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Year-end Tax Plans

California CPA: December 2012

Big Opportunity for CPAs in a Sea of Change

By Gina Chironis, CPA/PFS and Leonard C. Wright, CPA/PFS

With the election over, the tax-related question is: Now what? For 90 percent of Americans, according to the AICPA, the answer is a tax increase in 2013 under current law, as CPA clients are facing one of the broadest tax increases in American history.

“It is too early to know what tax law compromise will come from negotiations between President Obama and House Speaker Boehner,” says Michael Trank, CPA/PFS with Irvine-based Wertz & Co. and member of the CalCPA Personal Financial Planning Committee. “What we know is without new legislation the Bush tax law sunsets and we are back to 2000 rates.”

So, the more CPAs can prepare their clients for this possibility, the better. It’s important for CPAs—if they haven’t done so already—to reach out to clients now to develop plans and analyze “what if” scenarios based on what Congress may do to tax rates, exemptions and overall tax policy. Some of the changes we will be experiencing include:

  • The new 3.8 percent Medicare surtax on net investment income.
  • Additional 0.9 percent Medicare tax for high-income individuals.
  • Possible expiration of the Bush tax cuts.
  • Possible reinstatement of claw-back of itemized deductions.
  • Possible increase in long-term capital gains rates.
  • Possible increase in federal estate tax from 35 percent to 55 percent, coupled with a drop in the gift and estate exemption amount from $5,120,000 to $1 million.
  • Retroactive to Jan. 1, 2012, Proposition 30 tax increases in California.
  • Reduced Sec. 179 eligibility.

Recognize Income in 2012; Defer Expenses
How can CPAs help their clients to proactively take measures to reduce their tax burden in the coming year?

For individuals, options to consider before year-end include conversion of a Traditional IRA account to a Roth IRA; rollovers from 401(k), 403(b) or 457(b) to an in-plan Roth IRA; and, according to Jay Seiden, CPA at Maxwell & Co. in Irvine, “selling appreciated assets to take the capital gain in the current year.”

For C corporations, it could make sense to distribute dividends before year-end. One possible pitfall of this approach, however, is to be aware that 2012 tax estimates may need to be revised in the fourth quarter. If a significant increase in net income takes place, it’s important to ensure that tax software doesn’t automatically annualize the income over the entire year and calculate penalties.

Client Investment Income
This is a time, too, for CPAs to help clients look for ways to reduce taxable investment income in 2013 and forward. Why? Expiration of tax cuts, in combination with the increases levied by the Tax Relief Act and the Affordable Care Act, will be costly. The result is a 189 percent increase in the tax on dividends, and a 59 percent increase in the long-term capital gains tax as the 2012 top dividend tax rate moves from 15 percent to 43.4 percent, and the top long-term capital gains tax rate goes from 15 percent to 23.8 percent.

As CPAs meet with their clients, it’s a good idea to ask them if they are working with a proactive, fiduciary investment adviser or wealth manager, and encourage them to do so if they are not. It’s important for CPAs to communicate with their clients about the tax implications of their investing strategy.

For clients in higher tax brackets, appropriate strategies to recommend include:

  • Moving from taxable bonds to tax-free bonds in taxable accounts.
  • Reducing capital gains by adopting a passive investing strategy.
  • Avoiding high-dividend equity investments.
  • Harvesting tax loss throughout the year to minimize capital gains that are reported at year end.

Investment location is important: taxable bonds, Treasury Inflation Protected Securities, commodity and REIT mutual funds should be held in tax-deferred accounts whenever possible with small-cap equities located in taxable accounts.

To help CPAs make the best recommendations, the AICPA has made available various resources for its Personal Financial Planning Division members—just in time for the historic tax law changes everyone will experience. These changes are so important that elements of the PFP Section have been opened to all CPAs. To view the resources, available at no charge through the end of 2012, go online.

A key benefit available through the AICPA PFP Section is Forefield Advisor. “Forefield Advisor offers communication tools that will make a significant difference in helping your clients through the inevitable tax law changes,” says Angie Grainger, CPA/PFS, co-chair of the CalCPA PFP Committee.
Videos and unique content can be assembled to address the fiscal cliff, Roth conversion calculators and other discussion documents. A steady flow of client communication materials will help CPAs and their clients stay up to date as changes occur.

According to Dan Thomas, CPA/PFS, CalCPA member and chair of the AICPA PFS Credentialing Committee, the topics found in Forefield Advisor include tax planning, business planning, estate planning, Social Security, government benefits, legislative highlights, special situations and a variety of life events.
Other valuable resources on the site are the Social Security Handbook by Ted Sarenski, The CPA’s Guide to Financial and Estate Planning and webinars, available online.

According to CalCPA PFP Committee member Jean-Luc Bourdon, CPA/PFS, and member of the AICPA Credentialing Committee, “we are in a unique position to take advantage of what the AICPA has to offer, particularly when the Personal Financial Planning Section hosts the first AICPA Conference since the elections.”

The conference will be Jan. 21-23 in Las Vegas. Highlights include Bob Keebler’s post-election strategies for high-net worth clients, investment-related tax strategies, Social Security strategies and more.
Gina Chironis, CPA/PFS, MBA, is co-chair of the CalCPA Personal Financial Planning Committee and CEO of Clarity Wealth Management in Irvine. Leonard C. Wright, CPA/PFS, CFP, CLU, ChFC, is a member of the CalCPA PFP Committee and member the AICPA Financial Literacy Commission, Personal Financial Planning Executive Committee, National Media Task Force and chair of the YEP Task Force.

The article above was originally published in California CPA.