highly.

Tax planning can add huge value

Tax planning could be a huge value to people before and during retirement. Let me give you an example of tax alpha, although it doesn’t happen for every client. I had a lady—an incredible saver—who was saving about 50% of her $100,000 a year business income. That’s a huge problem. But then I looked and saw that she had a rental property. I like that, I like a little complexity in my clients. I was shocked to see that she was paying 11% in interest on her mortgage! And this is someone who is fairly well educated. She was also saving the $50,000 a year outside of her retirement account.

We talked about it and discussed it, and probably reduced her tax liability from $20,000 to $8,000. The only thing we changed was where and how she was getting paid and where she was putting the money when she was saving it. It had become a huge situation. We also helped her refinance her rental property and her home. We reduced her rates by several percentage points.

As we were looking at her information, she told me she was tired of paying so much money in taxes. We couldn’t help her to reduce taxes for the current year. But we helped her immensely the following year after we could do some planning, because planning allows you to make different choices. This lady had a great ability to save. That makes a great client.

We help clients to focus on what is truly important. You add measurable value when you have tax-focused financial planning. Imagine that a client got a bonus, and that they are an accredited investor. If you can recommend certain things they can do to lower their tax bill, they may be incredibly happy. Most of mine are.

Sometimes it takes a little while to get people comfortable with an idea. Take a client: You show them that they are doing a great job saving, but what can they do to lower their taxes? We put them in a defined benefit plan. And because they contribute to this plan, that saves them $40,000 based on their tax brackets. I would be happy even if that money was just going into a savings account.

Clients just don’t understand how taxes work

The most common thing I help people with is understanding how taxes actually work. Everybody complains about taxes, but most people don’t understand why they’re being taxed so much. What we do is give each client an education on how capital gains work, how rental income works, how your salary works, how you can do different things and pay lower tax rates.

Most people don’t understand why Warren Buffet, a multi-millionaire, is only paying 15–20% in taxes. It’s because he gets paid an extremely reasonable salary and most of his income is coming from dividends, which are taxed at maximum 20%. I read a commentary that said his secretary pays a greater percentage than he does. You find that unbelievable, but it’s possible. One of the great things about being an American is that you get a say in what you want your taxes to be.

If you get the proper advice and planning, and put together strategies, it can work very well. Now, there is some give and take. Nobody can do taxes and make everything totally tax-free. People say, “Nope. Don’t want to pay any taxes.” So I ask them, “What are you willing to do?”

We have to make some decisions about how they want to spend their money and opportunities they want to take advantage of. There are charitable trusts clients can fund that send something to their loved ones for the rest of their lives, even after the client passes on. That is a powerful thing, but the client has to choose if he can afford to give up an asset to charity in order to do that and not pay taxes.

Helping clients make better choices

Financial advisors often ask to see a client’s tax return. Make sure you understand why they’re paying too much in dividends and interest income. If they’re in the higher tax brackets, you should probably be putting your thinking cap on and trying to see if you can help buy them assets that will give them a better after-tax return than what they’re currently getting.

A client recently told me, “Ed, you’re doing a great job for us, but I’m always seeing these losses under capital gains.” And I said, “That’s because I’m doing a great job.” His account was going up but he wasn’t paying any taxes on the investments he had made. I could show him his return on his accounts, and that we were deferring the taxes as long as humanly possible.

A lot of clients think having money in a savings account is the greatest thing in the world because they sleep better at night. Maybe that’s true, but maybe it would be nice if they got an extra 2% or even 6% on that money versus 0.25%.

I recently had a man in his 90s come to me saying he had only $100,000 when really it was more like $400,000—but he had his money all spread out in different accounts. Most of his money in savings accounts and CDs, the highest of which was earning 0.25%. He was missing a huge opportunity. I spent my time trying to help him to get things organized so it’d be easy for him to see how much he actually had, and to get him to focus on the opportunity he had in front of him. He was very grateful.

It’s about empowerment

I tell clients there will come a point where they will have to incur taxes for various reasons. They might want to receive money, or do something for some reason. That’s fine. I had a client who had a very nice rainy day fund. They just put money away because I told them to, and then came to me and said, “We’re moving to another state and we need $200,000 to buy the new house.” I said, “No problem. You have a great income.”

The big issue was where the money would come from. We had a very frank discussion where I told that we could sell some equities, but they would have to pay income taxes on it. Or we could sell bonds, which would lessen the tax liability but increase the volatility of the portfolio. In good years it would go through the roof, and in bad years they would be very angry. I just wanted to make sure they understood that so it wouldn’t be upsetting when that happens.

They said, “OK, you told us, we’re good. We’ll be all right with our jobs.” They made the decision to accept the volatility. It’s only because we had this conversation that they felt comfortable and empowered. They knew they had some money, but didn’t know where it was going to come from.

Is the client comfortable?

We had a lady in her late 50s whose husband died suddenly at age 64. Most of their income was in retirement accounts, and it was more than enough money for her to live off of. But she wanted to start with a $300,000 donation so it would wipe out her income and she would pay zero taxes. That sounds nice. But the problem is that she couldn’t use up all the charitable deduction and she would be in the zero tax bracket. That didn’t make any sense to me. We discussed it, and I suggested a $250,000 conversion to a Roth, which would use up most of the $300,000 contribution.

