Proactive Planning with Your Individual Clients During Tax Season
In this audio stream, Lyle, Ted and Scott discuss why 2012 is a critical year to proactively plan with your clients. Hear about planning techniques that need to be considered now given the many unknowns in 2013. Learn about planning opportunities that can be uncovered while you’re preparing your clients 2011 tax returns. Find out tips to communicate the value of financial planning with clients, and how you can get paid for the work you are providing and increase your bottom line by adding or expanding Personal Financial Planning services.
If you prefer, you can read the entire transcript after the jump or download this and other audio webcasts from the Personal Financial Planning Section on AICPA.org.
Lyle Benson, CPA/PFS, President, L.K. Benson & Co. Based in Baltimore, Lyle runs his practice as a multi-family office, offering traditional tax services as well as a full scope of financial planning, including estate, retirement, investment, insurance and tax planning. He oversees clients’ investment portfolios and his compensation model is retainer/hourly fee.
Ted Sarenski, CPA/PFS, President, Blue Ocean Strategic Capital, LLC. Based in Syracuse, New York, Ted has gotten a taste for providing PFP services in a larger CPA firm and on his own. He provides financial planning services and manages assets. His compensation model is a mix of hourly, retainer and assets under management fees.
Scott Sprinkle, CPA/PFS, Partner, Sprinkle Financial Consultants, LLC. Based in Littleton, Colorado, Scott runs a traditional CPA practice alongside a registered investment adviser entity. He offers a full scope of tax and PFP services, and charges a mix of hourly, retainer and assets under management fees.
LYLE BENSON: This is Lyle Benson, and on behalf of the AICPA Personal Financial Planning Division, I'd like to welcome you to our podcast today, Proactive Planning for Your Individual Tax Clients Who Are in Tax Season.
Tax season's a great opportunity to discuss personal financial planning issues with your clients. You'll have an opportunity to be in front of almost all of your individual clients over the next 60 days or so, and the tax return itself really does create a great planning tool to move into a broader discussion of personal financial planning issues. It provides a natural stepping stone to financial planning, and really gives you an overall picture of a client's financial situation.
It helps you uncover planning opportunities that you may not have thought of if you just focus on the client's tax picture and really gives you a springboard to discussing those topics beyond the traditional tax planning that you might do for clients. And it's a great service to offer throughout the course of the year once you get these ideas in front of clients and you get them talking about them.
Setting that stage for that further discussion that can happen after tax season and throughout the year is really a great way to deepen your relationships with clients, as well. Some of the areas that you'll talk about on the personal financial planning side are critical areas for clients and of great concern to any individuals out there, things like retirement planning, education funding, managing their cash flow, developing an investment strategy overall. All those elements of a personal financial planning process that you go through with clients are critical to your clients reaching their longer-term financial goals. It also adds to your firm's bottom line. Expanded services, deeper relationships with clients and higher-value work are the kinds of things that most CPAs in practice are looking for these days.
And there are many different ways to go about providing this service and to structure your financial planning practice. It can really fit your skill set, your areas of interest and what your clients are concerned about. There's no one right way to practice in this area, and there are lots of different business models of successful CPA financial planners out there.
What we're going to focus on today is to talk a little bit about how you can take the tax return process and the time you spend with clients and their tax information over the course of the next few months and really utilize that to broaden your services in this area.
This year is a tricky year. A lot of unknowns from a tax planning standpoint compounded by an election year. Tax planning seems almost impossible in this environment, but you really need to set the stage for the client discussions you're going to have after tax season and throughout the end of the year, because it may be towards the end of the year before we really know what the tax planning picture looks like and the tax rate structure looks like going forward, and may very well be not until early next year before we have that -- any clarity on that.
I think it's really critical to be flexible in your planning in this area, as well, this year, and creating that flexibility and those pivot points with clients so that you're able to adapt to what happens in the tax law later this year is going to be really critical, and you can lay a lot of the groundwork for that now.
Just think about the tax changes that come into play at the end of this year if Congress doesn't act. The Bush tax cuts expire. So ordinary income rates go from 35% to 39.6%. Tax rates on investment income rise across the board. Capital gains go from 15% to 20%, or 0 to 10% if you're in a zero capital gains tax rate. Qualified dividends are once again taxed as ordinary income. In 2013, we have the 3.8% Medicare tax coming into play on investment income for individuals with income over certain levels. All of those will have impact on investment strategies, so that investment strategy and trying to get the best after-tax return on investments is going to be really critical in this tax planning environment.
