Taxed to the Max

I recently met with a potential client, a widow in her 70s, who insists on maintaining an enormous cash reserve in case she ends up owing more income tax than planned. I tried to explain that keeping so much money in a checking account is not very productive, but don't think I got through to her. What else can I say? Before you can help a client who has tax anxiety, you need to know what caused it. Did something happen in her childhood or marriage, or to a relative or friend, where a lack of money to pay taxes led to dire consequences or personal humiliation? Or is she simply unfamiliar with managing money, and dreads being caught short?

When you understand the source of her anxiety, you may be able to gently reassure her that she has more than enough money put aside, even under the most unlikely scenario. Once she calms down, remind her that your job is to help her become more financially secure.

You can then recommend what she should do with her excess cash. Or if she prefers to have choices, you might suggest several alternative courses of action that will allow the money to work harder for her.

I've been working for years with a client couple, both of whom are Type A personalities. At a recent social event, the wife confided to me that she hates it when April comes around, because she and her husband get into heated arguments about their taxes. Last year, they ended up not speaking to each other for weeks. She told me they would both appreciate my advice to prevent this from happening again, but I don't know what to say. Any suggestions? I would try to find out what upsets these clients so much. Is there an actual tax trauma in their past? Or is this annual eruption a symptom of money conflict that bubbles under the surface all year long?

To start working toward possible solutions, you could do a "stress inventory" for them–perhaps individually at first, then together. This is an assessment of ways their marital tension manifests itself around tax time, and ideas to help them avoid stress triggers. Ask them to think about stressful events they have handled well together in the past, and what they did that was different from their tax season meltdowns.

With what you learn from the stress inventory, you might go on to explore specific ways to defuse the April 15 time bomb. For example, if blowups tend to occur because they get in each other's way, they might divide up tax preparation tasks: one prepares Schedule A deductions, say, while the other collects capital gains information for Schedule D. Or if last-minute procrastination fuels their fights, they could address different aspects of their return in stages before the tax-filing deadline. On January 31, they could tackle their investments; on February 28, their deductions; and on March 31, the 1040 itself.

As part of this process, they should commit to communicating respectfully with each other. Urge them to avoid blame and recriminations, and monitor their tone of voice as well as the words they speak. If communicating orally about taxes is likely to push emotional buttons, you might suggest that they request information from each other in written notes or e-mails.

There's a good chance you can help this couple by encouraging them to remember ways they have coped with stress in the past, and asking them to envision how they might handle it better in the future. But be prepared: if they're truly "stressed to the max" at tax time, they may find that moving toward harmony is very difficult. If so, they may need to seek professional counseling before this season of living dangerously rolls around again.

A client has asked me for advice about her 24-year-old son, who has his own business as a computer consultant. She recently learned from his roommate that the young man hasn't filed a tax return since graduating from college. When she asked him about it, he said airily, "What the IRS doesn't know won't hurt them." This is a tough one! What would you suggest? I think the next step has to be for your client to approach her son again. Coach her not to be accusatory or confrontational, or he may simply dig in his toes. Instead, she might begin by saying something like this: "Son, I'm feeling bad that I may not have educated you very well about money and taxes. I'm also worried that by neglecting this responsibility, you could get into serious trouble, including fines and even jail time. Will you help reassure me by finding out more about this from my financial advisor?"

If you can get the son in to see you (preferably alone), you'll have an opportunity to help him resolve this tax issue. Most people find it easier to take advice from an objective third party than from a parent or authority figure with whom they have an emotional history. It may also be possible at that point to explore what's behind his "What, me worry?" attitude.

Remember that when people are under stress, as they tend to be when compelled to cough up thousands of hard-earned dollars, they will almost always revert to their oldest, most dysfunctional mode of behavior. Think of it as their primitive survival mode, and you won't be far wrong.

By preparing yourself in advance of tax season, you may be able to avoid slipping into this mode yourself. Get enough rest, and factor tension-relieving activities into your schedule. This will put you in a better position to help your clients move from a "taxed to the max" anxiety mode to a more rational level, where they can hear and absorb your sound financial advice.