Larry McKoy

2010 Year-end Tax Planning Time to ‘Kick It Up A Notch!’

Client indecision is a decision, and often the wrong one. How to do more than just provide options.

November 22, 2010
by Larry McKoy

We are reminded every day of the current uncertain tax environment. The more news our clients read, the more confused they become. I am constantly looking at prior tax laws trying to predict Congress’ next move. What advice should we give clients in these tough times?

Reading articles and going to conferences gives you all the raw material you need to construct good planning ideas for your clients. If you need planning strategies, you don’t have to look very far. Using these tax law strategies and adding creativity, objectivity and analytical skills have always been the strength of CPA tax planning. But as it stands now, that is not enough.

This year’s planning meetings will give us an opportunity to help clients with making decisions when clear vision does not exist. We have all seen some level of uncertain times, but this is the worst i that I have seen. See if any of the following situations sound familiar:

While speaking to clients about the Roth conversion, Charlie CPA was pointing out that his strategy was very sound mathematically. (This strategy has been adequately described in articles and webcast from the AICPA’s PFP and TAX divisions all year). Charlie found that while the basis of his recommendation was sound, clients were not jumping at the chance to convert. Charlie thought clients believed that “if it looks too good to be true, it probably is.” But he later discovered a different dynamic. He found two reasons they were hesitant to convert. First, some clients do not want to give the government money — no matter what. (Have you ever seen a client’s hand shake when writing a big tax check? Some of us have.) Second, some “do not trust government” when it comes to tax planning. Clients all rationalized this with “Congress will just take away the Roth benefits and I will lose.” 

This situation is becoming common. In a recent meeting with a business client, Sue CPA suggested accelerating income to take advantage of lower tax rates for dividends achieved in a strategic business restructuring. The client was presented with a well-thought-out strategy (using key assumptions) that would save money. Sue was certain this strategy was good for this client which had always implemented her strategies in the past. This year, the client was frozen with inaction due to the uncertainty and lack of trust in the current tax system. Most clients are “common sense wise” even if they may be “tax law illiterate.” Sue’s clients just didn’t feel right paying tax in advance of when it was absolutely required.

Lindsay CPA has been presenting planning options to clients related to the much-publicized Bush tax cuts and the possible (maybe probable?) higher tax rates in the coming years. When presented with a well-thought-out strategy to accelerate income into the current year, her clients are still reluctant to act. They are concerned about playing a “game” in which rules can change both before and after they make a decision. We often have clients ask, “Can the government really pass tax laws after I have implemented my tax strategy retroactively?” And the answer is “yes.” 

Estate and gift tax uncertainty may be the most egregious example of poor congressional tax policy. Clients have a right to know how to structure their affairs to reduce tax liability. I have found that this is not about avoiding paying tax. Many of my clients expect to pay some tax. I find they care more about not paying more tax than their neighbor! They want the tax rules to be fair, predictable and simple. Given the dramatic changes and uncertainty surrounding estate and gift tax laws, it’s easy to see why clients are reluctant to discuss planning.

Join us at the Advanced Personal Financial Planning Conference from Jan. 9-12, 2011, in Las Vegas where Larry will be presenting on Income Tax Opportunities in Wealth Transfer Planning.  Early registration ends for the conference on Dec. 17, 2010!

What clients need from CPAs (in addition to well-thought-out strategies) is a “total analysis” and objective advice. Advice is the key word. Too often, CPAs lay out an outstanding analysis that concludes in two or three options and then ask clients to choose one. Clients usually don’t understand the tax law and look to CPAs for help to make tax decisions. Clients want this question answered: “What would you do if you were in my shoes?” And in the past, our analytical and logical skills showed us a clear path. Every situation is different, but CPAs are challenged, more than ever, to not just lay out options, but to also help clients make a decision. Client indecision is a decision and will often be the wrong decision. 

Be prepared to address questions on your client’s mind, such as: What are the possibilities for tax changes? Will I be better off taking income this year or in 2011? Should I do estate planning when so many unanswered questions loom? Will I be better off on the sidelines while the tax law becomes predictable? No one is in a better position than CPAs to show clients the tax action plan that is custom designed for them. 

More than ever it’s important to put yourself in your client’s situation. Consider their family situation. Think about their financial situation. What is their tolerance for planning strategies with no certainty of success? These issues allow you to custom design action steps for them.

If you tailor your recommendations to each client you will be able to take him or her from “options” to “action.” CPAs cannot guarantee the results of tax planning. What we can guarantee is the process we take to formulate our recommendations. Each recommendation should contain the following:

  • Analytical comparison of all options to formulate an objective list of solutions
  • Review of the client’s situation to check how the various solutions fit this client
  • Consideration of the client’s tolerance for taking risks to achieve above average results

I compare these times to the recent financial meltdown. Clients wanted answers and advisers did not have them. I was very impressed watching CPA peers, particularly those with the Personal Financial Specialist (PFS) credential, stand with their clients during those horrible times. They helped clients and each other make the tough decisions to survive. Many other advisers hid and did not answer the phone because they did not have answers.

CPAs have a unique opportunity to stand by our clients during this stressful time and help them make appropriate tax planning decisions. Clients appreciate and value CPAs’ objective advice and assistance. Time to step up year-end planning a notch (or two)! BAM!

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Larry McKoy is a Senior Tax Partner at Goodman & Company LLP with over thirty years of experience working with tax issues and opportunities for his clients. He works in the areas of estate and financial planning as well. Larry currently serves on the AICPA Tax Executive Committee and the PFP Conference Planning Committee. He serves as liaison from the Tax Executive Committee to the PFP Executive Committee.

The PFS credential is exclusively available for CPAs. Prepare for the November/December 2010 PFS Exam with a 32.5-hour CPE self-study course covering estate, retirement, tax, investment, and insurance planning. Discounts are available. Order at CPA2Biz website. More in-depth education on the same topics is available as well. For more information, go to aicpa.org/pfp/pfs.

All members of the AICPA are eligible to join the PFP section. For CPAs who want to demonstrate their expertise in this subject matter, apply to become a PFS Credential holder.