A Tax Savvy Solution for Addressing Liquidity Needs

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Supernova Technology’s Loan Operations Manager, Austin Mead, recently shared trends, and insights that he has seen during tax time, as well as tips on how banks can support their clients as they navigate what solutions are available to them for paying their tax bill.

There is a growing trend of clients expecting more from their financial advisor. The share of investors looking to simplify their financial relationships by having banking and wealth management under one roof has risen from 13% in 2018 to 22% in 2021, according to consultancy McKinsey & Co. It’s increasingly important that banks take a holistic approach and have a wide range of solutions. Clients are looking for more than investment advice; they are looking for proactive tax planning, estate planning and debt planning, to name a few.

A Trending Solution for Taxes
Mead recalls the record number of service requests and new lines or draws that Supernova saw the last couple of years during tax time, particularly last year. “We saw about 50% of all draw requests being used for tax payments from April 1 to April 18.” Since 2020, each tax season has gotten busier and busier for his team. “New lines and balances were growing daily due to the reactive demand for a securities-based line of credit or SBLOC, which was mostly driven by capital gain tax obligations.”

Mead says he’s concerned about the down market but was still optimistic since Supernova data is still showing a steady increase for the first several weeks of the year — though not quite as high as last year.

Typically, in a down market, many advisers encourage their clients to hold on to their investments and ride it out verses selling them off, staying true to investing for the long-term strategy. Regardless of what strategy a client may have, if a client has liquidity needs, securities-based lending has been a trending solution banks can recommend at tax time. When talking about the measures Supernova’s partners put in place to ensure their clients avoid elevated risk, Mead says lending partners have proactive credit policies in place to hedge against their clients falling into a collateral call. Advisers are also in close communication with their clients through the adviser and client portals.

“Advisers can have educated conversations with their clients about where their portfolio stands versus the outstanding loan balance. Having insight to advance rates on certain securities plays a huge role in those conversations around rebalancing, paying down the loan, and even raising cash,” he says.

Mead says the top three most common reasons clients open or use a line during tax season is general liquidity, followed by strategic ways to avoid capital gains from the market and capital gains from real estate sales over the past few years. After the beginning of the year, there is a steady increase for line openings and/or usage through Tax Day, but he says the most active time period was April, leading up to Tax Day.

As Mead says, since the beginning of the year, there has been a steady, weekly increase in line opening and usage. It’s important banks start having conversations early with clients to ensure they are prepared for Tax Day and have access to liquidity when they need it.

Three Things to Do Now for Success During Tax Season

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After the holiday season, many people go back to work refreshed and ready to take on a new year. However, for banks and their vendors, January is one of the busiest times of the year.

Tax season kicks off every January. Customers must receive tax documents for reporting income, loan interest payments and other financial data required by the IRS. The process of collecting the proper data, building the documents and sending them to customers can often be stressful, unorganized and prone to mistakes. Banks have the charge of getting their customers the right information, at the right time, designed in a familiar way. This process is crucial to reinforcing the trust institutions actively work to build each day with their customers.

Many banks accept this stressful process as “just the way it is.” However, there are things leaders can do now, before the federal government even releases the annual tax data fields, to prepare for the January rush.

Create a Game Plan
Banks know that the biggest frustration with tax documents is that the IRS typically does not release the current year’s data fields and form requirements until late fall. While the forms do not typically change dramatically year-to-year, there are always some changes that must be mapped from the core into any document generation processes. Banks must then match that form with their individual system.

To begin taking a more proactive approach to tax season, the first step is to treat tax preparations like any other project. Identify what your team can control and what it cannot. What worked well last year, what didn’t? It is important to think critically — remember, the goal of this exercise is to streamline the process.

Work through the process and timeline step by step with your team, including all key employees who work closely on this project. Discuss pain points, things you can control and possible action items that can be taken ahead of time.

Once you have successfully identified all dependencies, fill in your project timeline. It is important to start sooner rather than later. Luckily there are two vital steps you can take right now.

Contact Your Core
Get in contact with your core provider as early as possible to discuss any changes. Discuss timelines and deadlines that can be shared internally and added to your project timeline. If your bank can receive test data from the core to proactively work through the process, that can prove incredibly valuable.

One of the larger obstacles of the tax process is the data matching and correct application of the data on the form. Janine Specht, senior vice president of business applications and innovation officer at Kearny Bancorp in Kearny, New Jersey, makes a point of coordinating with her core as early as possible to avoid these pain points.

“We have experienced missing data and wrong boxes which leads to the files being received by our core processor getting input incorrectly,” says Specht. “Then we realized we weren’t ready to print and send.”

Specht recommends creating a calendar with alerts for when to expect certain steps, so nothing is overlooked.

Contact Your Document Vendor
Once the core data is set and properly mapped, your team should prepare document vendors for a smooth workflow. If possible, coordinate any changes with vendors ahead of time. Securing the test data from your core will help with this; however, there are still steps you can take to prepare with your vendor if you cannot get any test data.

Communicate the deadlines and timelines you received from your core to the vendor, and be sure to get any deadlines or important steps from them to add to the internal project timeline.

Discuss any design issues that need to be solved outside of data fields. It is important to send customers a form that looks like the tax form they will be filling out, since the familiarity makes it easier to figure out what they need to do with the documents and reduce calls to customer service.

Tax season is stressful, but there are steps bankers can take ahead of time to ease some of those pain points. The more bank leaders can work through and plan for, the more prepared their employees will be. As banks are working through the process and create the project timeline, remember to think critically and outside of the box. This proactive mindset will make the New Year start more efficiently and reduce the stress associated with tax season.