In the middle part of the last decade I found myself standing in line at the grocery store waiting to checkout. Before me were two women in their late 50s discussing work.
One woman said to her friend, “Last year I worked in a tax office and it was the hardest job I ever had!”
I had to turn away as I suppressed a smile.
Later, as I reflected on that conversation, the smile faded. Is working in a tax office so hard? Did I really choose the of the most difficult of professions as my career?
It would explain a lot. Hiring qualified tax professionals has become nearly impossible over the last decade. Robert Half recently reported the unemployment rate for accountants stood at 1.8% in Q1 of 2019. The news isn’t any better if you plan on hiring a tax professional.
Crisis in Review
The crisis in the accounting industry is self-feeding. The worse it gets the more workload is shoved onto the desks of the remaining souls. Stress is taking a toll.
Several support groups for tax professionals exist on social media platforms. Tax season reveals a serious level of stress for practicing tax professionals. Complaints of long hours and clients unwilling to pay higher fees to compensate for the added complexities of the new tax laws has more professionals looking to leave the industry.
And it isn’t the tax pros facing the worst pinch. The ultimate loser is the client. With fewer experienced tax professionals accepting clients it has put taxpayers at risk. The IRS knows taxpayers have limited choices when defending themselves in an audit which means the IRS’ advantage is larger than ever.
Tax preparers are becoming more selective, too. Clients with documentation a mess are being turned away. Even clients with their documents in order are finding it hard to secure an experienced tax professional who understands the Tax Code and is willing to take on additional work.
Experienced tax professionals are like rock stars in many environments. An accountant in my office recently joined her mother for a Bingo event. She made the mistake of telling the lady next to her she was a tax professional. From that point on the questions came rapid fire with several people around her asking for her card and if she was accepting new clients. The relaxing weekend with mom turned into another afternoon of stress.
When I attend conferences (or on vacation or in the park or . . . )I get the same reaction. It becomes nearly impossible to enjoy time off if the people around me know what I do. They all have a quick question. They don’t understand an afternoon of quick questions is not time off to recharge.
People don’t care; they want answers their accountant can’t or refuses to answer. Or worse, they do their own tax return and want top quality answers without paying for it (until the IRS letter arrives).
It has gotten so bad that when I’m on vacation with Mrs. Accountant I tell people I’m a farmer (because I grew up on a farm and currently live on a hobby farm) so my vacation isn’t ruined. People are intensely interested in powerful tax strategies, but for some reason don’t want to pay the tax professional $500 for saving them $10,000. And have no problem consuming an accountant’s entire vacation.
And we wonder why the profession is shrinking.
To put it in further perspective: My office turned away over 20 new clients on April 15th this year. They just walked in and wanted us to drop everything so their return got filed on time. We don’t advertise; they just show up. Experienced tax professionals — even inexperienced tax professionals — have no problem filling their book. All they have to do is let people know what they do and it’s all over.
Greasing the Squeak
There are three groups who are willing to pay tax and accounting professionals well: government, big business and the wealthy. I see this even in my small tax office. Wealthy people and large businesses (I have even consulted large hedge funds) approach me in a different manner than typical clients. While they are acutely aware of the pressure tax professionals face, they make it clear they will pay for my time and information. In many of these cases I’m paid a fee versus and hourly rate. The incentive is to get me to stop watching the clock and focus on the Holy Grail: lower taxes coupled with higher returns and increased net worth.
While government watches my work, they don’t necessarily engage me. I’ve made it clear I don’t work for government which is probably why I haven’t been invited to do so. Businesses and individuals need my services more even if they pay less.
It is easy to see who is on the path to financial freedom and those who will doubtfully ever make it. The questions and the approach scream failure or success almost from the first words. Wealthy people want to learn while those allergic to wealth want confirmation they are right.
As self-serving as it sounds (and is), you need a tax professional. Finding one is the chore. I understand. When it comes to legal issues the wealthy (and smart) hire an attorney; when sick they see the doctor. When it comes to taxes — the largest expense you will have in life — too many hire a commissioned salesperson for guidance. That is like hiring the pharmaceutical sales rep if you are diagnosed with cancer! Or they go it alone when they are dealing with the sum total of all their income and wealth. Boggles the mind.
It is easy to cry about the crisis in the accounting and tax industry. I’m a solutions guy so I prefer to look for answers instead. The outline above expressing the stress professionals in the industry face is only to set the stage so you understand what is going on behind the curtain. There are actionable solutions professionals need to know and the public needs to understand so they can gain the maximum advantage to the benefit of all.
Several goals are necessary to improve the performance of the industry: reduce stress on the accountant, adequate compensation to encourage more to enter and stay the profession and more responsiveness to the client.
While salaries might be the easy culprit, money isn’t the overriding problem. Money would salve many wounds within the industry, especially at the entry level, and would encourage more to pursue an accounting career, but it will not alleviate the stress from endless deadlines and demands from clients. Let’s look at a variety of solutions, starting with salaries and fees, then addressing stress followed by industry trends sure to improve performance and reduce stress.
Money motivates. . . to a point. Offering tax professionals and accountants a larger salary is always nice. But if the stress is never-ending and job satisfaction is low more money will only make it easier for more to retire early and leave the rat race.
While there is an acute shortage of qualified tax and accounting professionals, many in the industry tend to work up to and beyond what is typically considered retirement age. People attracted to the industry love the work and the challenges even when it is demanding. Helping people manage their business, taxes and life is a powerful draw. Working with clients as they reach for their goals is addicting.
Larger firms have the advantage to segregating pricing from the front line accountants. Fees are negotiated between the firm and client by the sales teams. The tax and accounting professionals doing the work only need to record their time spent working on the account and serving the client’s needs. I do oversimplify a bit. The important takeaway is that the larger the firm the more distant fees and their collection are from the accountant doing the work.
Small and mid-sized firms are another story. Frequently the accountant working with the client in smaller firms is instrumental in the fee determining process. The client always wants a lower fee. What clients need to understand is a lower fee means a pay cut to the accountant in many cases, especially if she is also a partner or the owner of the firm. Nothing demotivates faster than a pay cut while the workload increases.
Fees and salaries go hand-in-hand. Clients need to be educated that lower fees mean fewer qualified candidates will seek a career in accounting and fewer qualified professionals available to work on their account in a timely manner.
The tax end of the profession feels the pinch hardest. Finding people willing to work a seasonal job at a high level of knowledge and experience for a seasonal salary has always been difficult.
Tax offices can best meet demand with adequate fees to cover the salaries of their professional team with a reasonable profit for the partners/owners. Tax work comes in various sizes. Business returns are different from individual return. For a tax office to be most efficient they need to focus on the type of client they wish to serve. It is difficult mixing very simple returns with complex return without dedicated staff to handle each type of return separately. Very small office are best served when focusing on a niche. Highly experienced accountants working on simple returns is a poor use of resources and an under qualified preparer working on a complex return opens the firm to litigation risk.
The right compensation package allows you to attract and retain high quality employees. Robert Half provides an excellent salary guide for the industry and there are several resources for compensation of tax professionals. Where you are located also determines how far you deviate from the averages. One thing is clear: Tax and accounting professionals can earn very substantial salaries with excellent work-life balance when handled properly. You want to be one of these firms or work for one.
