Planning for the year we have

Year-end planning for 2017 will be unlike any in recent memory, with the prospect of tax reform and questions as to retroactivity hanging in the air.

“With all the discussion of tax reform, what we haven’t heard is when, if it passes, it will be effective,” said Roger Harris, president of Padgett Business Services.

“We have to plan for the law we have,” he advised. “We could get reform, which starts next year with nothing changing for this year, or we could get reform in which multiple sections have a retroactive effective date. We always have to plan for the law you have and then react to changes as quickly as you can when we know what they really are.”

Harris intends to put everything that is known to date in a year-end newsletter for clients, which he will supplement with a “stop the presses” release if and when major events happen prior to year’s end.

“We will do our year-end planning like we always do, but based on what we know at the time,” he said. “The year-end newsletter has to be flexible and if something changes we will change it, or send a correction. Everyone is holding their breath and is a little skeptical given what we’ve seen come out of Washington this year. It’s hard to count on anything until you see it actually happen.”

“The current Section 179 limit works for most of our clients,” Harris observed. “But if they’re close to the limit and get to December, it’s hard to make the decision as to whether to purchase equipment this year or wait, given the uncertainty. It’s not just potentially different limits for expensing, but other tax rates that affect any decisions. And a lot like to prepay their state and local taxes to get a deduction in the current year. Depending on whether or not they will be deductible, the whole decision tree changes.”

“I’m hoping that as we get closer to the end of the year, there will be more certainty,” he said. “There may be a lot of activity as we get into December, so we are telling people that if they can wait, then wait. If not, then plan based on the law we have.”

Getting the word out

“This year is one of the most important years ever for year-end planning because of the possibility of tax reform,” said Dustin Stamper, director in Grant Thornton’s Washington National Tax Office. “We’re reaching out to clients earlier and more often than in prior years because of the possibility of tax reform.”

“Every year we suggest that clients accelerate deductions and defer income. It’s always good planning because of the time value of money, but the possibility of a rate cut makes it even more powerful this year,” he said. “If rates go down, then we’re not talking about a timing benefit, we’re talking about a permanent difference because of the ability to use deductions against today’s higher rates rather than the lower rates that would be enacted under tax reform.”

“In addition, there are deductions that people could lose altogether under tax reform, such as the deduction for state and local taxes,” Stamper noted. “While the framework calls for getting rid of personal and dependency exemptions, there’s not much planning you can do for those. The planning that is possible is where you can control the timing — for example, state and local taxes for 2017 where payment isn’t required until next year. If the option exists, pay them in 2017. That will not only have a greater benefit if rates go down, but the deduction itself may go away altogether.”

Stamper recommends using up the $14,000 annual gift tax exclusion per beneficiary every year. “If you’re worried about incurring estate and gift tax in the future, use the exclusions every year,” he said. “But be extra careful this year because of the possibility of repeal. Don’t stop estate planning, because there’s a good possibility that the estate tax stays in place. But don’t use a strategy that incurs gift tax, just in case it goes away — prioritize strategies that use lifetime or annual exclusions.”

Although Stamper believes the charitable contribution deduction will stay, it might be better to take it this year, he indicated. “It will likely remain under tax reform, but may be subject to high income limits,” he said “It’s also possible that the standard deduction will be so high that many taxpayers that itemize now would not itemize next year, so it’s doubly important to make a charitable contribution this year instead of next year.”

For Beanna Whitlock, it’s time to play the “what if” game with clients who might be negatively affected by aspects of tax reform.

“It’s the clients who will be negatively impacted that you have to play with so that they are not surprised,” said Whitlock, a San Antonio-based practitioner and educator, and former director of National Public Liaison for the Internal Revenue Service. “My crystal ball is broken, but the tax reform plan has changed many times, and will continue to change until they get a bill,” she said.

“Taxpayers with five to six children will lose a lot in terms of loss of the personal and dependency exemptions, even if the standard deduction is doubled,” she said. “If you explain this to people of lower income who use the standard deduction, they won’t be particularly happy with that. The expansion of the Earned Income Tax Credit may be the great equalizer here. Wealthier taxpayers don’t have that many children, and the middle class can’t afford that many, so it will affect those earning at the lower end the most,” she said.

“You have to run the numbers, but we don’t have enough knowledge of what’s going on to do anything with the numbers. If there is a tax reform bill, it will be a compromise bill, but we have no idea what the compromise will be,” she said. “Tax professionals deal with the finite, not with a conceptual framework.”

Whitlock agreed with Stamper that it’s necessary to reach out “early and often” to clients.

“Our tax planning newsletter is early this year,” she said. “We know that they’ve already heard about tax reform, and we don’t want them discussing it with the guy at the 7-Eleven or the UPS driver.”

“The newsletter tells them that we’re on top of this and will let them know as soon as we have definite direction from Washington,” she explained. “And if they’re concerned about how this might impact them, to please call our office for an appointment.”

Andrew Harrer/Bloomberg

Plan for your practice

“For 2017, some of the same norms still apply,” said Annie Schwab, a CPA and tax manager at Padgett Business Services. “These include deferring income and accelerating deductions if the taxpayer will be subject to lower rates next year. At this point, we don’t know what the rates will be or what deductions will be removed under tax reform.”

“It’s an important time for practitioners to reach out to their clients and see how their year is going,” she said. “Perhaps they’re looking to make large capital expenditures and are undecided to make the expenditure now or wait until 2018. The practitioner can explain the impact of the different options — once December 31 has gone there’s not much you can do.”

And end-of-year planning should include planning for the practitioner, Schwab suggested. “Look back at last season, assess staff capabilities, decide if you need to ‘fire’ any clients, and get completely organized before year’s end.”

A number of states impacted by the recent hurricanes have extended the extended October due date for 2016 returns until Jan. 31, 2018, she noted. “But you could have a lot on your plate at that time,” she said. “Just because you have until January 31, don’t wait until then — get them done as soon as possible.”

“Change is coming, although we’re not sure when or how it will affect our clients,” said Tynisa Gaines, assistant director at The Income Tax School. “We don’t think tax reform will bring much change for this year’s taxes.”

Gaines advised practitioners to tell their clients to file early to avoid the possibility of becoming a victim of refund fraud. “Clients need to become more involved with their own paperwork,” she said. “Something as simple as shredding documents that come in the mail can avoid ID theft.”

The end of the year is a good time to reach out to taxpayers with children in college, Gaines added. “We help them with the FAFSA [Free Application for Federal Student Aid] form, since it requires tax return information,” she said. “It’s easier now because the form requires last year’s information rather than the current year. It can now be filled out and linked to the IRS to import the data directly into the form.”

It’s important for a tax preparation office to emphasize customer service, according to Chuck McCabe, president of Peoples Income Tax and The Income Tax School. “There will always be some attrition. Even if you have a 95 percent retention rate, you still need to replace 5 percent before you can show any growth,” he said. “That means having enough competent staff to service clients. This year it’s especially important to have a well-trained staff.”