Tax planning during off season

[kamckinley]

Hi All,

I was just wondering if any of you offer tax planning during the off season. And if so...

- What is the scope of the tax plan?
- How long does it usually take?
- How much do you charge?

I have had several retirees contact me recently with questions about converting traditional IRAs to Roth IRAs and planning for the RMD.

Given the recent inquiries, I would like to create a tax planning package for retirees. Here's what I'm thinking so far...

Scope:
- Review recent tax law changes
- Review proposed tax law changes (if relevant) and possible impact to client
- Review client's current tax bracket and effective tax rate
- Review last prepared tax return for any mistakes, educational opportunities
- Review withholding and estimated tax payments to make sure they are adequate
- Determine best planning strategies/opportunities (below)

Planning strategies to review:
- Estimate RMD and related tax liability
- Estimate tax liability on Social Security benefits, should client delay SS for tax planning purposes?
- Accelerated IRA withdrawals: based on tax bracket and future RMD tax liability should client take additional IRA withdrawals up to the next tax bracket?
- Roth conversion: based on current and future tax brackets should client convert any traditional IRAs to Roth? Determine optimal schedule based on age and how close to 70 1/2
- Capital gains: given current cap gain rates, if client has any appreciated securities should they sell to take advantage of zero percent rate?
- Tax efficiency of investments: should investments be relocated or reallocated to minimize investment taxes? i.e., is/should the client using ETFs and/or muni bonds in taxable accounts to minimize taxes?
- For young retirees (under 59 1/2), how to tap into retirement accounts without penalty (72t, NUA strategies)

Any other issues, strategies, etc. that should be considered for a retiree not yet age 70 1/2?

For the above, I'm estimating 2 1/2 hours including meeting time and am planning on charging $375.

Any ideas, suggestions or advice from people who are offering a similar service (or considering it) are greatly appreciated.

Thank you!
Kristine

[Rapid Robert]

Hi All,

I was just wondering if any of you offer tax planning during the off season. And if so...

- What is the scope of the tax plan?
- How long does it usually take?
- How much do you charge?

I do tax planning but only of limited scope, and mostly for existing clients, or someone who intends to become a client next tax season.

I will forecast W-2 box amounts (fed and state) using two recent paystubs (this is harder than you might think to do right, for folks who have bonuses, 401ks, HSAs, employer stock compensation, Additional Medicare tax, etc). I will also come up with quarterly estimates for those who have large and uneven income during the year (annualized method).

I will use my vendor's planning software to create multi-year and multi-scenario reports, based on specific things they want to do.

It's almost always triggered by something very specific - death of a spouse, getting married, switching to Schedule C from wage earner or vice versa, sale of a rental property, exercise/grant of stock/options, etc.

It always takes longer than I think and I don't charge enough.

While your list of services is very good, it almost reads like an outline for an AARP or Kiplinger article. I wonder if you will really be able to answer those questions for people with anything but vague generalities. Getting a reliable forecast of current year taxes is hard enough, trying to forecast SS benefits or RMDs 5-10 years into the future is going to be a huge guessing game with lots of uncertainty. What if it's a married couple but only one of them wants to spend time with you, so you don't really know what the other one is interested in achieving. Plus, I'd be worried about giving clients investment advice about when and what they should be buying and selling.

[Lion]

You might want to read about The Tax Coach and use their free trial to see if it will help your consulting work:

http://www.taxcoachsystem.com/

[TAXNJ]

Hi All,

I was just wondering if any of you offer tax planning during the off season. And if so...

- What is the scope of the tax plan?
- How long does it usually take?
- How much do you charge?
........

Your proposed plan is better than most.

What is the scope of the tax plan? Entails generally what you propose and additional planning which would involve Estate Planning

How long does it usually take? That depends on what the client(s) is interested in; amount of client(s) portfolio - so could be two hours minimum and higher

How much do you charge? Depends on geographical area, portfolio, the type of plan, experience/ knowledge, etc. - know of various practices starting at a minimum $175 and can be $500 hour

Of course before one begins, one needs to carefully review what can be offered, disclosures, malpractice/liability insurance and a review by your attorney of services offered .

Also, Lion makes a good suggestion.

Best wishes

[kathyc2]

Are the items you listed out things you are experienced on and qualified to advise on?

Be extremely cautious regarding "advising" to sell assets, buy muni's and etc. If selling/buying is the clients proposal and you strictly advise them on the tax consequences, you should be fine. However, if you advise to sell or buy you may find yourself running into trouble with the SEC.

If this is something you have not previously ventured into, why not just start with 1 or 2 clients who have specific questions before creating a "package"? This would give you a better understanding of what is involved, problems encountered, time involved, etc.

Curious as to if you are using a specific software or a spreadsheet to project into the future? Keep in mind that you will need to take into account inflation, changing tax brackets, rates of return and other unknowns if you are looking ahead to more than a year or 2.