And in the estate and gift tax area, you've no doubt heard a lot about the $5 million exemption that we have now and the ability to take advantage of that by aggressively making gifts. That will revert back a million dollars at the end of the year of Congress does not act. And in all likelihood, it may not stay at $5 million one way or the other. The rate will also go from 35% to 55%. And the gift tax exemption reverts back to a million dollars. So there are lots of things going on in the gift and estate tax area, as well, that come into the planning that you should be thinking about for clients over these next couple of months.
So let's step back and dig a little deeper now into some of those planning considerations given these unknowns, how you can take some steps and try to help clients think about planning in this regard. I'd like to turn it over to Scott Sprinkle to talk a little bit about that. Scott, welcome.
SCOTT SPRINKLE: Thanks, Lyle. Good to be with you guys. I want to emphasize a couple of Lyle's points and then kind of go through where we are in the process with planning with clients and maybe helping individuals broaden their practices. I think 2012, from a financial planning and a tax planning perspective, is going to be a revolutionary year. I don't think we've ever had these type of opportunities to assist clients, and there's so much planning that you need to consider and start talking to clients on the front end of the year when you're meeting with them to go through their taxes.
Lyle's point with the Bush tax cuts expiring, I think we'd all probably look at the makeup of Congress right now, and with the election coming up, that there's probably no chance that there's going to be anything done before the election. So with that, what you need to be talking to clients about is the fact that if you're in the 33 to 35% bracket that you're going to 36 or 39.6, and with the Obama Medicare surtax, additional 3.8%, you could be paying taxes on the 43.4% tax rate.
Additionally, some of the President's proposals when we're looking at 2013 and what may happen in 2013 is you're going to see an attack, perhaps, on itemized deductions. At a minimum, we're going to see the reinstatement of personal exemption phaseouts and the reinstatement of itemized deduction phaseouts. So we -- if the Bush tax cuts expire. So we know that that's going to happen.
But some of the other proposals that are out there is for higher-income tax brackets we could see a reduction in itemized deductions, be it mortgage interest, charitable contributions, miscellaneous itemized deductions, as well as a deduction on the above-the-line deductions, such as health care, self-employed health care, retirement plan contribution, education expenses, et cetera. So it's really important to get in front of this and start talking to clients.
I think when we look at what may happen, what you have to do is plan to be flexible. A lot of this, we're not going to know what's going to occur in 2013 until we get to the last quarter, maybe the last month or the way Congress acts in this environment, maybe the last day of the year. So you have to be extremely flexible. What that means is you need to start planning on the front end, gathering data from clients on the front end, and when you're doing -- going through the tax returns, preparing tax returns, probably talking to clients about doing extensive tax projections that you can then use later in the year.
2012 with the tax environment and what you're looking at between 2012 and 2013, the additional returns by accelerating income are going to be kind of phenomenal. If you were to look at just the opportunity to harvest capital gains, you might see with gains going from 15 to 20% to perhaps 23.8% with the Medicare surtax, you're seeing opportunities to create 33% returns just by accelerating gains. So what you need to be talking to clients about doing your planning on accelerating income, you might be talking to them about talking to HR or, if they're a higher executive, paying bonuses before year end.
You also would want to look and discuss comp and benefit issues, items such as stock options. You might want to accelerate the exercising of some stock options. Right now is a prime opportunity to start talking to clients about Roth IRA conversions. Basically, you get two benefits. One, you can get -- do the conversion, increase the income, recognize the income at the lower tax brackets, and then you also get the free look. So if the investment markets do well, you can go all the way until October 15th of 2013, if you were to convert right now, before having to -- having the opportunity to unconvert.
So with our clients, what we're talking about is making very large Roth IRA conversions, doing it into multiple Roth IRA accounts, and so that if we want to unwind, we can unwind the investments that performed -- their performance was not up to par, or perhaps not as good, and let the winners continue to convert.
So there's a lot that you need to be talking to clients about. And I think what you're -- what clients are going to start to rely on you for is that you're more in a tax preparer -- that you're capable of doing all types of financial transactions.
Other things you might want to talk to clients about is to get organized now. If you have cash basis taxpayers, they should be looking at accelerating their billings and trying to collect income into 2012. It's a reverse paradigm. It's something that we haven't done through our careers, and clients are not ready for this, but it's something you need to start talking to them now.