Her other deductions were going to be pretty big and she would be in a low tax bracket. She was able to take advantage of this opportunity and honor her husband. She said, “Wow, you were able to think of all that.” I told her, “Yeah, it makes sense. Are you comfortable with it?”

I always ask clients if they are comfortable with an idea. Because I’ve had clients who tell me, “That’s way too complicated. Do I have to do this?” I might say, “This idea would save you $80,000. How badly do you need the money?” They might say, “I don’t need it that badly, because I don’t understand this.” Sometimes if the client doesn’t feel comfortable you’re better off letting them pay the taxes than trying to force them to do something they’re not ready to do.

You want to make sure clients have a reasonable level of understanding. I’m not saying that they can prepare their own tax return, but get them to a point where they understand that most of the things you talk about are rock solid but something might backfire. There are a few things that get really complicated so you may want to spend a little more time making sure clients are taking advantage of opportunities. But also that they have a reasonable understanding of what is going to happen in their life.

Issues arising from the new tax act

As we plan after the new tax act, I find that most clients are asking whether or not they’re going to have to itemize. Is that something they need to worry about? I’m finding that a lot of clients no longer have to itemize. The numbers I’ve seen thrown about are that 60% of Americans used to take the standard deduction and now it’s closer to 90%.

There’s also the bunching strategy, where you pay two years’ or more of something at once to claim the deductions in one year. That might be medical expenses or charitable donations. That’s one of the things we spend time on.

A lot of people are hearing about low refunds or underpayments in the news. They all worry to death and ask me, “Ed, can you tell me whether or not I’m going to owe taxes.” I tell them I haven’t gotten to their return yet, but we look at their information and fortunately my software roughly predicts what their tax liability will be. I look at their withholding and can tell them there is a 95% chance they won’t owe the IRS this year. They calm down then.

Choose your software wisely

I’ve been using the tax software Lacerte for over 30 years. It’s good, but there are others out there that are just as good. I encourage people to look at what fits their practice, because once you get involved with a software, it is extremely painful to change. It’s almost like getting married. There is never a perfect transfer of data and the more complex clients you have the bigger the learning curve for you and your staff.

I tell everybody to spend the money on software. I’ve looked at cheaper software and thought about changing. I would have saved about $8,000. But if Lacerte saves me $8,000 in time then it becomes a no-brainer. It pays for itself. When I saw that, I decided to stick with what I’ve got and it made my life easy.

Taxes and retirement

For advisors looking at taxes in retirement, I encourage you to understand where your clients’ taxable income is coming from. Is it Social Security? Is it a pension? The sale of stock or other real estate? You need to understand what is going to happen to your client to help them make the transition to retirement as painless as possible. People just don’t understand how all the different levers they have in their life will affect investments, their ability to live, and cashflow.

When it comes to retirement accounts, I find it ideal when I have a client with about 25% of their assets in taxable accounts—brokerage accounts or cash. I like to see if we can assist them in deferring paying taxes. We try to keep them in the 12% federal and 5% state tax brackets at least for a little while.

If we recognize that somebody is going to be below a bracket, we may decide to convert an IRA to a Roth. It’s a great opportunity to pay only 12% (or sometimes 22%) and minimize the tax situation. You tell the client, “Later on you’re going to be in a situation where you’ll pay a higher amount of taxes. There’s some room where your taxable income is now so why don’t we take this $20,000 and fill the bracket up.”

I tell people all the time, “There are going to be market declines and the market going up.” You find out someone’s risk tolerance when there’s a market decline. The client needs to understand that you’ve got their lifestyle guaranteed, because that’s the number one thing they worry about. Am I going to go broke? Am I going to have to change my lifestyle? If you can show them how their lifestyle will continue, they’ll feel much more comfortable with the advice you’re giving and how you’re directing them.

I start my conversations with retirees by asking about how much they are going to receive in Social Security benefits this year. Is anything changing from last year? We’ll take a look at how their distributions are changing and how much we’re currently withholding in taxes. As we look at that we make adjustments, maybe having extra money taken out so they can get a bigger refund. They’ll ask me, “What do you think?” I tell them ideally all returns are under $1,000. They say, “OK, let’s do it like that.”

I also tell clients to call me if something changes. Someone might call in June and say, “I know we put together a plan for this year but I’m tired of the rental property. I want to get out of it. How can we get out of it with the least amount of taxes and keep income flowing?” I tell them how we can do it. Always make your clients know that you welcome a phone call from them so that you can help them to have a better financial life.

Take the time to learn about taxes

Advisors who want to better understand tax planning can start with their own taxes, and asking very specific questions of their own tax preparer. Take a tax class, see if you like it. If you don’t like it, then see if you can get somebody on your team to become an expert in taxes. If your firm is big enough, you could hire a CPA.

But learning about taxes is not that overwhelming. I have been doing this a long time, but you can take your time, learn about taxes, take some products, and see if you are comfortable with it. Horsesmouth has some great products that can help you in figuring out the whole process. And I encourage you to look into the Alliance of Comprehensive Planners and the National Association of Tax Professionals. If you can team up with a CPA or get comfortable with taxes, it can be a great opportunity for you.

Very few advisors look at their clients’ tax returns. I would tell them that they’re missing out on grand opportunities or situations where they may be missing money. You may see interest income that indicates the client put away another $100,000, which might be better off in a brokerage account but because you didn’t know that it became a difficult situation. You need to help your clients because they don’t know what they don’t know.


This is a well informed and timely article. I concur with you in going the extra steps.

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