[Roland Slugg]

Hello Kristine. I would characterize many of the things you listed as "retirement planning," not "tax planning." In my view tax planning usually involves just the current year, plus, in some cases, the very next year. It is occasionally possible to do tax planning for additional future years, but I have found that when those future years arrive, everything has changed so much that the previous tax planning has become next to worthless.

If you're going to get into retirement planning, especially for non-clients, you may be legally required to get a license of some kind ... CFP for example ... and if you're going to recommend specific investments, you may need a securities license, as pointed out in another response above. Even if you're not required to obtain a license, I would think twice before giving investment advice. The downside risk is just too great.

There are a few things your DIDN'T list, but can be excellent tax planning ideas for some taxpayers. Here are a few:

• For taxpayers whose itemized deductions are fairly close to their standard deduction ... a little above or a little below ... bunching their itemized deductions into every other year can be a good tax planning scheme. This tactic works best for those whose itemized deductions can be accelerated and/or delayed, such as real estate taxes and charitable contributions. It is much less effective for persons with fixed home loans. It also works well for those with little or no state income tax withholding, as those taxpayers can time the payments of their state taxes (including estimated tax payments), so they're made in "itemizing" years only.
• For people who withdraw from an IRA or other retirement plan, whether the distributions represent RMDs or are voluntary, and they take all or most of their distributions late in the year, they can arrange to have enough FWHT (and SWHT in "itemizing" years) withheld from the distribution to satisfy their estimated tax obligations, then lowering or eliminating estimated tax payments accordingly. Withholding is deemed to have been paid in evenly during a calendar year, even if it was actually all withhold late in the year.
• For self-employed taxpayers who are 70½ or older but are still working, have S-E income but no other employees, suggest they set-up a SEP-IRA (if they haven't already) and contribute the max to it each year. I have two clients, and have had others, who contribute to their SEP and must also take RMDs annually.

The first two items bulleted above require a very disciplined client/taxpayer, and it helps if he/she is also fairly tax savvy. The last item, regarding a SEP-IRA, is really a no-brainer.

Regarding a few of the other items you listed:

Yes, if a taxpayer has a security or other asset he wants to sell, and the LTCG will be "taxed" at a 0% tax rate, he should definitely do so.

Yes, a taxpayer should convert IRA funds to a Roth IRA if he can do so at little or no tax cost. In practice, this is a rare occurrence, since most people in the 0% or 10% tax brackets are probably going to be in the same bracket in future years. If someone has a large, one-time loss, however, there might be an opportunity to make a conversion in that year.

No, a taxpayer should NOT convert IRA funds to a Roth IRA if he is in the 15% tax bracket or higher, unless he has an irrational desire to pay taxes needlessly early. Some advisers would draw the line at the 25% tax bracket, but IMO that would only work for someone who is close to RMD age and expects his tax bracket to be even higher than the 25% rate for each of the next several years.

One more comment about IRAs: I believe the option IRA owners age 70½ now have of making charitable contributions directly from their IRA is an excellent one. It's especially beneficial for non-itemizers, but it can even benefit those who do itemize. I had one client last year (MFJ) who made $2,500 in direct IRA-to-charity contributions. The couple's AGI turned out to be $169,500, and without those direct contributions, it would have been $172,000 subjecting the H to about $600 in higher Medicare premiums for 2017. That savings represents a "return" of 24% on the $2,500, and the client would have donated that $2,500 to the same organizations anyway. The expression "no-brainer" comes to mind yet again.

Regarding social security, an eligible person can start at any time at age 62 or after, and most people know this. Most people also realize that if they start getting benefits before age 66 ... their "full retirement age" (soon to be increased to age 67 over a six-year phase in period) ... that they will receive a permanently lower benefit. I'm convinced that many people who start their benefit at age 62 do so because they "heard" ... from their hair stylist, golfing buddy, neighbors and friends ... that the "smart" time to begin drawing benefits is right at age 62.

IMO there are only three reasons to start social security early: (1) The person simply wants (or badly needs) the income; (2) the person desperately wants to stop working but can't without income to replace the lost salary; or (3) the person has good reason to believe he isn't going to live very long. For those people, I say, "go for it," although I would urge the person who simply wants to quit working to work as long as he can. For everyone else, I believe the smartest age to start is age 70!

No matter when you start, if two people have the same earnings history, the break-even point is around age 82. You start at 62 and I start at 70, then at age 82 we both will have received about the same total benefits. You start at 66 and I start at 70, again at age 82 we both will have received about the same total benefits. If we both live beyond age 82, that race will become no contest. An age 70 starter will get $1,320 in benefits for each $1,000 an age 66 starter receives. And future COLAs will favor the late starter, too. A 2% COLA for someone receiving $2,000 per month is $40. For an age 70 starter receiving $2,640 per month because he waited four extra years, a 2% COLA will be nearly $53. Oh, and those COLAs the 66 starter received while I was still waiting for age 70? Those will be reflected in my starting amount, too.

Finally, except in the most dire of circumstances, I would recommend that a client not start taking distributions from his IRA or other plan before reaching age 59½.