I mentioned harvesting capital gains. Some practitioners have already started the process of harvesting gains. In our practice, what we're looking at is being flexible and nimble enough that if the tax law appears that it's -- the Bush cuts are going to expire and capital gains are going to go to 20%, we want to be able to harvest gains in the last quarter of the year, maybe even the last month of the year. Remember, you do not have 30-day wash sell rules when you're harvesting gains, so you can harvest a gain -- and there's some question right now, we'll have to get a little more -- a little more detail as to what the government might attack.
Historically, I once -- I guess I've been through this once in my career. Back in the '80s, where they raised capital gains, and you could do -- they allowed deemed sales, where you could make an election and do deemed sales. So we'll have to monitor that as we go to the end of the year. But that's an area of harvesting capital gains where you really want to look at things with clients.
The other thing with the -- with the phaseouts of itemized deductions coming back in in 2013, it'll be important that you try to front-load your itemized deductions. So even though you're trying to accelerate income, we're also looking to accelerate itemized deductions, because we're -- we don’t want to be limited or phased out of our itemized deductions in 2013. So we're also looking at continuing that process.
And then I think lastly, the estate and gift tax considerations that you should be talking to clients about are huge here, with -- like Lyle said, right now there's three different scenarios we're looking at. Currently the exemption, the estate exemption and the gift tax exemption are linked, and they're at 5,120,000 this year. So clients that have the ability or have high -- or large estates should be looking at doing gifting, whether it be sophisticated gifting or just using their exclusions this year, because next year, under the President's proposal, we're going to go back to $3.5 million exclusion, but the gift tax exemption's still going to be 1 million, or go back to $1 million, and your tax rate's going to go from 35 to 45%. And that's if that gets passed.
If nothing passes, then we're back to $1 million. So there's a big discrepancy there that we should be working with clients with. And a lot of these estate planning techniques take months to implement. And so it's not something you can wait until December, go to your clients in December and say, "Hey, let's do a GRAT or let's do a defective trust."
And I think the other thing that you want to look at on the estate planning, some of those techniques that we're looking at under the President's proposal are definitely under attack. GRATs, we've gone through a period of time with low interest rates where they've been a fabulous technique to use. A lot of people have done zero-out GRATs, short-term GRATs, rolling GRATs, and most of those provisions are going to be eliminated under this new proposal. They're talking about ten-year minimum terms. They're going to have minimum remainders. So it's going to significantly decrease the value of GRATs.
Likewise, with defective grantor trust and some of the tax sells and freezes, we're looking at the possibility of those defective grantor trusts going away for tax purposes, or actually they're not going to go away, they're going to continue to be defective grantor trust, but if they're taxable for income tax purposes, they're also going to have estate tax inclusion. So you're going to lose a lot of our big transfer techniques, and so this is an area where you need to be talking with clients, getting busy as soon as busy season gets over, on boning up on some of these transfer techniques and working with attorneys early in the year so you can implement planning before year end.
LYLE BENSON: Great, Scott. Thank you. A great overview of some of the things to be thinking about as you look at clients' tax returns this year and as you start to think about the planning that has to be focused on between now and year end. No vacations for CPAs at the end this year, I don't think.
Let's shift over now to talk a little bit about mining the tax return. How do you -- When you're sitting down with a client, and looking at a tax return, it can be such a great tool to learn more about a client's financial situation. Obviously, you need to put that in the context of the client's age and their financial situation overall. We've got with us today also Ted Sarenski. Ted, do you want to give us some thoughts on how you approach clients from that standpoint?
TED SARENSKI: Sure, Lyle. Thank you. One of the first things we talk to -- or look at, and one of the first screens you come to when you're inputting a tax return, whatever software you use, is what's the client's age? What's their birth date? And that can tell you a lot right there about items you might talk to them about. You ask for their W-2. You look at it and they say, "Well, hey, you're only 25 or 30 years old, and I look at your W-2, and you're not putting anything into your 401(k) plan. Your taxable wages and your gross wages are the same number. Why not?" So you can talk to them about planning for the future, that if you start young, you start early, you're going to have plenty of money, and especially the way things are going with government subsidiaries, such as Social Security or things like that down the road, might not be as robust for those folks who are younger today than they are for current retirees. So they really do need to look out for themselves.
