When It Comes To Talking About Taxes, Sometimes All You Need Is The Right Story

As we begin 2022, there is a lot of noise in the marketplace: midterm elections, omicron and everything in between.

One topic that seems to have been put on the back burner but shouldn’t be is the topic of taxes. According to the U.S. Debt Clock, the United States has about $29 trillion in debt as of the end of 2021. I know a trillion here or a trillion there may not seem like a lot, but just remember if you wanted to count to a trillion and you started today it would take you 32,000 years. Yes, 32,000 years. The big question will be, how do we pay all that back? Our government could stop spending, but let’s be honest. I want to be a professional golfer. Neither are going to happen.

One of my associates, Frank Pape, referenced this quote by Russell Long: “Don’t tax you, don’t tax me, tax the man behind the tree.” The reason I love this quote is because it encapsulates how everyone feels about taxes. They should be paid, but not by us. Unfortunately the man behind the tree is the end client.

When we go back to the Value of an Advisor study, we remember that one of the biggest sources of value an advisor provides their clients is through helping mitigate the impact of taxes on their portfolios. Not long ago I wrote about the top five questions advisors should be asking every client. On that list is, How much do you consider taxes when it comes to your investments? The problem is that sometimes advisors have a hard time explaining how taxes affect portfolios, and clients have a hard time seeing the effect of taxes on their portfolios. As we prepare to go into tax season, I thought it would be useful for advisors to be equipped with numerous stories or examples about how to talk about taxes to clients.

Let’s begin with some examples of everyday things that are analogous to what taxes represent in a client portfolio.

The bag of chips

My personal favorite illustration of after-tax returns is a bag of chips. You might be asking, what do chips have to do with taxes? Have you ever bought a big bag of chips and been disappointed by how many chips were actually in the bag? Think of the air in the bag as a tax on your bag of chips.