2007 Review of Tax Planning Systems

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• September 2007 Issue
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From the September 2007 Issue

Every year, millions of Americans collectively groan when confronted with their taxes. For the growing number that are self-filing, well … you get what you pay for. But even those who use a tax professional or accountant often forgo one of the most effective means of minimizing their tax burden or increasing their refund — planning.

Planning ahead for anything makes a difference, whether preparing for a road trip, constructing a building or booking a wedding hall. Knowing what the potential variables are and how they interact is essential to achieving the desired final result — a fun vacation, a new home, a perfect ceremony … or lessened tax liability.

In a market where tax preparation is becoming an increasingly commoditized, low-revenue-yielding service, tax planning offers firms an opportunity to offer a more valuable, higher profile and more visible role in their clients’ financial matters. Unfortunately, the profession has thus far failed to fully capitalize on tax planning services. Why? Communication is a key factor.

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Your clients know that strategic investment planning helps them grow wealth in the long term. They know that estate planning helps to preserve their wealth at the end of the “long term.” They need to realize that effective tax planning will help them keep more of their wealth in the comparably short term — the next tax season (or the next several tax years). By proactively preparing for expected or potential variables that can influence a client’s tax burden, the client not only benefits from having a forecast of their liability, but also can work with their financial and tax professionals to take steps to mitigate these factors, avoid potential penalties or the AMT, and hopefully lower their burden.

All of this is just jargon for the following: “No surprises on April 15. If we know what you’ll probably owe the IRS next April, we can find ways to make you owe less while we’re still in this tax year.” More than just making IRA contributions, this means really knowing how all of the various parts of various income, assets, deductions and credits come together to affect their taxes, and then creating a time-sensitive strategy to optimize these factors. Think of it as a financial tune-up.

That’s where tax planning systems like the ones reviewed here come in. These systems allow a tax professional to input a client’s real and anticipated future financial data. Most of the systems allow planning several years out, allowing the professional to input expected salary increases, potential low and high income years, farm income, projected unearned income variations, investment interest limitations and carryovers, medical and personal casualty loss deductions, passive losses, capital gains and losses, investment interest for alternative minimum tax purposes, and planned charitable giving. There are so many variables involved. By working on the current tax year, you may be able to help prevent a client from moving up a bracket because of just one of them, but the value in planning further out is also significant.

With the client’s data, the tax planner systems then build scenarios that can be easily changed to see the effects of one variable on tax over a period of time. With the professional’s tax knowledge and the planning program’s built-in tax information and ability to quickly crunch numbers, the professional can produce a client-ready plan that shows them where they are, what they can expect and what they need to do in order to get their taxes to the ideal scenario.

Most tax and accounting professionals don’t use a true planning system and instead rely upon their previous year tax system and inputting varying sums in areas that could help the client … if they do any planning at all. True tax planning systems go well beyond this and alert the professional to potential beneficial actions and incorporate the latest tax law information for the coming years.