This Letter Sold a $3,800 Tax Plan

A couple of weeks ago, a longtime TaxCoach member and friend came to me with a challenge. He’s a financial advisor in northern New Jersey who realizes that tax planning is the fastest way to a new client’s heart, so he opened up a tax practice and became an enrolled agent. Could I help him with a new prospective client?

The prospects are a married couple with a portfolio of rental properties throwing off significant passive losses. But his W2 income was too high to take advantage of the rental real estate loss allowance. Did I have any ideas to help them save taxes? Could I help sell a plan?

I told my friend to ask his prospect how much time she and her husband spent managing their rental properties. (Obviously, I was looking to see if they could claim “real estate professional” status and deduct those passive losses against their ordinary income. Of course, I didn’t want him to say anything about it – at least, not yet.) He dutifully reported back that they did indeed meet the 750-hour test. Furthermore, she was contemplating selling one of the properties at a significant gain. Once I had that information, we were off to the races.

One of the biggest challenges TaxCoach members face is diagnosing a prospect’s tax problems without giving away the prescription. How do you tell the client how much money you can save them without telling them how you’re going to do it? So I offered to draft a proposal for my friend that would do exactly that:

Dear Mr. & Mrs. Prospect-

I want to thank you for giving me the opportunity to analyze your last two years’ tax returns and discuss your financial situation. I appreciate the trust you’ve placed in me and I’m looking forward to repaying that trust with valuable advice.

I’ve reviewed those returns carefully, along with the supporting information you’ve given me about your involvement with your portfolio of properties. Based on that analysis, there appear to be several missed opportunities to take full advantage of the tax-savings potential from your properties. These missed opportunities appear to have cost $11,000 in unnecessary taxes in 2013 and $30,000 in unnecessary taxes in 2014.

You’ve also mentioned that you might be interested in selling one of your properties. This would ordinarily mean paying a 25% tax on recaptured depreciation plus, in your tax bracket, 20% in capital gains tax and 3.8% “net investment income tax” on any gains. I would like to introduce you to a strategy that could effectively eliminate the bulk of both of those obligations. This strategy is actually more effective than the 1031 exchange that you used to defer gain when you purchased your land in Sedona.

I’m proposing today to prepare a written plan to address all of those opportunities. The plan will offer written guidance for maximizing your deductible losses, using those losses to offset your ordinary income, and minimizing tax when you dispose of your properties. The fee for the plan will be $3,800, and it will be ready for delivery within two weeks of your commitment. I strongly urge you to take advantage of this opportunity before December 31, 2015, so that we can put as many of these strategies to work as possible for this year’s return!

I’ve made tax planning a core part of my service, and even become an Enrolled Agent so that I can represent taxpayers before the Internal Revenue Service. I can’t emphasize enough how important this is – if you get the taxes wrong, nothing else really matters. I look forward to working with you to help you harness these legal opportunities to rescue thousands you’re currently wasting in taxes you just don’t have to pay.

Sincerely, etc…

Take a closer look at a few things we accomplished:

  • We quickly identified the problem: $11,000 in unnecessary taxes in 2013 and $30,000 in unnecessary taxes in 2014.
  • We focused on pain, not gain. We could have talked about “saving you $30,000 in taxes in 2014,” but prospects are barraged with so many messages about saving money every single day that it becomes numbing. Behavioral economists will tell you there’s far more emotional impact in wasting $30,000 in taxes that could have been avoided.
  • We quoted the savings before we quoted the fee. The same behavioral economists who tell us to focus on pain instead of gain will tell us the “anchoring effect” means we should quote the bigger savings number to make our fee sound small in comparison.
  • We dropped a hint about a strategy (the monetized installment sale) to create significant savings when it came time to sell the appreciated property.

A week later, the prospect accepted the proposal. The next steps are to deliver a plan, create some nice savings, and ask for some referrals. I can think of two families in New Jersey who will enjoy a nicer holiday because of this letter!