From its origins as a response to client inquiries on how transactions would affect their tax returns, tax planning has morphed into a year-round enterprise for practitioners, as well as a solid builder of client loyalty.Yet it's still a relatively well-kept secret, according to Jorge Olivarietta, senior product manager at Lacerte. "When a client comes in for tax prep, it's not just about inputting the information and creating a return," he said. "An accountant's job is to take the inputs, and make sure that what the customer is planning on doing is the right action. At the end of the day, you want to come as close to zero liability as possible."
Ron Sosinski, the product manager of customer relations for CCH's ProSystem fx Tax, agreed. "Planning is an additional service practitioners can offer to help clients make financial decisions. Tax laws aren't getting any easier, and it's more important than ever before for clients to know what effect their actions will have on their taxes."
Teresa Mackintosh, vice president of marketing at Dexter, Mich.-based Creative Solutions, noted that planning is coming to the fore as the population ages. "As we embark on the time that Baby Boomers begin to retire, we're seeing a resurgence in tax planning. People need to project into the future more than one year, and act appropriately when faced with various retirement options," she said. "Since tax situations can impact the outcome of retirement events, tax planning is a good way for accountants to help their clients bridge from a working life to retirement and face the many decisions and opportunities that will be available to them."
For Holliston, Mass.-based preparer Larry Novick, tax planning is essential in building client loyalty. "If someone comes in on Jan. 1 and says, 'Guess what I did last year?' all I can say to them at that point is, 'Guess what it'll cost you?' Tax planning is ongoing work - you don't want to owe anything and you don't want a refund, because you don't want to give the government a non-interest-bearing loan."
Novick conducts mid-year check-ups for his clients to assess their situations. "They go to the doctor for a yearly check-up, and I tell them they should do the same for their taxes and finances. I send them a questionnaire on July 1, and people continue to come in right through the first of December."
"The service is complimentary," said Novick. "It's a good way to build rapport. After the consultation, if I have to do an additional service, I'll charge for that, of course. It builds client loyalty because you're always in their face. I don't want referrals; I want advocates. I want them to shout my name from the rooftops, and this generates that kind of loyalty."
Tools for planning ahead
As a result, most tax prep software packages have the capability to do simple "what-if" projections, and some have stand-alone modules with more sophisticated capabilities.
For example, Franklin, N.C.-based Drake Software has three-year projection capability built into its Tax Solution, and TaxSimple, based in Randolph, N.J., has tax planning worksheets to project tax liability to future years. ProSystem fx, Lacerte, UltraTax CS and GoSystem make available data-mining tools, which aid the practitioner in finding planning opportunities.
Washington-based BNA sells its Income Tax Planner as a stand-alone product. It can import data from leading compliance systems, including GoSystem, Lacerte, ProSystem, UltraTax CS and CrossLink, and generates reports and graphs, as well as client letters. It provides federal income tax projections for up to 10 years or cases, and seven modes of analysis, including years within cases, cases within years, adjustment, difference, taxpayer-spouse, annualization, and minor child. The program also allows the practitioner to specify whether or not to sunset the provisions of the 2001 tax act.
"By handling multiple cases and multiple years, we can help a client develop a strategy to time deductions and income to achieve the lowest effective tax liability," said Ken Kanter, partner and director of the national tax practice at CPA and business advisory firm J.H. Cohn.
"Many clients today are subject to the alternative minimum tax, especially clients that live in high-tax states such as New York," he said. "By projecting their income and deductions over a two- or three-year period, we can determine when would be the best time to pay their state and local income taxes, and at the same time avoid any underpayment of estimated tax penalties. By timing this deduction properly, we can help them achieve a tax deduction and avoid the AMT."
Another alternative to performing multiple-year projections, noted Kanter, has been the ability to see the impact of accelerating income to a year that a client may be in the AMT and pay tax at a lower rate compared to generating that income in the subsequent year.