Accounting and tax firms can maximize their efficiency by dealing with the next area of concern: stress. Reduced stress should lead to higher salaries and profits while providing optimal work-life balance and provided the client with the best value.
Stress is a constant in many accounting offices with deadlines constantly bearing down. Tax offices are even worse during the filing season. There are several way to reduce stress and improve your team’s well-being.
It starts with the client. Some clients increase the stress in the accounting and tax office. Paperwork hastily tossed in a box and missing paperwork tops the list. Everyone in the industry can tell stories about clients from hell: bad records, difficult to work with, constant interruptions. These clients increase stress massively and can drain the lifeblood out of a firm, harming all clients. The faster you disengage these clients the better for your firm and remaining clients. If you are that client you want to reevaluate, as it will become increasingly more difficult to secure a place at a quality firm.
Once you have a clean book of clients that value your work you can now excel at serving your clients.
Certain activities are more valuable to the client than others. Data entry is a low value task that also tends to add to stress when conducted for too long. The high value tasks are the most valuable to the client. High value tasks include planning and consulting.
Clients enjoy constructive conversations (planning and consulting) with their accountant because they feel they are getting value. And they are! No tax professional or accountant has ever created any real value plugging numbers. Business and personal planning — consulting — is a high profit activity for the firm that clients are happy to pay since planning with an experienced professional can yield a return into the three and four digit range. Smart clients are happy to spend $1,000 to save $10,000 or more in taxes or increase their net worth by orders of magnitude.
Consulting is a productive activity that also reduces stress. Professionals want to do more highly productive activities and avoid low value activities as often as possible. Productive is fun and makes clients happy; unproductive work is drudgery.
The issues boil down to managing the rote work activities and workflow.
Stress-laden work (data entry and other mindless tasks) can be addressed with automation, outsourcing or a combination of both.
While I viewed XCM as an outsourcing possibility, I missed what XCM was really all about: workflow.
Workflow is part of the automation process. Efficient workflow reduces stress and errors. GruntWorx and similar services complete many of the basic entries on a tax return. As the technology improves less and less time will be required by the accountant for data entry. This frees time to provide value-added services to the client like deeper tax return discussions, financial statement review and planning/consulting services to increase client’s net worth and reduce taxes.
Drake Software has Secure File Pro (it integrates with their software) as a portal to transfer documents between client and accountant. (Accounts complain endlessly behind the scenes over how much they hate it when clients take a picture of a document and text it because these are so hard to read and save. Document managers solve most of this problem.) SafeSend is another option that works with many of the most popular commercial grade tax software.
Automation reduces stress by reducing the amount of time buried in paperwork only punching numbers. Even if there is no time savings it is worth the added expense just for the reduced stress.
As automation technology evolves into robotic automation, computers will be able to enter more and more of the data on a tax return. The tax professional’s job in five years will be to review returns and consult with the client; the computer will handle the original preparation of the return. This will free more people in the field for more enjoyable and productive tasks, partially resolving the labor shortage within the industry.
Virtually all large accounting firms outsource a portion of their workload. In the last two tax season I worked on applying outsourcing a portion of my office’s work with less than exciting results.
I’m not willing to give up on the idea yet as outsourcing coupled with automation will consume a larger and larger part of the industry in the near future. Even people self preparing will find in the small print some or all of their tax return outsourced (the online software is probably programmed overseas). Fighting the inevitable will leave you stressed with lower profits while your competitors have lower prices, higher profits, fewer errors, spend more time consulting with their clients and have a better work-life balance.
Outsourcing can be integrated with automation and probably should.
Outsourcing also comes in two flavors: domestic and international.
Domestic outsourcing most clients have no problem with. Tax returns are either e-filed or mailed. In either case the data is handed off to another human being outside the firm for delivery to the IRS. This is all domestic and most feel comfortable with the process.
Real domestic outsourcing, however, involves your tax firm getting help from another tax office within the U.S. It might be a branch of the same firm or an outside firm hired to do the work. Domestic outsourcing still has issues with staffing and costs tend to be prohibitive.
International outsourcing is a whole different animal. Before an individual return can be outsourced in this manner requires approval by the taxpayer. Stiff penalties are a strong deterrent for a tax office to play it fast and lose.
Wealthy people and corporations generally are more comfortable with international outsourcing because they frequently have operations and/or investments in international markets. When proper security precautions are in place (using a reputable firm only) there is no reason to fear international outsourcing. I will test this process deeper in the upcoming tax season with clients who give authorization and report back to you.
When I attended the XCM conference I met many smaller firms that are using international outsourcing and making it work. (My first two years were false starts that were also expensive. If you can avoid the problems, especially the expensive ones, you may wish to consider learning from my experience.)
Individual clients are the most apprehensive. My goal is to get 100 clients next tax season to authorize outsourcing. I never outsource any client work unless I disclose to the client first and get their approval. We’ll see how it goes.
With the tax/accounting industry set to grow by 10% over the next decade, more professionals will be needed to complete all the additional work. As fewer people pursue accounting and tax as a profession automation and outsourcing will play a key role in completing work and managing workflow. Without these efficiencies more highly talented people will leave the field for less stressful work and from burnout.
The demand for solid information has never been higher. The Tax Code is complex and getting more so every year. Without automation and outsourcing there will be no time for your accountant to spend quality time with you or they will need to raise fees massively to seduce more people to work for them. The trends are a gift that reduce stress and increase accountant productivity. This is really good for the client and the accountant alike.
If you demand your tax and accounting work be done the old-fashioned way, don’t call me; we are full-up. We use computers to prepare returns, e-filing to file tax returns, use automation where ever we can and would love to find an outsourcing solution so we can handle more of the clients we currently turn away. And less stress would be nice before burnout sets in.
And if you demand I punch all the numbers by hand or you do your own return, don’t ask me any tax questions if you see me at a conference or at the park. I’m just a farmer. I have no idea what you’re talking about.
More Wealth Building Resources
Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.
Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?
Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.
Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.
QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.
A cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.
Running a business is similar to conducting a science experiment. Unsuccessful proprietors use trial and error hoping to find a winning strategy. Gamblers do something similar. Successful business owners do things a bit differently; examine where need exists and then search out a plausible solution.
Success is similar across all industries and business sizes. Whether you are managing a massive international corporation, a regional firm, a small local business or running a side gig to pay the bills while you enjoy all life has to offer, the rules of success are similar from top to bottom.
Today we will focus on the side hustle and small local businesses. The conversation will also focus on the tax preparation industry.
I own and run my own accounting practice which is centered on tax and have been doing so for over three decades. What worked in the 1980s and 1990s would bring you ridicule if you tried the same thing today. For example, I offered free electronic filing in my community before any other tax firm. Offer free electronic filing as you shtick today and you’d get a plethora or dead stares.
My tax office morphed into something different on a regular business since the beginning. Of interest to you, kind readers, is the current transformation.
There are a variety of tools underutilized by most tax offices that would increase productivity, reduce stress and increase profits.
Why these tools are so underutilized is a mystery to me. It shouldn’t be such a personal mystery since I had to be dragged into the room kicking and screaming. What forced the current transformation of my business was an unusual event a few years back.
A series of events led to this blog and a national footprint for my very small firm. All the technology I pooh-poohed in the past now was desperately needed. I was so unprepared the first year from the influx of work I almost lost my practice. It was a disaster.
