Forging Tax/Financial Planning Links


(Page 1 of 2)

Vendors recognize it's a short hop from tax prep to tax planning to long-range investment and retirement goals.

by Richard McCausland

Tax software vendors and financial planning software makers have been talking about their programs getting together for a long time. And with good reason-by one estimate, 90 percent of the data needed for a financial plan is held in tax returns.

Partner Insights

So in recognition of the fact that so many tax professionals also function as their clients' personal financial advisors, tax software publishers are developing tools or forging alliances to better serve their installed base in these dual roles. What are vendors doing to help preparers and advisors get together? Recent developments include:

● CCH Tax Compliance, headquartered in Torrance, Calif., has just brought out GainsKeeper Pro, an online portfolio management tool targeted to tax preparers. Gain and loss information from the sale of investments can now be imported directly into CCH's ProSystem fx Tax.

● Dexter, Mich.-based Creative Solutions, publisher of UltraTax, has joined forces with ByAllAccounts to include the latter's WebPortfolio account aggregation engine within the CSI NetClient private portal. The aggregation tool is meant to give financial professionals a better understanding of a client's positions vis-a-vis specific securities. In this way, the professional can better advise the client on how to strengthen the portfolio while minimizing potential tax liability.

● Hauppauge, N.Y.-based AccountantsWorld is linking its desktop suite of products, including Tax Relief, to the Web-based Cost Basis Solver. This is a tool for automatically calculating the securities payment and cost- basis data needed to complete Schedules B and D. It saves the tax preparer from having to research stock splits, spin-offs, taxable and non-taxable distributions, and other relevant corporate actions.

Cost Basis Solver is, in fact, a private-label version of XciTax, marketed jointly by Standard & Poor's and New York-based Xcitek. The online service draws on both the S&P Daily Dividend Record (equity and mutual fund dividend payment information dating back to 1990) and the Xcitek Cost Basis Database (corporate action and tax-impact securities data back to 1990).

Tax Act Rife with Investment Implications

Tax preparers who double as personal financial planners will be dispensing reams of advice in the coming year to ensure their clients derive the maximum benefits stemming from the Jobs and Growth Tax Relief Reconciliation Act of 2003.
More than 20 million individual returns are expected to benefit immediately from the application of lower dividend tax rates, according to a CCH explanatory guide. However, a financial professional can help taxpayers determine whether they would be better off using the dividend income to take a deduction for investment purposes, or whether they should include the dividend as income taxed at a favorable rate. The answer, of course, depends on the amount of investment expenses incurred and the applicable tax rate.
Under the new act, dividends may be taxed at the same rate as capital gains-that is, at 15 percent for most taxpayers, or 5 percent for taxpayers who fall in the 15 or 10 percent income tax bracket. Before 2003, dividends were taxed at ordinary income tax rates, which could be as high as 38.6 percent.
Tax planners will want to keep an eye on clients' investment portfolios, suggests the CCH guide. It's worth noting, for instance, that dividends received from a regulated investment company or real estate investment trust qualify for the lower dividend tax rate in certain circumstances. Also, dividends paid by an S corporation should be eligible for the reduced rate.
However, dividends received from a tax-exempt entity do not qualify for the lower rate, nor do dividends received from a mutual savings bank if the bank claims a dividends-paid deduction. Similarly, dividends received on employer securities in certain retirement plans do not qualify if the employer takes a dividends-paid deduction.
Dividends received from a foreign corporation qualify for the lower rate only if the entity itself is qualified-that is, has its stock traded on an established U.S. securities market, is subject to a tax treaty that meets certain qualifications, or is incorporated in a U.S. possession.
Meanwhile, more than 15 million individual tax returns are expected to be affected by the lower capital gains tax rates, states the CCH guide. Most capital gains will now be taxed at 15 percent, versus a maximum rate of 20 percent prior to the act. If a client has taxable income that is subject to a 10 or 15 percent income tax rate, a portion of the client's taxable gains may be subject to a new 5 percent rate. Higher rates still apply to certain types of capital assets, such as collectibles.

