13 Things Clients Don't Get About Taxes: Advisors’ Advice  

2. Clients don't get how tax brackets work.

The biggest misconception my clients have had around taxes involves the progressive tax brackets. Most individuals think that their total income puts them into the appropriate marginal bracket and that ALL of their income is taxed at that rate.

I've used this opportunity to educate them that this isn't how the progressive tax brackets work. I then show them a table of the tax brackets and educate them how income up to each bracket's limit is taxed at that bracket's tax rate and once that limit is reached all new income is taxed at the next highest tax bracket until all of their income is used up. I've described it as a multi-level fountain in which I pour a set amount of water at the top and it cascades down to the next level as the previous level fills up.

— Donovan Brooks, CFP, founder and financial planner at Prospurpose Wealth in Saint Joseph, Missouri

3. Clients miss under-the-radar tax planning opportunities.

The biggest misconception clients sometimes have about taxes is that the most popular and often spoken-of strategic moves, such as contributing to tax-advantaged accounts and taking deductions, are the most important. Yet, an all-encompassing approach offers them many more tax advantages they might have overlooked.

There is no better way to dispel this myth than to always stay on top of and share all the newer and other less-spoken-about tax-advantaged moves, from the Secure Act 2.0 to old-school tax-loss harvesting and donating appreciated assets and required minimum distributions from qualified retirement accounts. Empowering your clients with this information allows them to feel more confident about their money and you, giving them a well-deserved seat at the table to "celebrate" their wins.

— Alissa Krasner Maizes, financial planner and founder of Amplify My Wealth in Boca Raton, Florida

4. Clients underestimate Uncle Sam's reach.

The biggest issue I see is clients not understanding that once you are a U.S. resident, you must pay taxes on your worldwide income, not just U.S.-sourced income. The ones that understand it are concerned about double taxation.

The solution is a lot of education, explaining the concept and explaining the implications (penalties) of not including the above income. I also explain about foreign tax credits, which will ensure they are not double-taxed.

A lot of times, it ends up being just a reporting issue, we are able to avoid double taxation, and they stay compliant.

— Jane Mepham, CFP, founder and principal advisor at Elgon Financial Advisors in Austin, Texas

5. Clients don't understand taxes in retirement.

Some clients think there is an age 65+ tax bracket for earned income. That once you retire, there's a special tax bracket for retirees. Like a "Medicare" plan for taxes.

Which is not true. Easiest way to clear it up was to show a tax schedule and their estimated taxes in retirement via a plan.

— Nicholas Bunio, CFP, Retirement Wealth Advisors in Berwyn, Pennsylvania

6. Clients put tax minimization over wealth building.

The biggest misconception that clients have around taxes is that their time is best spent figuring out how to pay less or no taxes when in actuality it is always FAR more lucrative to figure out how to make more money. This is not to say that tax planning to minimize tax burden is not also wise, but too often clients get lost in the weeds of tax minimization at the expense of increasing their income (especially self-employed individuals).

I clear this up for clients by showing them models explaining the tradeoff between putting time into avoiding taxes versus putting that same amount of time and effort into increasing income.

— Eric Amzalag, CFP and owner of Peak Financial Planning in Los Angeles

7. Clients assume their employer is withholding the correct amount.

In my experience, the biggest misconception is that your employer knows how much you need withheld in taxes, and you do not need to do projections yourself to make sure this is correct. This is a big misconception because your employer only knows what you fill out on your form W-4, and uses a table to withhold based on your income, and the dependents/allowances you fill them in on.

They do not know if your spouse makes a substantial income that pushes you into a higher tax bracket that could cause you to be very under-withheld from a tax perspective, potentially leading to a big surprise come tax time!

An added bonus one is thinking bonuses are taxed differently than your salary. They are not, just withheld differently!

— Matthew Gottshall, CFP, financial advisor at Balanced Wealth Group (Ameriprise Financial) in Westlake, Ohio

8. Clients don't get tax loss harvesting.

A common misconception about taxes relates to the popular strategy of tax loss harvesting. The common assertion is that any tax losses realized using this strategy should automatically be seen as “capital gains tax savings.” While tax loss harvesting does lower your tax bill in that particular tax year, it trades the opportunity to lower your tax bill in a future year. Therefore, tax planning that involves tax loss (and even tax gain) harvesting should always be considered through the lens of multiple tax years.

— Craig Toberman, CFP, founder of Toberman Wealth in St. Louis, Missouri

9. Clients think tax planning is their accountant's job.

The biggest misunderstanding I see is tax planning vs. tax preparation. Clients think an accountant should be able to save them money on taxes upon preparing the return, but this usually isn't really the case. The opportunities for tax savings tend to come through tax planning, which a financial advisor often initiates/implements throughout the entire year.

— Michael Caligiuri, CFP, founder and CEO of Caligiuri Financial in Columbus, Ohio

10. Clients don't understand how home sales are taxed.

Most people think you don't have to pay taxes on your house gain if you use the money to buy a new house. This used to be accurate, but the law changed before I was born. The myth lives on because most taxpayers don't have to pay taxes on the gain from a house for entirely different reasons. If you lived in the house for two of the last five years, you could exclude $250,000 gains ($500,000 if filing a joint return).

— Robert Persichitte, CFP, financial planner at DeLAGify Financial in Arvada, Colorado

11. Clients think an extension gives them more time to pay.

Tom was so busy running his business that he completely forgot about his taxes. The due date was quickly approaching, and he knew he wasn't going to be able to file on time. So, he did what any procrastinator would do and filed for an extension.

Tom thought he had scored himself some extra time to pay his taxes, but little did he know, he was in for a rude awakening. He assumed that he wouldn't owe that much in taxes, but when he finally sat down to calculate everything, he realized he had a pretty hefty bill.

That's when he realized that filing an extension doesn't mean you have more time to pay. The clock is ticking, and interest and penalties will be added to any unpaid balances after the original due date.

The best thing you can do is to file your taxes as soon as possible and pay what you can.

— Ryan Greiser, CFP, founder and financial planner at Opulus in Doylestown, Pennsylvania

12. Clients don't keep up with changing tax rules.

Some clients still have old tax rules and norms ingrained that are holding them back. For example, most Americans take the standard deduction, yet many still think they can itemize their taxes. You will see this when people talk about deducting their mortgage interest. While it is true that you can itemize and deduct mortgage interest (up to a cap), since the standard deduction was doubled, itemizing is rarely a better option.

Our opportunity as financial planners is to help clients to understand the standard deduction and how there may be opportunities to “chunk” expenses and donations to itemize one year and take the standard deduction on other years.

— Jay Zigmont, CFP, founder of Childfree Wealth in Water Valley, Mississippi

13. Clients misunderstand tax write-offs.

Tax write-offs are free money. “The more I write off, the less tax I will pay.”

A tax write-off is a deduction that reduces taxable income. If you spend $100 as a write-off, you save about $24, but you're still spending $76 (if in the 24% tax bracket). In other words, a write-off allows you to spend money with pretax dollars instead of after-tax dollars. Although write-offs reduce tax, you shouldn't spend profits only to reduce tax. Doing so would have a negative effect on profits and cash flow as a business owner.

— Travis Gatzemeier, CFP, founder and financial planner at Kinetix Financial Planning in Flower Mound, Texas