I’m not the kind of guy who quits! It was time to open my mind and transform my practice once again. Now with several strategies implemented I want to share how I increased my business footprint, reduced headcount, reduced stress and sent profits higher than ever before.
Profit Power Plays
The old model of tax preparation required an army of tax professionals plugging numbers into the software. Since tax preparation is nothing more than glorified data entry (sorry peers) it was easy to automate virtually every aspect of the preparation process. (So a rabid mob of tax professionals don’t lynch me, the tax profession is more than data processing. Yes, tax preparation IS data entry. As long as you know where to plug the numbers you are golden. However, it is still rote, mind numbing work. Where a tax preparer turns professional is when she consults with clients helping them get different numbers before the fact to plug into said computer. Better?)
There are three things I implemented in the last year or two which made all the difference and a few things which didn’t work.
The three things which worked well are Gruntworx, outsourcing and cloud services. What didn’t work was outsourcing. Yes, some outsourcing worked like a charm and one attempt was a disaster. I’ll elaborate on each winning attempt and the one thing I wish I wouldn’t have wasted my time on.
Gruntworx was the best thing I added to my practice in the last decade. For a couple thousand dollars Gruntworx eliminated the need for several data entry staff. Most returns cost less than $10 to send to Gruntworx in my office.
The trick of turning Gruntworx into a profit engine requires some explanation. First, simple returns are virtually completed, requiring only your review. At first I resisted sending small returns with a few W-2s, interest income, dividends and mortgage interest. Then I realized Gruntwork practically finished the return for a buck seventy-five, or thereabouts. There is no way I can get the work done in-house for close to that cost. A quick review, adding any items Gruntworx doesn’t handle, and the return is ready to present to the client.
Larger returns still require an experienced tax professional. Gruntworx handles a variety of traditional tax reporting forms (W-2s, a variety of 1099s and other similar type forms), but can’t input most Schedule C, E and F expenses. Gruntworx will enter 1099-MISC income to Schedule C. But, since expenses are beyond the capabilities of Gruntworx my office quickly elected to handle those entries internally.
Brokerage statements are a snap with Gruntworx and probably the biggest time saver of all the forms except W-2s, and W-2s only take more time because there are so many of them on almost all returns.
There are a few caveats. Gruntworx is really fast, but is slower to get data entry back to you as the April due date approaches. My office had a response to most files sent within 24 hours, sometimes only a few hours. By mid-March to the finish line it became a few days.
Another caveat involves brokerage statements. Clients with massive trades will send the Gruntworx bill for that client quite high. One client had a thick stack of trades which would have wasted a day entering the data. Gruntworx charged $78.50. Still a deal, but my policy is to scan and attach pertinent pages of the brokerage statement and enter only the consolidated numbers in the software. This is fast AND cheap and you know how cheap this accountant is. (Some accountants disagree with my policy. I’m good with that. Just send it to Gruntworx and get the workload out of your office.)
One final caveat involving Gruntworx. Review is necessary! As every tax professional’s eyes will attest, tax documents can be hard to read at times. We found two errors this tax season from Gruntworx. The computer entered a smudged number wrong. There is still room for the tax professional in the Gruntworx world.
Gruntworx works with Drake Software, which I use in my office. It also works with some Intuit, Thomson and CCH software. If your tax software isn’t on the list still check with Gruntworx as it still might work. If not, similar products are available for all the larger commercial software packages.
You can estimate the cost of Gruntworx for your office here.
Gruntworx and Drake are used by my office, but are not affiliates. Regardless, I highly recommend both for large and small tax offices. These companies will supercharge your tax prep side gig run out of the home or store front firm. Gruntworx makes you look like a larger and more professional firm
Outsourcing is admitting you don’t have to do everything yourself. In the past we handled payroll, bookkeeping, tax, audit and consulting all under one roof. This is a lot for a small one-location firm.
There are different levels of outsourcing. The level which worked for me involved payroll. Payroll requires dedicated staff and I didn’t handle enough payrolls to keep payroll dedicated staff. Also, payroll is a commodity business with national firms sucking all the profit out of it for small and local firms.
Virtually all payrolls are now handled by someone else. You can read about it hear, including who I use. (Reminder: the payroll service I use is an affiliate.)
My firm earns more profit not preparing payroll than we did doing all the work. Outsourcing freed valuable resources for other important tasks.
Where payroll was a success story, tax preparation was not. I knew there were serious issues to manage if it was going to work, but in the end it was a complete failure.
I will keep business names out of it. My goal is not to defame, but to inform.
First, I asked several local clients if they’d be willing to allow me to outsource their tax return to a U.S. source. A small number agreed to help with my experiment.
A VPN was set up with security locked tight to protect data. To make a long story short, the outsourcing firm made so many mistakes it took more time to fix the returns they worked on than if we just did the whole thing ourselves. We did not run the outsourced returns through Gruntworx.
VPNs are slow and clunky which might have been a very small part of the problem. Unfortunately, the real problem was quality. The outsourcing company failed on many levels. Their preparers were very green. If we would have rolled out the program the cost per return would have been favorable, but not nearly as generous as Gruntworx.
Due to lower profitability, security issues, time constraints, quality of work and incessant errors, I do not recommend outsourcing tax returns at this time unless you consider cloud services, which we will cover next.
Cloud services come in a variety of flavors, just like outsourcing.
I’m a big fan of cloud computing. I can work anywhere I have an internet connection without logging into the office system with a VPN.
Cloud computing can get expensive, but compared to the cost of IT services and servers it is a steal.
My office is undergoing its largest cloud build-out ever. Drake Software allows us to host their software on the cloud. (Don’t quote me, but I think the cost is $600 per year for the first user and $300 for each additional user. I’ll update when I get to the office or discover a different price.)
There are several benefits to hosting Drake on their cloud. The biggest benefit is working from home is easier. No more driving to the office on weekends.
Another benefit with hosting the tax software in the cloud includes outsourcing again. Some outsourcing firms are outside the U.S and that opens a host of problems. My experience shows how U.S. based outsourcing firms can also fail big-time. But with the tax software hosted in the cloud I can hire qualified employees from anywhere and train and supervise them on my terms!
This blog brings in complex tax returns most tax offices only see periodically. Finding qualifies tax professionals has been my greatest challenge and it’s wearing me out. Cloud computing will open the frontier. I can hire awesome tax people from around the country. There is no reason to house the entire team under one roof!
I sound optimistic because I haven’t had my head slammed in the door yet with cloud. It is a work in progress with lots of opportunity. Best of all, no VPNs!
Finding team members who I can vet and train is a powerful advantage only cloud services allows me to do. Training my team is the only way to assure the best accountants serve my clients.
Business is always an on-going work in progress. What worked a decade ago doesn’t today. Successful business owners are constantly reinvesting their company.
The ideas I shared today are the ones I felt were the most important. I’ll publish more on this in the future as my firm evolves. If you are considering tax preparation as a seasonal side gig consider the information above. It makes a difference.
Tax services is a profitable industry, but has its risks. Current tax professionals can glean what they need from the proffered information. At minimum it can get you thinking about your business and the various ways you can increase the bottom line while keeping your sanity.
Wealth Building Resources
Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?
Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.
QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.
A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.
As children we dream. We dream unfettered. We dream of traveling to the stars; we dream of life as a policeman, fireman or even a doctor. Some fall in love with numbers and can’t think of anything else. We dream of great discoveries as scientists or helping people reach their dreams and goals financially.