Bruce Hechler, managing member of XciTax, says, "The accounting community is moving toward financial planning"-and understandably so. "If you look at the type of information a financial planner deals with, and compare it to what a tax planner deals with, this is not a big leap."

"Certainly the big [CPA] firms have discovered this," continues Hechler. "It's not a revelation. But I think more of the small firms are figuring this out as well." As a result, "All of them need securities information in various forms, and we think we can ride that coattail."

Another trend that is helping financial professionals fill their dual roles as tax preparers and financial planners is the popularity of online file cabinets, organizers, and other sorts of document management systems that allow practitioners to commingle a wide range of Web-native and scanned-in documents, all in one place.

Take the case of Goldenberg Rosenthal. With 20 partners and 130 professional and support staff, this Jenkintown, Pa.-based accounting firm currently prepares approximately 2,000 1040s each tax season using ProSystem fx Tax. Those returns are now being saved electronically in PDF format, and stored in the Web-hosted GoFileRoom from Immediatech, headquartered in Englewood Cliffs, N.J.

GR's plans for GoFileRoom extend beyond tax preparation to include its tax planning, estate planning, and investment review services. Chief information officer Salvatore DeRose notes that the document management system can accommodate a wide range of automatically imported or scanned-in financial documents: tax returns, 1099s, bank statements, stock certificates, brokerage reports, wills, and deeds. "Ultimately, we would like one electronic store for all of these documents so that if you were to go to a client's house, you could download and store locally on your machine all the documents you would need" for that meeting, he says.

Goldenberg Rosenthal tax principal Frank Pileggi stresses that a key benefit of GoFileRoom is "it frees up mobility." That's important, he explains, because "when you can be in front of clients, that's when planning opportunities are created."

Tax/PFP Integration

AccountantsWorld, through the integration it provides between its Tax Relief and PFP Relief packages, has been in the forefront of providing tools that accommodate both the tax and financial planning needs of its customer base.

The Personal Financial Planning tool features a "financial profile" for listing all asset, liability, income, and expense data for each client, from which budget, net worth, and other financial calculations are derived. The profile data-including name, address, and Social Security number-can be "flowed" from the completed tax return.

PFP Relief is meant to help clients attain their financial goals, which might mean putting away enough money for retirement, paying for children's college education, or allocating investments more productively.

"Most [of our competitors] think of themselves as tax software vendors; we are in the practice development business," states president Chandra Bhansali. Since tax professionals already have access to so much crucial financial data, it makes sense for AccountantsWorld to help them find ways to use this data as a cornerstone for building new practice areas that better serve their clients.

With that goal in mind, AccountantsWorld forged its alliance with XciTax to market the private-labeled Cost Basis Solver. This Web-based service enhances the practitioner's tax planning capabilities by allowing him or her to better leverage the tax advantages of capital losses using real-time data, according to Bhansali. What's more, "Cost basis software is probably one of the easiest tools for accountants to use," he insists.

With so many consumers more heavily involved in the stock market than ever before, they want to know for capital gains purposes what the precise value of the stock was when they bought it. As a result, "Many accountants are using [cost-basis calculations] as an additional source of revenue," says Bhansali.

XciTax is looking to line up three or four other tax preparation software partners in addition to AccountantsWorld, according to Hechler. "That's our marketing strategy." Discussions already are under way with companies "that have existing products we complement or supplement. Some of them have huge customer bases," he reports.

Gwen Gruber, tax preparer with Hansen Jergenson Nergaard in Bloomington, Minn., estimates that at least 30 percent of the 1040 returns the firm handles have "capital gains issues," largely involving dividend reinvestment plans. "We were doing [the calculations] by hand on Excel," she recalls, before subscribing to XciTax. "This is really handy," says Gruber, as it saves the company valuable time.

Suppliers of Tax/Financial Planning Tools

Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.

Register now for FREE site access and more