The holidays ahead signal the start of serious tax season preparation for most tax preparers. Staffing, training, testing new software and technology, and becoming proficient on the latest tax law changes are at the top of most preparers' to-do lists.

And the state of the economy, naturally, remains on peoples' minds.

"In recessionary times, people are looking to cut expenses," said Mike Solomon, partner-in-charge at the Philadelphia office of Amper, Politziner & Mattia. "We're experiencing a lot more fee pressure as an industry than ever before, so it will be hard to get that 3 or 4 percent inflationary increase. Clients are more closely examining their fees, as well as looking for more opportunities to reduce their tax burden."

Boston-area regional firm DiCicco, Gulman & Co. LLP, in anticipation of tax season, has just completed a major office shift, explained chief operating officer Cheryl Burke: "We re-organized the firm by practice group area. The reason is to better focus on clients, our staff and the firm. Each of our clients will now have a dedicated team - audit and tax expertise exists in all the groups."

"We planned for tax season by investing in training, and making sure the staff knows the strategy and understands the goals of the firm," she continued. "Our clients need us to be there for them, and we want to keep them focused on client service."

Rochester, N.Y.-based CPA Ellyn Schaefer said that she cut expenses by switching to a lower-cost professional software package. "We've been attending software seminars, but haven't put it to the test yet," she said.

Much of the preparation centers on the advice that practitioners will give their clients. This year, given the state of the economy, it will be more important than ever.


Schaeffer has been advising her business clients that the potential carryback period for 2008 net operating losses has been lengthened from two years to five years. "The gross receipts test has been raised from $5 million to $15 million, so more businesses are able to take advantage of the provision," she said. (For more on NOLs, see "Tax Strategy" on page 13.)

"This year, return preparers should be careful to review what questions they are asking on the questionnaires they typically send out at year's end," said Bob Scharin, senior tax analyst at the Tax & Accounting business of Thomson Reuters. "Some important tax law changes took place in the middle of the year, so it's important to know the exact date the client engaged in certain transactions."

"For example, the sales tax deduction for car purchases took effect for purchases after Feb. 16, 2009," he said. "The homebuyer credit started out as a first-time homebuyer credit, but it's now extended to current homeowners who are moving. Changes in the provisions took effect for purchases made after Nov. 6, 2009. Other law changes that may affect what a practitioner asks are changes in the Hope Credit, and in the Energy Efficient Home Credit for 2009."

"Otherwise, it looks like the late-year changes that will occur will be more prospective in effect," Scharin said. "The AMT patch has already been enacted, so there won't be that kind of late-year change."

The conversion of a traditional IRA to a Roth IRA, previously only available to those with modified adjusted gross income of less than $100,000, will be available in 2010, noted Amper's Solomon: "The government is giving a tax benefit rarely afforded."

"They're enabling anyone to make the rollover, and they're allowing you to pay tax on the rollover in two installments," he explained. "If you do the rollover in January 2010, you can pay the tax in 2012 and 2013 [on the 2011 and 2012 returns]. The government determined that when you convert, it means they get more tax revenue. Since most people don't like to pay up front, the government gives a tax break to encourage taxpayers to do it. That decision to do it or not will be a major question for CPAs to deal with this coming tax season. It's something they should inform their clients about during the tax season."

"Practitioners should talk about this with their clients," agreed Scharin. "They might consider having upper-income clients make nondeductible IRA contributions for 2009 up to April 15, 2010, and that way the client can convert the funds from a nondeductible traditional IRA to a Roth IRA. It's a way to put them in line to take greater advantage of the Roth IRA."

Rick Rodenbeck, tax practice leader at the Kansas City, Mo., office of cbiz, cautioned that the conversion might result in higher taxable income. "If you convert at the beginning of 2010, future appreciation is no longer taxed, but you have to compare the marginal tax rate for 2009 and what you think the rate will be in 2010."


Those with some appreciation in their portfolio should consider making gifts of appreciated stock to charity, instead of cash, advised Rodenbeck. "Even though overall their investments might not have rebounded that much, there still might be some gains in the short term, which they can gift to charity," he advised.

"Overall, it's been a year of extremes," he said. "If you're in the highest of income brackets, you want as much income this year as you can have because the tax rates might not go down. On the flip side, if you have a loss, you want the loss to be as big as you can because of the carryback rules. A lot of clients in 2008 had losses in their business entities but the business was too large and couldn't be carried back more than two years. Now, the small-business limitation has been removed and companies can carry back the loss. That can make some people refocus between now and the end of the year."

There are a number of strategies to advise clients on before the end of the year, according to Ann Gunst, CPA, CFP, vice president of financial planning for Lenox Advisors. "High-net-worth individuals need to be reminded that gifts up to $13,000 per person will not be subject to the gift tax. But the gift needs to be complete by December 31," she said.

Tax loss harvesting is something that should be considered, she advised. "With current market conditions, a lot of portfolios have unrealized losses. The taxpayer can take advantage of these by selling off some of them," she said. "Up to $3,000 of capital losses can be used to offset ordinary income."

"Where a taxpayer has both a capital loss carryforward and unrealized gains in his portfolio, he should consider selling off some positions to take advantage of the loss carryforward," she said. "And with Congress looking to increase the capital gains rate in 2011, it might be a good idea to take some of these gains in 2009 or 2010," she said. "With all the stress on the economy, it's not likely that they will increase the rate for 2010."


Gunst agreed that conversion of a traditional IRA to a Roth is highly attractive. "The beauty of Roth is that after age 591/2 all withdrawals are tax-free, so long as it's been held for more than five years," she said. "But if higher tax rates in 2011 and 2012 are a problem, it might be better to pay tax immediately in 2010, rather than defer it to those years."

Another factor in favor of a Roth IRA is that a traditional IRA is subject to ordinary income rates at death, whereas the Roth is not because taxes have already been paid, Gunst noted. "So if you're planning to pass assets to your estate tax-free, you want to make use of the conversion," she said.

"You have to analyze a Roth conversion on a case-by-case basis," she said. "Not everyone is an ideal candidate. For example, a person that does not have non-retirement assets to pay the taxes should not convert. Taxes for a Roth conversion are calculated on the date of conversion, and that liability has to be paid."


The health care bill will be a major topic of conversation among tax preparers and their clients, said Solomon. "In its current version, it carries quite a bit of tax provisions to pay for universal health care ... . We will have to follow what the bill ultimately looks like and how much of a tax burden it will be for upper- and middle-income taxpayers."

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