Then we grow up.
Society tells us we must prepare for retirement as soon as possible. The financial services industry breathes and dies by our willingness to buy into their story.
The news feeds are filled with stories of people who started early, saved hard and retired early. As someone living inside said community I notice a pattern. A large majority of people who take a knee at an early age—any age, in fact—go through a predictable pattern. Travel dreams are realized. Some want to golf or fish. After a while golfing or fishing all day becomes the job. Travel turns into a drag. Living on the road looks far more appealing from the outside.
Experiencing new destinations is what people really want. The actual traveling is sheer pain. I’ve never heard anyone say she can’t wait to be sealed inside an aluminum tube with her 260 closest friends for several hours.
Even with travel dreams alive, it is as common as weeds in a garden for people to pick up a side gig (some call it a side hustle) after the gloss of retirement wears off.
Then, there are people who find their calling early and live their side gig from day one. We call these people entrepreneurs or business owners.
Never Ending Story
Whether you find your calling early or after you retire from a “traditional” career, life is best when you discover what provides you the greatest joy. Once you find the activity you enjoy most you begin to build a life and habits around said activity.
Starting a business or side gig requires planning. The one issue rarely addressed is the exit plan. As I look down the barrel of my fast approaching 54th birthday I have to ask serious questions about my tax practice. What if I were injured or got sick? Either event could destroy what I spent a lifetime building.
As we age and accumulate wealth we quickly discover the need for a living will. I propose a significant percentage of people also need to consider an occupational living will.
Vision of the Future
Of all the employees I ever had, Bev is the only one still asked about every tax season. Bev hasn’t worked for me in seven years!
Bev was my first employee. Her skills and work ethic assured my efforts to build a firm were successful. Bev wasn’t the fastest, but she was consistent. And for the record, fast isn’t always better in taxes and accounting.
When I let Bev go it broke my heart. I wrestled with the decision a long time. Her abilities were more than adequate, but bitter Wisconsin winters were taking their toll. Cold air took her breath away. There were times Bev would need several minutes to catch her breath walking from the car to the office door. Her health was more important than a few more years of service.
Bev still comes to the office every tax season to get her return done. It’s a continuing fringe benefit for a rockstar employee. It’s always a good day when Bev walks in the door.
But there was another reason I asked Bev to retire.
When winter turns nasty and the hours long Bev felt the effects. She lost a step as tax season wore on. If the weather added to the stress I could chart the increase in errors.
I review virtually every return in my office. Some get a minor once-over and other returns get a proctology exam. Bev started to lose a step in her 60s when the workload increased and weather added stress. If only I found the fountain of youth to keep Bev at her post.
Dementia is an insidious disease. It approaches gradually. People around you may notice, but we have self-defense mechanism to delude ourselves. We are the last to know our quality is no longer up to par.
Bev is still mentally sound. Stress and health were the real deciding factors.
Lifetime of Love
I was lucky. I found the work I enjoy early in life. As a business owner I can choose my hours and workload within reason. This is a lifelong occupation. If I were to sell my practice I’d probably be doing taxes and consulting on the side within months. (Either that or Mrs. Accountant would hit me with a rolling pin as I started to bounce off walls.)
As much as I love my work I must accept the day may come when I’m no longer proficient at it. Worse, a car accident or cancer could end my ability to serve my clients. In the past the issue wasn’t as acute. The returns I handled back then were more traditional. Now I manage accounts from around the nation, all with advanced issues. Finding qualified staff has been a challenge. Dementia in unwelcome.
I’m not alone in this. The Washington Post had an excellent article dealing with these issues and it’s where I got the idea for this post.
The more you love your calling the less likely you want to retire from it. Unfortunately, the day comes when we no longer serve our clients adequately. That is where an action plan set into place well in advance can protect you, your family and your clients.
Occupational Living Will
Your facts and circumstances will determine the necessary steps in your occupational living will. Below are steps I’ve taken over the last several years in preparation for my demise.
- Create a business bible. Around the time Bev took the long walk I had a come to Jesus moment. I knew the day would come when my body couldn’t cash the checks my mind was writing. Every member of my office team was a part of building the office bible. Every task was outlined step-by-step. Should any employee be on vacation, quit, retire or become incapacitated, there was a guide for each process our company performs. We discovered the office bible is an excellent tool when we get in a bind and it gets regular use. It is also a part of the training process for new employees.
- Create redundancy. Certain people handle certain tasks. In a small office it is hard to have several people working on every project. While it is natural for one person to handle most issues around certain tasks, it is wise to train staff to have at least a working knowledge of other tasks. The increased payroll expenses should be minimal.
- Create a succession plan of ownership. This is hard for business owners. In my office if I’m ever unable to perform my duties I would lose the right to vote my shares. In effect I would lose control of my company to someone already in place and able to make the decisions necessary to keep clients serviced and the company alive.
- Train and train some more. It is almost impossible to over-train your team. Cross train so more than one person is competent in all areas of practice.
- Keep your family informed. Planning for dementia, accident or other disease is not the highlight of the day. Still, keep a copy of the office bible available to family members with additional information on operating the business. Remember, your family will be under serious stress if something happens to you. Provide a guide to make it as easy as possible for your loved ones in your time of incapacity. Be sure to inform family of pass codes and where the money is, including working capital, online savings accounts and lines of credit.
Here are considerations I’ve had a difficult time handling, yet MUST be addressed.
- Find your replacement. It is so easy for me to fall into the trap of I’m so good at what I do nobody can measure up. That’s ego, not intelligence speaking. Once upon a time I had a much larger staff. As my practice transformed into serving fewer clients at a higher level it grew harder to find experienced tax professionals to compliment my talents. My primary goal this year is to find my replacement. Instead of sending me out to pasture I can have more free time during tax season and a seasoned pro to compliment my tax skills. A true win/win situation.
- Work with peer/competitors. At first blush this one sounds stupid. But think about it. You already work with other professionals and businesses in your field. Start a dialog to build bridges for unforeseen personal events. It could lead to a sale or merger of your business. Or, it could compliment both businesses, reducing stress and increasing profits for all.
Estate planning is often put off to the detriment of family. In business it is even more important to plan ahead. Having trusted friends and family in place to guide you through an illness or dementia might be uncomfortable, but it is necessary if you care about your clients, employees, friends and family.
There are alternatives to retiring. Your workload can shift, be reduced or more focused. When you love your work as much as much as I do it is hard to plan for the day it will be reduced or completely out of your life.
But it is still the right thing to do.
Countdown clocks abound. The most ominous is the doomsday clock counting down to Armageddon. With 26 days to the tax due date here in the States tax professionals are counting down to a less tragic event.
Early retirement was something I dreamed of from high school on. I was attracted to the seasonal nature of the tax profession. The ease at which tax offices can be sold also held my interest. The original goal was to build the business, save like crazy, invest said monies and take an early bow. I decided I should at least enjoy my profession if I’m going to give it my all. The unintended consequence was that I couldn’t unplug as planned.
By the time the birthday cake reached 40 candles I was ready to retire to a quiet and secluded life. Pulling off the Band-Aid fast was tried to no avail so I started a countdown clock. I published it on an old blog. The countdown clock listed the years, months, days, hours, seconds and even tenths of a second. That baby really had a lot of action on the right side.
