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How to Build an Effective Organization System for Tracking Tax Impact

Date: June 30, 2021

Tax season can be a stressful time for anyone who works in a financial service position. For financial advisors, tracking down every single transaction or trade you did for every single client you have to accurately measure the tax impact of those transactions can be a lot of work. I’ve found that taking a proactive approach to keeping this information organized throughout the year makes tax season so much easier for me. It also has the potential to increase the referrals you get from CPAs. Here’s a step-by-step breakdown of how to handle tax impact:

#1 Track Tax Impact Throughout the Year

As you work with your clients throughout the year, you may end up executing transactions or trades that have a tax impact for them. When this happens, it helps to flag these transactions and keep them collected and organized as you go.

This way, you aren’t scrambling right before the start of tax season to dig through every transaction and trade you did for every client to compile a summary of the total tax impact for the year. With the right organization system, you’ll have essentially built that summary already.

Pulse360, for example, has a tagging feature that allows you to categorize individual notes and then easily generate summaries based on those tags later. This way, you can just tag any transaction or note with “tax impact” and then automatically pull all those tagged notes into a premade tax impact template to create your summary in seconds.

However, you don’t need Pulse360 to do this. It could be as simple as an Excel spreadsheet or Word document where you maintain an ongoing list of transactions and trades for each client. The key is to develop a system that is simple and repeatable so that you can easily maintain up-to-date, organized records for all of your clients.

The key to making this process simple and repeatable is to use a consistent system for tracking and compiling these notes and transactions.

If you’re keeping them in Word or Excel, give the document or spreadsheet a clear label like “Tax Impact Summary for [Client Name]” and make sure you use the same labeling structure for all clients. This will make them easier to find later.

When you make a transaction or execute a trade that might impact a client’s taxes, add that to this document or spreadsheet right away. When you do, be consistent about the information you provide for it. The basic details like date, transaction type, and amount should be there so that it will be easy to go back through statements, 1099s, and other records to verify them. 

#2 Generate a Summary

Ahead of tax season—usually January to April—use these notes you’ve kept to generate a complete summary of tax impact. This should be a pretty quick process. If you kept these notes compiled in a Word document, you could just use that as your summary. If you kept it in an Excel spreadsheet, you can just copy that data into a table in a Word document.

This summary will make tax season easier for both your client and their CPA so it’s a really helpful thing you can do—and if you’ve kept organized throughout the year, it won’t take much time at all for you to do this.

#3 Email the Summary to the Client and CPA

Once you’ve reviewed the summary to ensure nothing is left out, send an email with it to your client and ask them for permission to forward it on to their CPA or tax professional. Ideally, you want to get this summary out to your client ahead of the January 31st deadline financial institutions are required to get 1099s and other tax forms out by. Doing this ensures clients have something they can easily reference to get a head start on calculating tax liability and to know what forms they should be expecting. 

This is also a great proactive step that shows the CPA they won’t have to chase you around for the information they need. You’ve got all the relevant information ready and laid out in a simple summary that they can reference.

#4 Review the Summary with Your Client

Taxes are a key piece of your client’s overall financial plan. Generating this summary is a great opportunity to suggest a tax planning meeting with your client. You can also recommend including their CPA in this meeting.

During that meeting, walk through the summary to talk through some examples of improved tax efficiency in their investment strategy and other opportunities taken to minimize tax liability. 

Then, look ahead to the next year to discuss what changes you might need to make based on any modifications to tax laws or changes in the client’s financial situation. Talk about what potential tax exposure the client might expect and just come up with an overall strategy for managing tax impact for your client going forward. 

As you know, once a transaction is processed, it’s done and it’s too late to do anything about the tax implications. This meeting is an opportunity to put preventative measures in place before that happens. It can also be an opportunity to strengthen your relationship with that CPA.

CPAs have no shortage of financial advisors trying to get their attention. By being the one that they can rely on time and time again to provide the organized and thorough tax impact summaries they need to make their job easier, you can really stand out from the pack. When you make their job easier, you increase your chance of getting referrals from them in the future. 

Check out the video on how you can do all the above using Pulse360 for your financial advisory practice:

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