Kathy Tollakesen, a CPA and CFP at Midwest regional firm Sikich LLP, likewise uses tax-planning software to identify and plan for her clients by projecting different "what-if" scenarios. "Due to the recently passed Pension Protection Act of 2006, Congress has given us an opportunity to do significant charitable contribution planning," she said. "Individuals may now withdraw funds directly from their IRA and transfer them to qualified public charities. The individual will not have to include the IRA distribution in income for the current year, and will be able to receive a charitable contribution for the payment to charity. However, this technique is only available for calendar years 2006 and 2007, without any carryover to a subsequent year, and the owner of the IRA must be age 70-1/2 or older."
From prep to planning
CCH produces two planning capabilities for its ProSystem fx Tax product, noted Sosinski. "Tax Projector is part of the ProSystem fx program. It takes information from the current year and shows what taxes will be for the following year based on phase-ins and phase-outs, higher rates, loss of a dependent, etc."
ProSystem fx Planning is a separate module, and is much more sophisticated, according to Sosinski. "ProSystem Planning integrates with ProSystem Tax to act as the base year, and from there the practitioner can project out for multiple years," he said.
CCH's Client Relate moves the planning process ahead a step by combining its Tax Research Network with ProSystem fx Tax to pinpoint clients that are affected by new tax developments or that may benefit from additional services. It searches the practitioner's database of tax returns and finds clients who are potentially affected by a particular development or issue. It also includes sample client letters, spreadsheets and filled-in forms to use for a client's particular situation. The practitioner can customize their own search criteria to identify clients.
Creative Solutions provides tax-planning capability within its UltraTax CS compliance software, according to Mackintosh. "It can project next year's tax liability and determine estimated payments, based on this year's information," she said.
A separate module, UltraTax Planner CS, can be used for more sophisticated scenarios. "Planner CS can create an unlimited number of scenarios over any number of years, and analyze different tax strategies. With its built-in word processing and graphing capability, it facilitates communicating the results to the client," she said. Planner CS integrates with UltraTax CS and its sister Thomson product, GoSystem RS.
Tax Alerts, which links RIA's Checkpoint tax research with the compliance software of UltraTax CS and GoSystem RS, keeps the practitioner informed of important events that could potentially affect specific clients. The service recommends specific actions to take, and includes suggested client letters to explain the issue. "It acts as a criteria identifier that works in conjunction with a data-mining tool to allow the practitioner to identify a subset of clients affected by a given tax situation," she said.
Lacerte has built planning capability into its basic compliance program, according to Olivarietta. Its Lacerte Tax Planner goes a step further, allowing the projection of future tax liability under multiple scenarios.
"The Planner is a separate product that can be launched within the program," he said. "It will take tax data from the current year and send it into the planner to create a base year. It tells you, 'This is where you start from and if you take certain actions this is where you'll end up.'"
Lacerte also has a Tax Analyzer, which helps identify potential current and future tax savings by identifying clients who could be affected by new tax laws. "Tax Analyzer gives the preparer things he may want to consider to provide savings for a particular client," said Olivarietta. "For example, it might suggest that the taxpayer should consider contributing more to his 401(k) because the limits are increasing, and it calculates the effect of this on his tax in future years."
For those whose clients have multiple Schedule D transactions, Wolters Kluwer Financial Services' GainsKeeper can be an essential planning tool. "The IRS has highlighted Schedule D as one of the opportunities for people to fudge the numbers and not report accurately," said GainsKeeper product consultant Shawn Warner. "They believe there's a huge gap embedded in Schedule D reporting."
"Too often, accountants and individuals have lumped securities together at the gain or loss level," he continued. "They want accountants to itemize."
GainsKeeper imports trades from a client's brokerage accounts to provide a complete Schedule D. It contains a "what-if" tool that simulates the tax consequences of a trade before the order is placed. It displays holdings by stock exchange, industry type and market capitalization to aid in meeting a client's diversification goals.
"A stock split is a simple calculation, but when you get into corporate spinoffs, it becomes a daunting challenge to get it right," said Warner. "Gainskeeper fully automates all corporate action adjustments."
Of course, with all the software available, it is still the expertise of the individual practitioner that determines the end result for the client.
"The software may do much of the number-crunching, but at the end of the day it is the experienced professional that makes the recommendations to the clients and helps put the plan into action," said Kanter.
Noted Olivarietta, "Tax planning is a piece of the larger financial planning picture - looking at life's events and seeing what impact those have on a taxpayer's future tax liability."
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