So I could adequately plan my transition to Easy Street I set the clock at three years. I started an active search for buyers. Serious investors showed up. As the clock ticked down I started to visualize my life in retirement. I hated what I saw and chickened out.
Time Counts and Keeps Counting
When I was a young man I tagged along with my dad as he went to meet the owner of a restaurant in a small town near where I live. The restaurateur was in the final stages of selling his baby. He put 15 years into the venture and did rather well. I was perplexed over why he would quit at a time when he was at the top of his game. Now I realize how often professional athletes make the same mistake I did back then. He then gave a nugget of wisdom that has never left me. “If you can’t make enough to retire from a business in 15 years you never will.”
As the conversation went on he expanded his philosophy. He said the first five years you work like crazy to get the thing off the ground. The second five year period you start making real money. The final five years you should turn obscene amounts of money and if you save and invest there should never be a demand to work again for you.
Wisdom shows up from unlikely sources. An afternoon ride with dad turned into a learning experience. Learning experiences are everywhere when you are open to the knowledge.
In a way the restaurateur had a countdown clock he started the day he opened the doors. In a way I did too. The difference is I didn’t follow through.
Life is too short to waste on things you don’t enjoy. Part of the excitement of life is the feeling we had as kids on Christmas morning. Wanting is far more pleasurable—and memorable—than having. Once the gifts are opened the excitement is over!
Countdown clocks provide adults with the same opportunity. It’s common for people to have a countdown to vacation or retirement. Expecting parents countdown to the expected delivery date. Now if baby would just adhere to the schedule mom and dad would be grateful. (Baby will provide many more disappointments after messing up the delivery day. And a diaper or two hundred.)
Should Everything Have an Expiration Date?
We’re all familiar with countdown clocks in all their manifestations. The real question is: Should we embrace the countdown clock?
I personally think the countdown clock is one of the most powerful tools we have if used properly. As much as I love tax work I’m still feeling the burn as we approach the deadline. I don’t start the countdown clock in February. I’m still fresh and full of lust for another tax project. Now, with a couple months of endless sitting and pounding out returns, I’m ready for the expiration date to arrive. (Twenty-six days and counting as I write, but accountant’s already know that.)
Life should be exciting and filled with anticipation. Expecting a child is awesome (I’ve done it twice so I know), but as Mrs. Accountant can attest, there comes a time when you want that creature cut out of the womb!
Anticipation only works if there is a release at the end. My business exit countdown clock lost its punch when I removed any chance of an expiration date. It also lost meaning.
There will still come a day when I no longer can walk the mile. It would be a dirty shame if I continued on my current path until I was unable to perform in an acceptable manner. There is a sad story behind that.
When I started my practice I hired an extraordinary tax professional. Her name is Bev. For decades she lived the dream of seasonal labor with plenty of time the rest of the year to pursue additional dreams. Bev’s husband worked for my dad’s business. Bev handled books for another business of my dad’s. She also had experience working in other tax offices. She was good at what she did.
Then that thief we call time left his mark. Bev grew older and I sometimes like to say she lost a step as she approached 70, but that isn’t the reason I didn’t call her back one year. The last few years she worked for me the weather of NE Wisconsin made life miserable on Bev. When the temperatures dipped below zero as it does every winter, Bev struggled getting from her vehicle to the door of the office. It wasn’t a long slog either. The cold just took her breath away and it started to scare the hell out of me.
If anything ever happened to Bev because I kept inviting her back for one more year I could never forgive myself. I planned the exit for the last few years she worked for me. Eventually there was no question. She had to take a knee.
Bev is now a client. She is due any day now. I am grateful for all the years she gave to my firm.
If only I could garner the courage to treat myself with the same respect.
Expiration Isn’t the End!
Only one expiration is the end and we all get that one right the first time.
A countdown clock can create anticipation for a vacation, wedding day, retirement party or any other event. Letting go is really hard for some people. Remember who you’re reading.
A countdown clock, an expiration, doesn’t mean the end; it should signal the beginning of a new adventure. Bev was hurt when I told her my concerns for her health. She knew I was cutting her loose. Bev is a lot like me. She would have died running the obstacle course for my company. As her employer I had an obligation to make sure she didn’t die for the cause. Bev deserved an awesome retirement and is enjoying one. Another tax return isn’t worth risking your life over.
There are countdown clocks I have adhered to. When this blog came around I had a difficult choice to make. I have a farm, a tax practice and a new blog. One had to go. I farmed most of my life so I decided it was time to take a different path. There might be a day when I return to my roots. (You can count on it.)
I started a countdown clock to liquidate the farming obligations. Now I have a few chickens for personal consumption. Breakfast is on my ladies.
One end was also a new beginning. You can do anything, just not everything. Choices must be made. Everything should reach an expiration point.
Expiration opens opportunities. I can set a countdown clock in my office without walking away from the profession! I can hire more qualified tax professionals and train them. I still get the thrill of tax season without the pain of endless hours in a chair. (For the record, that sounds mighty nice about now.) Clients sometimes hate I don’t take every last stinking step myself. They don’t know what they are asking for. Most men (and I say men because we are weak compared to the more civilized gender) run until they break. Clients will not like that either.
Now that we have the farm sold (okay, I still own the farm; it’s just devoid of animals at the moment) and the tax practice has an expiration date, what about this blog? Oh-oh! Did I strike a nerve?
I haven’t started a countdown clock for my practice though it is for sale at the right price. (Note: It’s cheaper now than latter in the year.) Realistically I’ll be around for the foreseeable future. But I may not pound as many numbers as I once did.
I’ll let you in on a secret. I spend more time reviewing tax returns than preparing them. Keep it quiet though. Clients don’t have a clue. If clients ever find out they’ll be glad to hear I reviewed every return this year. (So far.) That will change as the calendar rolls a few more years into the future. It’ll be gradual. New and old employees will do more of the work and the world will never know.
The countdown clock has begun.
And as for this blog? I’ve been writing since high school. Finished my first novel my senior year. (Or was it my junior year? I always forget. Age.)
I’ve written other blogs, published books, sold magazine articles and short stories. I even published on content farms. (Notice I didn’t provide any links. Not all material is worth reading. Even your favorite accountant needed a growing and maturation phase.) There is no doubt I will write until the day I die.
But I also wrote what I now call my skanky blogs in the flash fiction TG community. I did it for four years and the traffic was seven to eight times more than this blog. I had my reasons for writing the material. One reason was I always wanted to learn to write flash fiction people would read. I worked that out of my system. Next!
All good things must end. Today isn’t that day for this blog or my practice even, regardless what I say while in a sleep deprived coma. Tax work, consulting and this blog are here to say for at least a few more years.
But if I did start a countdown clock and place it front and center on the home page it might bring back some of that excitement and anticipation.
Tax season is still early in the tooth but patterns are starting to emerge.
My software allows me to use current year data to estimate results based on the Tax Cuts and Jobs Act changes. With a couple hundred returns under the belt already the impact of the changes are mostly expected with a few surprises thrown in.
Since planning will be so important this year I wanted to share my findings. Please understand these are estimated results. Several factors are hard to nail down in these estimates as the accounting industry is still deciding how to handle certain issues and the IRS still has to write regulations interpreting the changes.
One of the biggest issues not accounted for is the business income deduction as it is adjusted for guaranteed payments to partners and reasonable compensation to S corporation owners. If you aren’t familiar with these terms you can still benefit from my early findings.