[kathyc2]

Roland, you gave some good generic ideas. However, when you dig into the specifics for a client, the generic may not make sense. Offhand, I can think of several situations where this applies:

RS: "Yes, if a taxpayer has a security or other asset he wants to sell, and the LTCG will be "taxed" at a 0% tax rate, he should definitely do so.”

Not necessarily. Even if the LTCG rate is 0 a higher AGI can easily affect other taxable income. Think taxability of SS, CTC, RSC, PMI deduction, Sch A floor items, etc. Although it would be rarer, selling an investment at 0% LTCG rates can result in EIC disallowance. Yikes!


RS: " Yes, a taxpayer should convert IRA funds to a Roth IRA if he can do so at little or no tax cost. In practice, this is a rare occurrence, since most people in the 0% or 10% tax brackets are probably going to be in the same bracket in future years."

If a client has "room" to convert to Roth with no federal tax, I strongly encourage them to do so. There will likely be a future year when they need to take a larger distribution due to a large expense (medical, home repair, vehicle purchase, etc.). Also, if the IRA becomes inherited property, it will more than likely be taxable to children.



RS: "No, a taxpayer should NOT convert IRA funds to a Roth IRA if he is in the 15% tax bracket or higher, unless he has an irrational desire to pay taxes needlessly early."

If after SS starts, client will be in the range where some is taxable, but lower than the 85% max, it often makes sense to convert before SS benefits start. If client is in this range, an additional IRA distribution can work out to a 27.75% net rate. 1,000 distribution taxed at 15%=150. However, if the 1K causes 850 more of SS to be taxable, that will also be taxed at 15% or 127.50. 150.00 plus 127.50 equals 277.50.

I find this type of planning can be quite fun, but it can also get very complex very quickly.

[kathyc2]

One thing to remember is the 32% bump only applies to those born before 1955. For those born in 1960 or later the max bump is 24%, and prorated for those between the two DOB years.

As far as starting SS at FRA or waiting until 70, I find something missing in your analysis and others who reach the same conclusion. Say benefit is 20K at age 66. Assume COLA averages 2%. That would make the age 70 benefits 28.6K (4 years COLA plus 32% bump). Then also assume that either the SS benefits are invested or the same amounts of other investments are not used for living expenses and continue earning. If you use a 7% rate of return, and work through the numbers, you will find that the 'break-even" between starting at 66 or 70 is around age 90 when both scenarios are ~1.6M. This method gives a significantly different result than the break-even at age 82.

Approximately 65% of 70 year old men will make it to age 80, and 22% to age 90. Corresponding numbers for women are 75% and 33%. So, for both genders the chance of living past 82 is greater than 50%, but less than 50% of making it to 90.

[kathyc2]

Following is planning I did for a couple that I'm patting myself on the back for how well it turned out.

He retired late 2012 at age 62. He had always worked physically demanding jobs and it took a toll. She was a teacher who loved her job and wanted to continue working for a few years.
They hadn't been able to set back much, but had about 100K that was mostly in a non-qualified plan. Starting in 2013 I had them start moving money from the non-qualified to IRA and spousal IRA's. With the IRA's reducing SS taxability and RSC, I was able to get their tax at 0 or near 0. Tax savings from 2013-15 was ~12K.

In 2016 she retired with a small (12K) pension. With the pension, non-qualified income and SS we still have about 10K room to start converting the Traditional's to Roths with zero federal tax. I can't see where they will ever pay federal tax again!

For moderate income clients I really push them to start looking at what we can do when they are mid 50's. Both to make sure retirement is financially comfortable and to see if there is a possibility of shifting around between types of accounts to decrease tax. Last year I had a new client that worked out similarly. They had money sitting in a non-qualified account and after they are both retired their income would be significantly below the standard deduction/exemptions amount. Having them move from non-qualified to IRA's gives them a deduction now, and they are low enough that they will also be able to take it out tax free in the future.

Another example is a couple that are basically living on SS and part time job. He called and wanted to take 20K from IRA to buy car. Doing that would have made SS taxable and a large chunk going to FIT. Instead, I suggested that he take out a car loan and take the money out over time for payments tax free!

I really feel that there are much larger planning opportunities for moderate income people because of taxability of SS than for higher income people, and it's quite fun!

[kamckinley]

Wow, thank you for all the thoughtful responses. I thought I had subscribed to this thread, but then never received a notification so I thought no one responded. I was very pleasantly surprised when I logged in today and saw how many people took the time to respond - and in great detail.

You've given me a lot to think about... thank you again!

[FEDUKE404]

No acknowledgements from TTB

. . . I thought I had subscribed to this thread, but then never received a notification so I thought no one responded. I was very pleasantly surprised when I logged in today and saw how many people took the time to respond . . .

FWIW: I also no longer receive any email notifications, as I always have in the past, when people post on a subscribed thread.

Nothing has changed: same computer, same email, same ID, same password, same settings

So, until I (infrequently in the off season) "check in," I remain unaware of any posted responses.

Not a problem, but does fall into the category of "minor inconvenience."

FE