Tax Planning for clients - what do you do?

[Zee]

I'm sure many of you have client's that don't take advantage of tax planning opportunities available. Often the cash-flow needs of a small business, doesn't facilitate tax savings strategy. Or, the client sees us only once a year and doesn't call before making decisions that have adverse tax consequences.

It might be interesting to learn what tax-saving opportunities are most often missed by your clients, or strategies others have found helpful for clients.

Solo-401K plans are a good example.

[erchess]

Tax Planning and Me

The items most missed by my clients are mileage due to failure to keep adequate records and as Zee noted the failure to fund or sometimes even create retirement accounts. Failure to substantiate deductions other than mileage that they in many cases knew were deductible without my having to tell them so is another gigantic issue. They also pay no attention to the timing of any income or spending. I'd say that about covers ways in which clients mess themselves up while still having me do their taxes.

As far as tax planning goes, I do keep my ear to the ground politically speaking and I will offer opinions such as that the trend after 2009 will be for tax rates on incomes of 100K and up to increase while rates for those making less will likely decrease or at least not increase. The impact of those changes on people with income they can receive or defer without running afoul of constructive receipt is obvious. The impact on incurring or delaying deductible expenses is also obvious except that in delaying there is the risk that the deduction may be limited in some way by future law.

If taxpayers can give me estimates of their future income and expenditures and agree with me on the probable future course of taxation in the US then I can give them advice on planning cost recovery and optimal timing of expenditures. But tax planning is only as accurate as are the forecasts of future behavior of the taxpayer and the government and society in general upon which the planning is based . It is important to be careful to spell out that fact and the underlying assumptions when you do tax planning. Also my lowest fee for a written opinion is $400 because I stick 75% of the fee in a sinking fund that I will tap only to settle a dispute with a client or after I am some reasonable amount of time into retirement.

[outwest]

I guess it's just a difference in preceptions..

and please accept my apologies in advance, but "substantiate your expenses" does not equal "tax planning" to me. And I wonder what the legal risk of such advice is that would prompt a practitioner to set aside 75% of the fee for lawsuits?

(All the following assumes compliance with the rules and substantiation in full.)

Most missed tax planning to me suggests such strategies such as, well, is there useful work that you could hire your kids for? That potentially takes the equivalent of a standard deduction for each working kid off the parents Sch C and SE and taxes it at 0% to the kid. It's also a factor in the choice of entity as payroll taxes become a factor if a S Corp is chosen. etc etc. And if you are following the rules, the kid learns a little about the value of money and work.

To me, this is tax planning.

[JohnH]

I generally tell them that the first priority is to put the maximum into their SEP plan and to read John Bogle's advice about asset allocation & investing, understand it, and apply it. Since the majority of them don't get past that step, there isn't much planning left to do.

I don't charge for that advice, because it only take a couple of minutes. Those who do decide to go further will usually skip my free advice, preferring to pay someone huge sums of money to tell them they need to buy whole life insurance, annuities, and proprietary mutual funds with high loads. But they get to feel good because they can sit in a fancy office in a high-rent building while being told these are smart money moves.

[DaveO]

You can lead them to water but.... Effective tax planning is one of my big frustrations with clients. After explaining the SE Health Insurance deduction, HSA's, employment of children, Sec 105 plans and more, year after year and not seeing people adopt those ideas I just get tired of talking.

Oh, I have a handful that take it to heart and make the changes necessary to save thousands of dollars in taxes but they are the rare exception. Seems like most people take an interest in tax planning only after they realize they have a 5 figure balance due. Suddenly "remembering" thousands of dollars of expense, not reporting income or padding expense logs don't qualify as tax planning either.

[erchess]

Clarify and Expand

and please accept my apologies in advance, but "substantiate your expenses" does not equal "tax planning" to me. And I wonder what the legal risk of such advice is that would prompt a practitioner to set aside 75% of the fee for lawsuits?

(All the following assumes compliance with the rules and substantiation in full.)

Most missed tax planning to me suggests such strategies such as, well, is there useful work that you could hire your kids for? That potentially takes the equivalent of a standard deduction for each working kid off the parents Sch C and SE and taxes it at 0% to the kid. It's also a factor in the choice of entity as payroll taxes become a factor if a S Corp is chosen. etc etc. And if you are following the rules, the kid learns a little about the value of money and work.

To me, this is tax planning.

What would prompt this practitioner to set aside 75% of the fee for a WRITTEN opinion is that if I DO get hauled into court there is no way I can suggest that I don't think I said exactly what the plaintiff thinks I sad AND the fact that in my opinion statements about the future behavior of the government, the economy, and the public are inherently questionable at best. Also the only "tax planning" I have been formally taught to do is to adjust their withholding so that next year's refund will be of the size the client says that they want. This was particularly stressed in cases where the client expressed unhappiness with this year's refund. Anything else involving work with someone's future taxes that I know I have figured out on my own. I would be more confident if I had taken college level courses in taxation but I never did. I'm very good at handling the tax consequences of past events but for a variety of reasons I tend to back away from predicting events more than a few weeks into the future..