Some results were expected. High income taxpayers are doing rather well with the new rules. My original thought was the biggest benefits would go to those well up the tax bracket ladder.
That has been the case, but significant tax reductions are being felt by those down to $100,000 of income and even lower!
My reading of the tax bill led me to believe lower income taxpayers wouldn’t benefit much. Eliminating personal exemptions while increasing the standard deduction was mostly a wash on the surface as the amounts generally offset.
The child tax credit enhancements are helping families with children. In the end, families in the upper middle class are doing well based on estimates.
The reason for this post is the unexpected results. Common knowledge on how the tax changes will affect taxpayers has been written about ad nauseam. There are plenty of surprises I do want to share.
As the first tax returns came in it started to look like the majority of clients would see nickels and dimes to their tax savings or additional tax next year. These early clients also tend to have very simple returns with lower income (at least for my client list).
My team and I review the expected changes with every client. We quickly discovered the tax savings frequently crawled lower down the income ladder. I personally find this a pleasant surprise. If a tax cut is going to work you need to give the break to those who will spend it. People like me only add it to the investment heap without helping the nation’s economy much.
Eliminating personal exemptions and replacing it with a higher standard deduction didn’t hurt as much as feared, especially if children are involved. Households without children are seeing minor changes unless their income is higher where they benefit from the lower tax brackets and longer time spent in lower brackets.
Retired clients were expected to see modest adjustments. However, because many retired persons can control their income stream somewhat due to timing of withdrawals from retirement accounts, they can react to the changes and plan for an overall lower tax liability.
The most unexpected result was the percentage of clients who will see a tax reduction. My client base is not a typical cross-section of the country. Low income taxpayers generally seek a different type of tax professional.
Of those facing a higher tax liability the numbers can be large. Most tax increases are nominal, but a few are significant. The worst part is I can’t tell you what to look out for. It always involves something unusual that affects the return negatively. All I can do is encourage a consultation with a tax professional after tax season. My guess is most taxpayers will find more value in a consulting session than they have for many years.
Two expected changes that turned unexpected are having a serious effect. Miscellaneous deductions on Schedule A, subject to 2% no longer apply in 2018 and after. These deductions had no affect for most taxpayers since the deductions in this category had to exceed 2% of adjusted gross income before it counted.
As a good accountant I studiously entered the information from clients even if I knew it wouldn’t count so they could see I didn’t miss it.
The things in the “subject to 2%” area of Schedule A include tax preparation fees, safe deposit box, union dues and specialty work clothes (uniform, safety glasses, steel tipped boots, et cetera). Most of these items are small enough not to change the amount itemized.
Certain education expenses fall into this category, too, along with certain legal fees from protecting or increasing taxable income.
But the biggest losers involve unreimbursed employee business expenses. Sales people top the list. I also have a rock band where equipment and travel not reimbursed by the band are no longer deductible.
Miles add up fast for traveling sales people. When I say traveling it usually involves local clients. Distant travel is more likely to be reimbursed by an employer.
There are a few planning tips. First, it’s best if the employer reimburses expenses. They’re not reported by the taxpayer receiving the reimbursement and deductible by the employer.
For the rock band and a few other clients I might recommend changing from an S corporation to a partnership. Before making this change it is vital to have your tax situation reviewed by a competent tax professional.
The reason for my recommendation to change to a partnership is that unreimbursed partnership expenses are fully deductible on page two of Schedule E and listed as UPE. The downside is the possibility of higher self-employment taxes.
The final Schedule A issue relates to the limitation on the so-called SALT (state and local taxes) deduction. In 2018 and after the SALT deductions are limited to $10,000. Most people assumed this only affected high income taxpayers from high tax states. Think again.
I have several clients from low tax states facing the cap. One Texas client saw a reduced estimated deduction because real estate and sales taxes pushed him above $10,000. And Texas doesn’t have an income tax!
The more returns my office prepares the more I’m convinced clients will need to sit with me this summer and plan. You, kind readers, need to do the same.
I’m setting some appointments already. Due to the demands tax professionals will face this summer I recommend setting an appointment early. My office will accept consulting sessions from the beginning of May until the end of December. (The two weeks after the due date are for “me” time.)
One more thing before you prepare for the weekend.
There is a lot of confusion about the ACA (Obamacare) penalty for not having health insurance. The penalty applies for the current 2017 tax return being filed AND the 2018 return. The healthcare coverage penalty disappears in 2019!
My advice is plan. Of all years, this will be the one that gives you more bang for the buck than you’ve enjoyed for a long time.
Now go and have some fun. See y’all tomorrow for Stalking the Accountant.
As tax season approaches I start to fall into a familiar pattern I’ve developed over the years to help focus my attention.
Some people like listening to music while they read; I don’t. I prefer absolute quite, huddled in a dimly lit corner while I devour pages of knowledge or embark on an adventure through space and time.
Preparing taxes is different. Plugging numbers as an elegant return is formed requires background noise. I find certain long pieces (frequently an entire album) and repeat the material again and again all day long. It drives the office crazy because sometimes my choices are really out there.
Life requires balance so I try to distract my mind with something intellectually stimulating for at least a few hours per week as well.
With these thoughts in mind, here are some of the things I was doing over the last week:
What I’ve Been Reading
Climate change and the extinction of species is a hot topic sure to fire up the political agenda. Strip away the politics and your IQ jumps better than 40 points. The Ends of the World is a longer-term look at life and extinction events on Earth. If you think man is causing the sixth great extinction you might want to think again. You should see what trees did to early life on the planet. If man wants to get serious about creating a mass extinction we will need to up our game.
Before the politically minded become smug, know climate change is real and man is a large part of the current changes. There will be consequences! As George Carlin said, “The planet will be fine. The planet isn’t going anywhere. We are!”
The Ends of the World is must-read material for people interested in how climate change in the past affected Earth along with the evidence from prior mass extinctions. Stripped of political dialog, you might find this a powerful education helpful in your daily life as you choose how to live.
What I’m Watching
This week I want to share two YouTube videos I found mentally stimulating.
The Unbelievable Powers of Electricity shocked me. (Sorry, I couldn’t resist.) My understanding of electricity isn’t vast, but still notable. This documentary added to my knowledge base.
How can a documentary about the oldest living thing on the planet be interesting? Well, I’m glad I took a chance. Oldest Tree on Earth: The Curse of the Methuselah Tree proved far more interesting than I ever imagined. Highly recommended.
What I’m Listening To
I tend toward long play music to fill in the background when I’m working numbers. The sounds can get really strange as tax season rambles on. So far I’m on this side of the line of normal with Pink Floyd echoing from my office.
The Wall is the best concept album (double album, actually) ever produced, IMHO. It also qualifies for long play at nearly an hour and a half before the sound ends.
Updates and Reminders
Tax season is here and I want to grow the DIY tax preparation part of this blog. Please consider using the same tax software my office uses online when doing your own return. I published on preparing your own tax return recently. It might be worth another read before filing.
As a reminder, the forum is a great place to interact with other like-minded people. The more people who use the forum the more vibrant the platform becomes.
I’ve added two affiliate programs recently. SoFi is a great program to reduce your student loan interest so you can build your net worth faster. They also offer personal loans and mortgages.
