Expand Your Financial Planning Practice Through Your Clients Tax Return AICPA Advanced Personal Financial Planning Conference Speakers: Lyle K. Benson, Jr. CPA/PFS, CFP Glenn S. Freed, CPA/PFS 1
Why use tax returns to develop personal financial planning Overall picture of clients financial situation Uncover opportunities for planning that client has overlooked Details of cash flow/income situation Use in conjunction with client balance sheet 2
Regulation 7216 How does this impact you if you are a tax preparer? Obtain written consent from clients Disclosure of tax return information (general, specific, foreign) Disclosure of use of tax return information Criminal penalty for knowingly and recklessly disclosing or using tax return information More information at pfp.aicpa.org. 3
Dependents Children Education planning Gifting Income shifting remember kiddie tax rules Gift Tax Returns Elderly parents Estate planning Dependency rules Future financial commitment 4
Income Understand the Sources Wages, Self Employment Income, Partnership Income, etc. Deferral opportunities 401(k), 457, 403(b) Retirement plans from former employers Consolidate IRAs from multiple sources Social Security benefits SS Maximization Strategies Does a Roth Conversion make sense? 5
Interest Schedule B Source/alternatives/assets managed Taxable Tax Exempt Critical to understand their investment strategies Bank Accounts FDIC limits Cash levels emergency fund Is there too much in cash? 6
Dividends Schedule B Source funds stocks Performance Consider alternatives to these investments How are assets titled? How are assets custodied? Tax efficiency of investments Impact of market downturn Too much concentration in one stock? Review tax impact and potential changes to tax law. 7
Schedule C Succession planning Retirement plans Determine income shifting opportunities among family members Risk management: Discuss range of options to structure the business Compare to LLC, Corporation, etc. Home Office Hobby Loss Rules 8
Schedule D Capital Loss carrovers Trading activity fees / expenses Portfolio churning? Loss harvesting part of ongoing wealth management Coordinated with tax plan? Core of investment strategy 9
Retirement Plans/Distributions Required Minimum Distributions being taken? Net Unrealized Appreciation (NUA) from 401(k) Should there be distributions? Beneficiary elections Where should client be taking money from? Has a Roth Conversion been considered? Cash flow needs sustainable withdrawal rate 10
Schedule E LLCs, Subchapter S and Partnership Income? Passive Losses? Self-Employment Income Valuation issues IRS attack on Family Entities Investment partnerships Hedge funds Venture capital Other alternative investments Any potential tax liabilities arising from negative basis? 11
Schedule E Real estate Risk management Multiple owners Form of ownership Estate planning Passive activity loss rules Vacation home rules Like-kind exchanges 12
Schedule E Trusts (1041) How are assets being managed? Trustee adequacy What is the purpose of the trust arrangement? Is investment strategy appropriate? Is trust income being reported properly? Distributing income or retaining? 13
Simple, SEP, IRA Maximizing opportunity Investment choice What is the best choice for deferral opportunities? Consider qualified plan/defined benefit plan Consider hiring spouse 14
Itemized Deductions Charitable Contributions Appreciated securities Timing of Deductions CRUT, Charitable Lead Trust Private foundation Donor Advised Funds IRA distribution direct to charity Contribution carryovers IRS documentation rules 15
State Taxes Growing importance Residency rules Statutory Domiciliary Multiple state residency Planning opportunities and pitfalls Potential tax liability in other states Timing of payments and AMT 16
Medical Expenses Long Term Care Insurance Health Insurance Self Employed? What is current coverage? Potential health issues COBRA if job loss Medicare Rules Eldercare issues Impact of Obama Health Care Act Corporate medical reimbursement plan Health Savings Accounts 17
Miscellaneous Deductions Investment fees Reasonable or excessive? Other expenses 2% AGI Planning opportunities to avoid loss of deductions How to shift? Bunching deductions into one year Allocating deductions among Schedule A, Schedule C and Schedule E 18
Interest Expense Mortgage interest expense rules Planning opportunities Limitations (new $1.1 million rule) Refinancing opportunities current rate environment Investment interest expenses carryover rules Other interest tracking use of funds Margin Interest 19
Partnership Tax Returns Current partnership agreement Valuation Buy Sell Retirement plans Employee benefit plans Partners Profit Allocation Pro-rata Special Allocations Guaranteed Payments Multi-state operations 20
Corporate Tax Returns Total assets Compensation of officers reasonable? Rents who owns the property? Pension and profit sharing Employee benefit plans Shareholder agreement Partners Succession plan Deferred compensation agreements Multi-state operations S-Corp vs. C Corp S-Corp adequate basis for losses? 21
Gift Tax Returns Number of donees Previously filed 709 Split gifts 529 plans special rules Valuation discounts Basis and date Generation skipping Exemption availability Life insurance trusts Gifting Strategy 22
Alternative Minimum Tax Impact on overall planning Current/proposed changes Stock options Planning opportunities for ISO exercise AMT Credit Carryover potential loss of credit 23
2011 Changes Impact on your clients situations Potential future impact of tax rate increases Potential expiration of Bush tax cuts - status Estate tax status 24
Checklist to use in your practice How to utilize this checklist Analysis of a Tax Return for Personal Financial Planning Done Dependents and Filing Status N otes D oes t he client have children? Underst and any educat ion planning opport unit ies. D iscuss gift ing opport unit es w it h t he client. C onsiderincome shift ing t o t ake advant age oft he children's low t ax rat e. Have gift t ax ret urns been filed? D o t he numberand ages ofdependent s indicat e t hat income cont inuat ion needs are likely t o be high? D oes t he client have elderly parent s w hom t hey care for? D iscuss est at e planning w it h t he client. Review t he dependency rules t o be sure t he parent s can be claimed. D iscuss t he fut ure financial commit ment oft his care w it h t he client. Is t he client divorced? C onsiderfiling st at us and dependency exempt ions in divorce sit uat ions. Done Income N otes What is t he source oft he client 's income? Underst and t heirsources ofincome -w ages,self-employment,part nership,et c. Are t here any income deferal opport unit ies available given t he client 's invest ment income source? D iscusss t he benefit s ofsaving t hrough 401( k),457,403( b),sep,orira's. D oes t he client have income from a ret irement plan st il held w it h formeremployers? D iscuss roloverofunds t o an IRA orconsolidat ing IRA's w it h t he client. D oes t he client have social securit y income? C onsiderw het herany oft he social securit y income maximizing st rat egies might apply. Is t he family income dependent on one w age earner? Done Are maximum 401( k)cont ribut ions being made? Schedule B What are t he sources oft he client 's int erest income? N otes 25
Summary We can learn a lot about someone through their tax return. Many tax and investment planning opportunities can be uncovered with a thorough review of your tax return. 26
Thank You Lyle K. Benson, Jr. CPA/PFS, CFP L.K. Benson & Company, P.C. lyle@lkbenson.com Phone:(410) 494-6680 www.lkbenson.com Glenn S. Freed, CPA/PFS Vericimetry Advisors, LLC Glenn.freed@vericimetry.com Phone: (818) 813-1351 27