As the year winds down and holiday anticipation builds, tax professionals are performing their annual rituals of getting ready for tax return season by checking supplies, test-driving software, training additional staff and packaging year-end planning tips for their clients."It's never too late for tax planning," said New York-based CPA Marc Albaum. "You've got until the ball drops to take action, and if you do it later than that, then you've got an early start for 2008."
The most important deadline for taxes is the month of December, not April, agreed Edward R. Marcum, tax practice leader at Clifton Gunderson LLP, a Midwestern-based regional accounting firm. "This is your last opportunity to plan, strategize and execute on tax minimization."
"Higher pension contribution limits have been permanently extended, so plan to maximize your contributions with these higher limits. There are some easy-to-execute strategies, but most strategies require a level of investment, such as maximizing your contributions to a 401(k) or your IRA," Marcum said. "Beware of strategies that lower your taxes without some level of investment in money or effort."
Year-end planning helps the professional schedule his clients before the rush begins, as well as organizing the information for the return itself, observers noted.
"Some of the basics for planning for individuals involves reviewing levels of income and deductions for this year, and projecting them into 2007," said Mike Hirsch, tax partner at Texas firm Weaver and Tidwell.
"If there are certain things you can control, there can be tax savings from control of tax rates and the alternative minimum tax, and capital gains and losses. It's also important to look at charitable donation tax planning, especially in the area of making cash donations of appreciated stock," he said.
"For some of our clients, there is the possibility of doing bunching strategies," continued Hirsch. "The increase in the standard deduction can make it advantageous to bunch two years' worth of deductions in one year and take the standard deduction the next year."
Hirsch noted that there is still time to take advantage of the Code Section 179 expensing for depreciable business assets before the end of the year. "The additional larger benefits were supposed to expire, but have been extended to 2009."
"Something that hasn't received much publicity is the age change for the kiddie tax," Hirsch said. "The age has been raised from 14 to 18. This is fairly significant, because taxpayers with a child age 14 to 17 who were planning to report the child's interest or dividends on the child's return now must wait until they're 18."
The kiddie tax taxes a portion of the child's investment income at the parents' rate.
The recently passed Pension Protection Act of 2006 has given an opportunity to do some significant charitable contribution planning for individuals over 70-1/2, according to Kathy Tollaksen, a CPA at Aurora, Ill.-based Sikich LLP. "Those individuals may now withdraw funds directly from their IRA and transfer it to qualified public charities," she said.
"The individual will not have to include the IRA distribution into income for the current year, and will be able to receive a charitable contribution for the payment to public charities, while at the same time satisfying the minimum distribution requirement. But this planning technique is only available for calendar year 2006 and 2007, without any carryover to any subsequent year," she said.
The contribution needs to go directly from the IRA to the charity, Tollaksen emphasized. "The IRA administrator can make out the check and the taxpayer can deliver it, but the check cannot be made out to the taxpayer who then gives it to the charity," she said.
As a result of the recent elections, some taxpayers may want to accelerate their income and pay tax now if they think the change in Congress might result in higher tax rates, said Robert DeMeola, partner-in-charge of J.H. Cohn's New York office. "Anytime we're in an election year, clients are willing to spend more time in planning," he noted.
The firm does not outsource its returns, according to DeMeola. "We don't outsource anything. Any good business would consider it, but when we did consider it, we decided against it. Our clients hire us to do their returns, and we don't want to lose quality control. We'll hire our own staff within the country to take care of our own work."
Taxpayers should understand that the pretax return on investment is not as important as the after-tax return, according to Chris Fronk, CPA, CFA and portfolio manager at Chicago-based Northern Trust Quantitative Management.
"Normally, the further you can defer capital gains into the future, the better, unless rates are going up," he said. "If capital gains rates go up to 20 percent, it's probably still better to defer realizing the gain, but if it goes up, say, to 28 percent, the taxpayer may be better off to pay some of the gains on the lower rate, so when he pulls out in a couple of years he only pays tax on subsequent gains."
Gene Polley, senior business advisor at Fiducial's San Diego office, gets much of his tax work done during the year-end review that he encourages clients to do. "That way, we've got everything racked and stacked for March 15 or April 15. It's always a smoother return for clients who go through the review."
Matawan, N.J.-based CPA Salim Omar believes that customer relationships are vital in the face of increasing competition. "More franchises are entering the market, so you have to keep a good relationship with your existing clients," he said. Each year, Omar rents out a restaurant and invites all his previous-year customers to a client appreciation party. "Then in January we send out a client organizer, and phone them to make sure they received it, and schedule a time they can come in."
Van Ballantyne, a Greenland, N.H.-based preparer, also tries to begin the process early. "We like to begin in May, and take a proactive position throughout the year," he said. "We do mid-year and year-end reviews, and try to train our clients to know what our expectations are. Since we're a classic write-up practice, we control the client's records throughout the year, and have a headstart as to what position they're in."
Ballantyne said that one of the most important things during tax season is coping with the additional stress. "I'll have a masseuse come in and give chair massages to the staff. It relaxes them and helps them go back to work refreshed, and it also builds good will, even if they don't think it will help."
Jeff Corey, tax director of Rochester, N.Y.-based Bonadio Group, breaks down tax season preparation into "four Ps" - pain, process, people and profit.
"It's hard work and extremely stressful," he said, "and it's not getting any easier. There's more legislation, more regulations, and a huge drought of tax people to help you deal with it. The only way to deal with complexity is process - to make use of technology to get the work done more efficiently. We have four offices with a couple of hundred people, so we use technology to make sure people are as consistent as possible throughout the organization."
"Outsourcing is not as hot as it was a few years ago," he noted. "We've been able to get a big bang using college interns. Within a couple of years technology might make outsourcing obsolete. Scanning is now so sophisticated that we can scan in source information and it goes right into the return. But they still haven't invented a machine that will sit down and talk to the client."
On the profit side, Corey said that the firm has an Operation 1040 Incentive Program for identifying the potential for financial services. "The key is to make sure the tax people do not engage in selling," he said. "But tax time is when you're doing things that can expose the possibilities, so we try to recognize these things during tax season and give them to the financial side."
Corey also believes in stress management during the season. "We do a lot of little things we call mandatory fun - things like having ice cream or a putting contest," he said. "I don't assume a 50-year-old like me knows what a 26-year-old considers fun, so I ask them."
Jill McDermott, director of organizational effectiveness for Thomson Tax and Accounting, agrees that a little investment in stress relief will pay big dividends during tax season. "There are a lot of little things you can do, including better nutrition and exercise during tax season," she said. "A certain amount of stress may help focus, but there's a tipping point. You can take just 60 or 120 seconds to close your eyes, focus on breathing, or meditate. It helps to disengage the brain and engage the rest of the body, so when you return to work the brain becomes more focused."
"Also, a number of people I talk to said that having an animal in the office helps to relieve stress," she said.
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