This said, I encourage you to use SoFi (or any lending) in a responsible way. Debt is caustic to wealth! SoFi could reduce your interest rate allowing you faster retirement of the debt. If I find out you added to your debt burden I will find you and give you a very stern look.
Personal Capital is a growing platform for managing your net worth. It’s hard to manage what you don’t know and Personal Capital is a good way to visualize and manage your financial empire
Finally, don’t forget we have a number of cash giveaways coming up. The first is only a week and a half away from the date of this post’s publication. The drawing dates are reported on the Where Am I page. Click the notice for the rules.
Have a great weekend, kind readers. See y’all Monday.
The world is crazier than it is sane. People complain about having no money and then get rid of what they have as fast as possible. How many people can’t make it until the following week without money issues? A short week and most people are already down to fumes. Thank God, payday is Thursday so you can stop at the bar on the way home. Anything to relieve the stress of money.
Chaos is all around us. Concerns over an overheating stock market and economy are always present in the background. If it isn’t the economy being too good, it’s the bad economy. There is no just right.
Before anyone forgets, there’s plenty of chaos from politics. Talk about a distraction! Best if we all stand alert in case Rex Tillerson, the current Secretary of State, calls us for advice. One never knows.
Talking about politics, it’s hard to get any useful work done when a fat guy from the backwoods of Korea (not necessarily close to the backwoods of Wisconsin where your favorite accountant resides if anyone’s concerned) is waving missiles and nuclear weapons around.
It’s easy to get distracted with the chaos all around us. Traffic, work, a screaming client, the wife and kids all add to the endless disruption of our natural flow of productive activity.
Complaining doesn’t help; it only encourages complaint! There is good news, however. Great men and women throughout time have all had the uncanny ability to focus on the important while the world burned around them. If you don’t believe me, ask any mother with an infant.
An American Hero
President Herbert Hoover is an unlikely hero to most Americans. Most people consider him a failure because all they remember is the Great Depression starting about the same time as his presidency and he was unable to solve the issue. It’s the wrong impression. The Great Depression would have started when it did regardless who was President. If Hoover weren’t President, he would have been the guy called in to fix the problem.
I had the same distorted disillusion of Hoover most of my life. My interest in Hoover was more about the market collapse than about the man. Then a recent issue of The Economist recommended a book by Kenneth Whyte titled Hoover: An Extraordinary Life in Extraordinary Times. I love books and knew this one had the promise of heavy use for years so I bought it.
Over the years I built a spotty sketch of Hoover and his life. There were plenty of gaps and misconceptions. Whyte set me straight. So much so I have a planned post comparing Hoover to Trump since we sometimes hear the two Presidents have much in common. No they don’t! I think it’ll be an enlightening read once I get the words spanked onto the digital page.
Today we will focus, ahem, on one facet of Hoover’s personality: his ability to focus under extreme conditions.
My favorite story of Hoover and his can-do attitude started in England.
On June 28, 1913, Archduke Franz Ferdinand of Austria was assassinated. It didn’t seem like a serious issue on the surface. Life went on as usual, but behind the scenes a diplomatic disaster was in the making. Then, a month later, the world exploded.
Americans were vacationing in Europe as usual on the eve of the Great War, as it was called until we decided to do it again even better twenty years later. It can be argued Europe was resting from November 12, 1918 until August 31, 1939; a sort of war halftime to regroup for the second half. (Yes, I know many consider WWII started when Japan made her move in China in 1931. We’ll stick to the European theatre for this installment.)
Hoover was in London with no warning of the impending armies gearing for war. When the fighting started a large number of Americans needed to be evacuated. A humanitarian disaster was certain if someone didn’t find a way to fix the problem.
Hoover never hesitated. He orchestrated the evacuation of Americans with unimaginable efficiency.
Once the continent was cleared of vacationing Americans, another even greater problem arose. Belgium was caught between the warring powers and the Belgium people were suffering. Food was scarce as the country was virtually quarantined.
People were dying! Civilians. Women and children. And neither side cared to help over concern it might bolster the opposing side.
Herbert Hoover never wavered. He worked relentlessly with the Germans, British and Americans to provide relief for Belgium.
Germany controlled Belgium. Germany requested the right to cross Belgium in her run for Paris at the start of the war and moved within days without waiting for an answer. Belgium was defenseless and at the mercy of the German military. The suffering in Belgium during the Great War was some of the greatest human suffering in history.
Amidst the chaos Hoover went to work. He traveled to Berlin to seek aid from the German government to no avail. Great Britain didn’t trust the Germans and Hoover wasn’t even British!
Hoover built a relief effort rapidly, saving millions from starvation. The U.S. government reluctantly, at Hoover’s incessant prodding, provided limited funding and permission to organize the American farmers into producing the food necessary for the relief effort. President Wilson, along with the British, feared the relief effort would help the Germans by diverting food to the German troops.
Enemies allowed Hoover free rein to travel across borders without restriction. He was the only man alive allowed to do so by both sides. His constant drive built the Commission for Relief in Belgium that helped American farmers produce more, raise private and public funding to deliver the goods to Great Britain and get the food to the Belgium people in desperate need.
Hoover visited Belgium several times during the war to see firsthand the devastation and suffering. His mind was always going, working on solutions to the intractable problems of feeding the Belgium people during the war.
At its peak the Commission had an $11 million a month budget with 78% provided by government grants. Over 10 million people were fed daily at the height of the effort.
Only when the U.S. entered the war did Hoover’s relief effort end. Germany would not allow an American behind German lines after that point.
Blocking Out the Noise
Hoover’s ability to focus when distractions were everywhere is legendary. Most people have a hard time reading a book unless there is silence! Hoover could concentrate in any environment.
The ability to focus during chaos will determine a large part of your success. If minor distractions, such as the stock market, can derail your financial plans you are in big trouble.
Marriage, or any relationship for that matter, will have distractions. Successful marriages don’t require all parties involved to never notice other people they find attractive. There will be attractive people! There will be kind, caring, attractive people willing to weasel into your relationship when you are under duress. Especially when you are at your weakest! The marriages that survive a lifetime find focus on the commitment to the relationship. It’s a team sport even when the night is darkest.
Business is the same. Do you really think owning a business is all fun with loads of money pouring in? Heck no! There are good days and bad days. Then a recession comes along and tests your grit. Fewer businesses survive than marriages. In my years as an accountant serving business owners I can attest most issues business owners face involve the lack of focus. Business owners want to do everything until they wear out and fail. Everybody thinks they can be Elon Musk, running 78 ½ different Fortune 500 companies. You’re not Elon Musk! And for the record, the jury is still out on Elon. The boy is amazing, but he has a full plate with no guarantees.
Happiness at the Focal Point
You and I don’t have to be Herbert Hoover. We can have Hoover’s focusing talent by following one simple rule:
- Define your goal in its simplest form.
Hoover’s goal was simple: Feed the Belgium people.
My 30 year marriage is based on a similar simple rule: Remain faithful to Mrs. Accountant. All too often we try to focus and several things at once and fail. In my marriage I always focused on Mrs. Accountant. I would always try to take the path that would cause her the least anguish. Of course I failed at times! Focus isn’t about never failing. But my failures were relatively minor. I never cheated and never felt tempted. I know where I have it good because I focused there. Stupid mistakes happened, but faithful to my relationship with Mrs. Accountant I always was.
You need a focal point. I hear people with the financial goal of financial independence (FI) all the time. Well, what exactly is that? FI is a simple enough goal, but it’s not a defining goal!
