Most clients have no way of knowing whether their tax preparer is good or not, whether the fees paid are worth it, or what value they can expect. Here is a case study that just occurred.
Case Study
The client was a married couple with both spouses earning approximately equal amounts around $150,000 each.
- One spouse had the maximum 401k deducted from their salary; the other had about $8,000 less than the maximum amount. The shortfall wasn’t because they needed the money to cover living costs but was determined by that spouse so they would qualify for the maximum employer match. However, the shortfall would have given them an $8,000 added deduction, reduced their current taxes and provided added tax-deferred savings. A Roth 401k was previously recommended, but they decided to do the deductible 401k instead. This was rediscussed but their decision remained the same. That spouse was unaware of the maximum that could have been withheld.
- One spouse had a managed brokerage account where the original portfolio consisted of about half in index funds and half in actively managed mutual funds. The investment account was opened about 10 years ago when the allocation was decided upon as was the Assets Under Management (AUM) fee. The preparer did a quick review of the portfolio since a statement was included with the tax data the client provided. The preparer indicated that the mix of index funds grew about 145% in that period while the actively managed funds were about 60%. There also appeared to be no effort to rebalance the portfolio – thankfully. Further, the actively managed funds had an embedded fee of about 1.25% while the index funds fees were about .2%. The higher management fee did not reflect itself in better performance with a more than 50% poorer performance. The client was, in effect, paying a double fee since they paid the asset manager AND the mutual fund managers for presumably the same thing. The preparer also brought up that the trending of AUM fees over the past 10 years has been lower and it was likely that new clients of the investment management firm were being charged a lower percentage of AUM. It was suggested they review the portfolio’s performance and also the fees they were being charged.
- Through neglect, they had a not insubstantial amount in a bank savings account paying less than .2%. This was somewhat obvious when the bank’s 1099 amount was questioned. It was suggested that they move those funds to a higher-paying money market fund.
- One of the spouses did not have an employer’s cafeteria plan deduction to cover a dental insurance policy they were paying for.
- A minor child started a part-time job last year, and there was about $32 withholding tax. Filing a tax return to get the refund was cost-prohibitive. They were told to have their child fill out a new W-4, not write anything in Steps 2 and 3, but write EXEMPT in Step 4 below Step 4 ( c ), and also to fill out a similar form for State withholding.
Takeaways
There are many other things great tax preparers can do and the above is a single illustration. A great tax preparer is not just a tax preparer but a collaborator with the client in their financial affairs. If cost is an issue for the client rather than value, a wise shopper would employ the lowest cost qualified preparer. However, if the client wants value, then the cost would just become one measure of the totality of the relationship.
The client has one decision to make. Are they concerned about the cost paid or the value received?
The above is an actual situation.
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