I am also to an extent handicapped by the tax awareness of the clients I attract. I think that the fact that I am neither a CPA nor a Tax Attorney keeps me from getting clients who see the value in say quarterly or more frequent meetings with a tax adviser. I don't care how much you know about taxes there are limits to what you can do for a client who only has time for you annually. Also I don't care how much you understand about calculus or how gifted you are as a teacher, you can't teach it to a child who is struggling with his sums. Similarly when their eyes glaze over as you explain the requirements to document business expenses there's not a lot of point in trying to discuss timing of expenses. For some reason all of my self employed clients right now are of the age when hopefully one's children are not dependents. I am indeed aware of the deep wisdom on many levels of employing kiddies in one's business.

On the other hand I took no offense at your post. You're clearly a higher powered tax adviser than I am. It will be to my benefit if I can keep reading your posts.

[outwest]

Thanks but ...

On the other hand I took no offense at your post. You're clearly a higher powered tax adviser than I am. It will be to my benefit if I can keep reading your posts.

I read here and purchase the taxbook because I've got so much to keep sorted out. On the other hand, I like to think in terms of how deduction rules may help a client if followed rather than how to deny a deduction if not.

A little exercise I did one time may illustrate this. Everyone here knows the rules about substantiating mileage. Everyone here also knows the difficulty in getting clients to do it. One day I say down and timed my self on a cycle of flipping open a log book, write in a short 3 - 10 mile trip, close the book and repeat 10 times. I then took the standard mileage rate for those miles and applied a tax rate of 35% (federal, state, and SE combined) to calculate the tax savings. Using the time I'd clocked, I calculated the effective hourly rate to write it down was $200 + .

Now, when we have a discussion, I point out the $200 / hour is pretty good money. I still don't get mileage logs on everyone, but I get more. And many have a easier time keeping up if they can tell themselves "I making $200/hour"

Sure clients don't follow our advice, sure they are lazy, doctors have the same problem. I've long gotten over the fact they don't always listen, but I point out what I can as part of the value that separates me from the software or storefront tax shops.

On another topic, I'm working on a habit of doing a memo on any significant discussion with a client with a copy to them and my files. Though I've never had a problem, it's a CYA thing. Note, there is a brief covered opinion disclaimer at the bottom noting that certain IRS required elements are missing.

Clients like the followup, I get a chance to throw in that thing I forgot to mention on the phone. It's also billable

and I know, it's a pretty anal CPA that would calculate that mileage thing..... you know, with the current rates maybe I should do it again.

[equinecpa]

All I can say is "wow". I can't believe the attitudes some of you have. I'm sorry but I have to disagree big time with a few of you.

I feel my most important role as a tax advisor is tax planning. I like to be proactive not reactive. I schedule planning meetings in the fall with most of my larger small business clients. Larger being defined as those who are profitable and likely to have tax planning issues.

At that time we review their books, project income taxes and then look at strategies to minimize that liability. For S Corp clients we establish the shareholder wage for the year.
We might identify sec 179 opportunities etc. I might point out that credit card balances should be paid off with cash on hand, or a might advise them to not pay off a loan and maintain a healthy cash position in slow times.

This year with my individual taxpayers I'm making sure that those who qualify and don't own a home realize what an opportunity they have at their disposal to purchase one. I also let those clients who would really benefit from funding an IRA or Sep that they should fund one and will set up one for them should they decide to open an account (I also am an RIA).

What I don't do is make sure my client's have a receipt for every figure they give me at tax time nor do I make sure they have a mileage log. . I do let them know the rules and the requirements but I'm not a babysitter. If they tell me their business mileage is xx miles, personal y miles, that's good enough for me. My engagement letter states that I don't audit this information, and that they are responsible for its accuracy. That's good enough for me.

Carolyn

[AuditorTurnedGood]

I meet with my clients

a minimum of twice after we file the previous year's return. Once briefly in June or July to see how the year is shaping up and adjust S-Corp officer comp accordingly, and once in October to do a full proforma of the current year return so we can do any needed tax planning or payments over a few months. Funding SEP IRAs, Section 179 expensing, and, since most of my clients are cash basis, making any needed purchases in the current year, are all things we discuss.

I have a smaller practice (50-70 returns) and keep it that way because I want to be actively involved in planning for my client's tax situation. My fees are higher than most because of that involvement. To an extent I use the same theory on my more stubborn clients I do with my nephew: Cole does something silly and hurts himself a little. He looks at me looking for sympathy, and 90% of the time he hears "Well, you won't do that again will you?" I had one client call me at 4:00pm on a Saturday from the Acura dealership's finance office to discuss whether the car should be in his name or that of the business. That is what I call one well trained client.

[outwest]

Don't read to far into that example...

But I dont' babysit them either nor do I audit their information on behalf of the IRS. My engagement letter also specifies they are responsible for backup and substantiation.

(long rehash of circ 230, due diligence, and ignoring implications of information omitted here, I do that stuff)

I feel my most important role as a tax advisor is tax planning. I like to be proactive not reactive. I schedule planning meetings in the fall with most of my larger small business clients. Larger being defined as those who are profitable and likely to have tax planning issues.
Carolyn

Well said. It's a whole lot more rewarding to provide the services you describe and I agree that's where we have more value to the client.