Tax-planning tips to discuss with clients at year-end

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By Jeffrey R. Neher, CPA

For many CPA firms, the 2019 tax filing season for was one of the most difficult. The complexity of tax code changes, including the new Section 199A deduction, along with form and e-filing delays, made the last tax season one we don’t want to repeat. Further complicating this situation was the fact that many clients were surprised by smaller tax refunds or larger tax bills.

Given what happened this year, it is more important than ever for CPAs to work with clients on tax planning at year-end to avoid a repeat of March/April 2019 in March/April 2020. Below are some tax-planning tips, and strategies, that may help lower client anxiety ahead of Tax Day 2020, and result in more productive year-end meetings with clients.

  • Capital Gain Distributions: Capital gain distributions in 2018 were larger for many clients, causing many to question why they had to pay taxes on these distributions in the first place, when the value of their holdings was showing unrealized losses Make sure to check expected distributions, and discuss whether or not the implementation of tax-loss harvesting may help clients offset these capital gain distributions. Similarly, there may be additional capital gains that should be examined, and planned for, as a part of year-end meetings with clients. If you are not also your client’s financial advisor, you will need to ask him or her to put you in touch with his or her advisor so you can work together. If you do provide your clients with tax management, wealth management, and investment management advice and services as part of a holistic offering, then you have a key advantage—possessing all the information and estimates you need to help clients craft plans to address their financial goals next year in a tax-smart way.
  • Deductions: Itemizing deductions has become harder for many clients due to limitations on taking deductions on state and local income and real estate taxes (the SALT deduction limitation) and the elimination of most 2% miscellaneous itemized deductions. For many taxpayers, this limitation may prevent them from getting a bigger benefit for their charitable deductions. When meeting with a client who has charitable intent and wishes to make annual contributions to certain philanthropic organizations, you can suggest that they utilize a donor advised fund. This vehicle will allow for distributions to charities in accordance with the donor’s wishes, and the contributions to the fund can occur in years the client wishes to itemize. This strategy can produce an even bigger impact when highly appreciated assets are given to the charitable donor advised fund, eliminating the tax on the gain while preserving the charitable deduction for the full market value of the highly appreciated property. Helping your clients with such a plan will help you understand what they care about—which significantly strengthens your relationships.
  • 199A Deductions: The amount of the 199A deduction can be reduced or eliminated if a client’s income is too high. Reducing the capital gains may assist in keeping the client’s income below the phaseout thresholds. Strategies to defer gains using Section 1031 exchanges and installment sales to lump gains into one year may eliminate the deduction in the year the high income was accrued, but will then require the client to keepe income lower in later years to preserve the 199A deduction in those years. The key here is no one likes surprises that may have occurred on their 2018 tax returns. Planning for expected income, deferral techniques, and timing may at least reduce the surprises and leave more in our clients’ pockets.
  • Roth IRA: Even if you have done a Roth Conversion analysis for your clients in the past, it may be time to revisit given the current lower tax rates to determine if a conversion is still the best move. Yes, you have to pay the tax today, so there does need to be some liquidity to cover the tax liability that will occur. When computing the opportunity cost versus the tax savings in the future, consider that Required Minimum Distributions (RMD) may cause your client to pay net investment income tax on their investment income due to their income being above the threshold for the tax. Making a Roth Conversion to cause future RMDs to be lower, and keeping the client’s income below the threshold, eliminates this 3.8% tax. The client’s income may also then be low enough to avoid being subject to the additional 5% capital gains tax.. It is not just the income in the Roth IRA that will never be taxed, but the other tax savings that can occur due to the lowering of the RMDs for the client. Many high-income taxpayers may not need all of their RMDs to live on, and thus the amount not needed can stay in the Roth and grow tax-free.

These are just a few of the tax and financial planning tips to discuss with clients to help them prepare for the upcoming tax season. Taking the time to plan ahead now will not only make filing returns ahead of the next Tax Day a much smoother process but can also empower clients to save more in taxes—and use that extra savings to assist with their financial goals.

Jeffrey R. Neher, CPA is Co-Founder and Of Counsel at Wenatchee, Wash.-based Cordell, Neher & Co., PLLC ( By Jeffrey R. Neher, CPA

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