4 Basic Tax Terms Clients Need to Know

Trade journals are always encouraging tax preparers to be more consultative with their clients. “Don’t just reach out at tax time.” For those of us who scratch our heads trying to figure out the best conversations to have with clients, I’ve found that education works. By asking probing questions, I can quickly get a feel as to how sophisticated a client is. I can then begin the process of changing their mindset about tax.

As a tax professional, part of my roll is to educate clients on issues of tax and accounting. To build trust, I let them know that I am a former franchise owner who understands their day-to-day struggles managing employees, keeping up with the competition and trying to squeak out a profit. Consulting with them in this way helps my clients develop business practices that benefit them both on the revenue side and the tax side.

I’ve found that most of my clients don’t realize that they can look at getting more out of their money by focusing on making business decisions based on their tax situation, which can greatly increase purchasing power.

To best help my clients, I am constantly educating them on tax concepts and strategies, like the ones below:

#1 – Tax Code: It’s important to explain to clients that the tax code was designed specifically to help out and promote the world of business, not the single person. So, as a person who earns money, they are taxed on it and can use whatever is left to spend on expenses, savings and other things.

Businesses earn money, use that money for expenses and savings, and then get taxed on whatever is left over. It’s designed this way to get businesses to make purchases and feed money into the U.S. economy.

#2 – Tax Brackets: One common mistake people make when looking at tax brackets is that they think that the tax works retroactively. They assume that when they make a certain amount of money, they will be taxed at the higher bracket for your whole income. I have had clients specifically ask me to let them know when they are getting close to the next bracket, with the sole purpose of making less money in order to stay within a certain bracket.

As you well know, that’s not how this works; U.S. tax brackets are progressive. But, getting that across to clients that have a lot of fear and confusion about tax can be hard. Here’s how I teach my clients; think of it as several buckets labeled 0 percent, another marked 10 percent, 15 percent and so on. Your income, after deductions, is the water that fills those buckets. As you fill them up to the brim, all the water in that bucket will only be taxed by the % labeled on the bucket. No matter how many buckets you fill, the original bucket will always be at 0 percent, the 2nd bucket at 10 percent and so on. The bottom line? Make as much money as you can!

#3 – Marginal Tax Rate: For every new dollar a client makes, they need to know which rate it will be taxed at and which bucket it will be poured into. Teaching your clients the marginal tax rate is important because while it stinks when they have to pay it, it’s awesome when it makes them money.

#4 – Deduction: Most people understand that a deduction shields taxable money from being taxed. I remind my clients that for every $1 deducted they shield ($1*Marginal Tax Rate), that’s $1 they do not have to pay to the government.

Be Proactive

By reaching out to your clients and asking them about their businesses, you get better insight into what they need to know about tax and how you can help them. Giving them a bit of education along the way will increase their loyalty to you.