A simple goal presented correctly will cover all the “how’s” later. FI is not clear so it misses the focal point. Define FI. Does this mean freedom to travel, retire to the country or run your own business? Focus when you set your most basic of goals.
A better simple goal: To attain a liquid net worth large enough to live off investment income without worry so I can pursue my dream of (travel/running my dream business/pursuing philosophical studies).
The how-to automatically fills in as you focus on the goal. The 4% Rule comes into play without mentioning it in your goal. Saving and investing are automatic in your financial goal.
Focus is a learned trait. Herbert Hoover was in London for business when the world called his name. No other man alive was in the right place at the right time to do what he did. Once tragedy arose there was no time to practice; you’d better be prepared for the unexpected.
You may never face the challenges of Hoover during the Great War. Then again, Hoover never realized his number was about to be called the day before hostilities broke out.
Your eyes must be trained to the focal point at all times.
You never know when they’ll call your name.
Two kinds of clients scare me most. The first ask me as they pick up their tax return what they can do to lower their tax bill. The other requires a pry bar to get complete information out of them during the year.
Each of these clients scares me because I can’t give them a good answer. The first client is really asking what they could have done better last year when the answer makes no difference and the second client gives me reasonably accurate information (if I’m lucky) meaning my advice is only “reasonably” accurate.
The worst part is some tax breaks aren’t gentle phase-outs, but cliffs. One additional dollar of income can cost $500 of tax savings! Clients receiving the healthcare credit face several cliffs as their income crosses mile markers of the federal poverty level (100%, 200%, 300% and 400%). A small amount of additional income can result is a significant reduction in the credit causing a seriously higher tax bill.
Compounding the problem is where you take a deduction. A good example here is Health Savings Account contributions. You can pay the money yourself and take a deduction on Page 1 of Form 1040 or have your employer withhold from your paycheck and deposit the funds. The second way is usually better.
HSA contributions are an adjustment to gross income when you make the contribution yourself. When handled through a payroll deduction it reduces the W-2 and hence, total income. The further up the page a deduction is taken, the better. As you move down Form 1040 options for certain credits and deductions are reduced.
Prioritizing Your Tax Planning
Money is limited so you have to pick and choose which tax benefits to focus on. We will use a hypothetical client named Fawn to illustrate how prioritizing tax options can yield massive results.
Fawn is a single mother with a son approaching the age of majority. She works full-time and earns in the low to mid 30’s with overtime.
Fawn has several issues to consider. We will assume healthcare is covered at work or she doesn’t have a health plan from the Healthcare.gov site. We do this to simplify our illustration and to focus on three potential tax planning options: Earned Income Credit, Saver’s Credit and the Student Loan Interest Deduction.
The Earned Income Credit is on a sliding scale. It starts low, maxes out around $10,000 to $20,000 (depending on how many children you have), and hovers around this maximum plateau for a while before starting a slow decline as income climbs. Fawn’s EIC is slightly under $1,000.
Earning more money will reduce her credit. But, there is a way to earn more and still get a larger EIC. If Fawn has a retirement plan at work she can divert money to this fund so it never shows up on her personal tax return. An HSA run through payroll will have a similar effect.
EIC is generally calculated off Adjusted Gross Income (AGI) and earned income with some modifications. We will not go into all the possible issues affects Fawn’s return. What I want to make clear is the advantages of reducing income on certain areas of the tax return without giving up income. In short, I want you to have your cake and eat it too.
Choices are almost always available to reduce taxes and increase a refund if plan in advance. We can pick this apart deeper, but today’s point is concept. I want you to understand a simple concept. You don’t have to earn less to avoid the loss of credits.
When higher income increases taxes due and reduces or eliminates credits at a rate near or greater than your additional income it makes sense to stop earning unless you can break through to the next level where income goes up while taxes are muted. Or you follow my plan.
Bringing Together Disparate Pieces
Every action can have multiple effects! Diverting more money into a 401(k) can do more than just reduce your reported income on the W-2. Lower income means lower tax. It also means you might qualify for a Saver’s Credit! Think of that for a moment. The very act of saving might actually reduce your income enough to qualify you for a Saver’s Credit. Isn’t the tax code great!
There is still one more problem Fawn can’t figure out how to solve. She has student loans that just came out of deferment. The payments are small and will all go to interest for a while.
The new tax law working through Congress might eliminate the student loan interest deduction after this year so she wants to pay at least $2,500 to max out this year’s deduction. Unfortunately, all this retirement saving to maximize the EIC and Saver’s Credit has reduced her take-home pay to the minimum level she needs to cover basic bills.
The student loan interest deduction might also reduce state income taxes. This is an important deduction and since it might go away, Fawn wants to max out the benefit this year.
She can’t reduce her income more without keeping food on the table. Here is where tax planning leaves the comfort of Form 1040 and heads for the real world. Fawn needs $2,500 to pay at least the full amount of the interest deduction. (Remember, all payments will go to interest first and she has at least $2,500 of accumulated interest.)
Since Fawn started making token payments earlier in the year (let’s say $500) she has some of the deduction covered already. It would probably make sense to borrow money short-term to max out the student loan deduction. Her top dollar will probably be in the 15% tax bracket so the student loan deduction will benefit her $300 if she can come up with the remaining $2,000 to maximize the deduction.
Credit card is probably a bad idea here, but a car loan or help from family or a friend makes sense. Fawn could also approach her employer and ask him for a loan. If she explained her situation nicely, the employer might buy into the idea since it helps a valued member of his team and really costs him nothing more than a temporary loss of use of a small amount of money.
The Good Game
Gaming the system is one of America’s great pastimes. It can be very rewarding as long as you keep it legal.
The above example has plenty of holes and I took some liberty with the facts. I was careful not to get hung up on exact numbers. No matter what numbers I use, your situation will be somewhat different. I understand increasing her 401(k) investment helps the Saver’s Credit limits. It might also increase the credit from10% to 20% (or more) of the first $2,000. The student loan interest deduction could improve situations all around the tax return.
The point today is to look at your tax situation and examine it for un- or under-utilized deductions and credits and then start thinking outside the box.
There are many opportunities to manipulate your tax results legally! Adjusting your 401(k) contributions higher doesn’t reduce your take-home pay as much as the additional contribution due to lower taxes and potentially higher credits.
Normal people can do this; not just the self-employed or rich! HSA and 401(k) contributions are not a drain on the budget; they are necessary parts of a vibrant financial plan.
I focused on lower income earners this post. I get plenty of complaints I spend too much time on ideas reducing taxes for the self-employed and high incomers. Every income category has opportunities.
Whether you are a good client or one who wants to know how the past could have been better or only coughs up all the information needed during tax season, you can plan with purpose.
Fawn is not a hypothetical client (though her name was changed to protect the guilty); she is a living, breathing human being I’ve helped for a few years now. I modified her factset slightly for this post and because she reads this blog and is sure to remind me when she gets around to reading this post.
We ran the numbers and it paid to borrow money to take advantage of the student loan interest deduction. She can pay the loan in full (which her awesome employer did lend to her) by April 1st. Her increased refund will kill most of the loan.
The best part is she keeps the money, the added tax savings, no matter what happens in the future.
And if we get a new tax code we get to play the game with a few different rules. So hand me the dice; it’s my turn to roll.