The other thing with the younger folks, they maybe have children. So you get the children's ages, and you look at the children's ages and say, "Okay, why aren't we saving into a 529 plan? You should be saving maybe for their education down the road." That's getting more and more expensive and getting tougher and tougher to fund as you go. Another thing, if they're self-employed, are they a schedule C? Maybe they can hire their kids. There's a way to put money aside for the children and get a deduction for it at the same time. So just looking at the people's ages can help.
You have Baby Boom clients. Maybe they're in their mid to late 50s. It's time to start talking to them about when do you collect Social Security? Do you start at 62? Do you start at full retirement age, which is currently 66? Do you wait to 70? When you're working with a couple, it would be very helpful to them, because they don't get the right information necessarily when you talk to the Social Security Administration at your local office. What often happens is that they will look at benefits for that individual person and what is the best benefit for that individual person? They're not into financial planning, where they're going to talk about, well, why don't we delay you collecting and have your spouse collect, and maybe you'll collect spousal benefits off your spouse when they start? They don't do that. They try to determine what's the best benefit for you today. That's not necessarily the best benefit for that couple down the road.
Another thing you want to look at if you've got clients in that later-50 age bracket and they're talking about retiring, what are they going to do about health insurance between the time that they retire before 65 when Medicare kicks in? How are they going to cover that? That is getting very expensive these days, to cover those costs. So you really want to look at talking to them about what is out there for you. COBRA might only last 18 months. That doesn't get you all the way to age 65. What other options are available in your area, and how much is that going to cost you? You've got to take that in consideration before you retire. So bringing up a topic such as that.
Do they have enough saved? What I have done and what I would suggest a lot of folks do, ask your clients if they will allow you to get copies of their investment statements from the brokers or the folks that they do work with on their investments. This doesn’t mean that you have to become an investment expert, but you can take a look at what they have in total in terms of amount invested, and you could suggest maybe that they don't have enough saved, that if they have what might be considered a safe withdraw rate of 4%, they're going to need another half a million, or they're going to need another three-quarters of a million saved by the time they turn 65 or 66, or the day they want to retire. So that's an area that you could monitor.
Scott mentioned capital gain harvesting. You could take a look at things like that. But as we go further in the future, you certainly maybe want to look at things like are they looking at the investments on a tax basis? Most investment advisors do not look at the tax situation. They're not CPA background. They really don't consider taxes most of the time. They look at more what is the best from an investment standpoint? Well, you as the CPA certainly look at it more from the tax aspect and could maybe offer some advice in that area to their various advisors.
Another thing you might look at, because individuals don't necessarily look at this, most people that come to us for tax returns are not financial people to begin with, or they might be doing their own return. They may have multiple investment places. They might have three, four different brokers. A lot of folks don't put all their investments with one person. So you might look at three different sets of statements from three different investment advisors and find that they're all purchasing the same investments in the same proportion, and this individual or couple may think that they're well diversified when they're not. So you could advise on that.
You could say, "You know, you've got Apple stock in each of these three portfolios, so you've got a very heavy weight in that one stock. Maybe you don't want that. Maybe you want to be more diversified." So helping them along with those decisions to review the investments on a regular basis, if you can. And they will send these to you. Get copies of the monthly statements.
One thing that Scott mentioned before is Roth conversions. Certainly, if you've got a client in their later 50s, let's say early 60s, and maybe they have retired or they're not working as much as they did before and they're in a lower tax bracket, and they have taxable IRAs or 401(k)s that they're going to convert to IRAs, you might want to look at the Roth conversion option to use up some of those low tax brackets today. Yes, you'll pay more tax today in dollars, but maybe you're going to use up the 15 and 25% tax brackets that won't get -- that probably are going to rise as we go in the future when --
Let's say these folks don't even use up their IRA or 401(k). They may end up in a situation where their children inherit that, and my prediction is that tax rates will be higher in the future to pay for those Baby Boomers that are retiring. So it's potential that their children could pay a higher tax rate than the couple today will. So having them use up those lower tax rates that are available to them today is a good thing to look at.
Another thing to talk to them about that you can get a deduction on the federal and many state returns is long-term care insurance. Children of couples today are all over the United States. They are not living right next to their parents to be able to take care of their parents, so you might talk to them about, do you have long-term care insurance? And if you don't have long-term care insurance, how would you fund the care in a nursing home or an assisted living facility if something were to happen to either one of you? Because now you've got two sets of costs. You've got the costs you currently have of living in your home, and now you've got the cost of one of the couple potentially living in a very expensive assisted living or nursing home situation.
So you want to take a look at all these things. You want to be able to talk to your client more about a lot of things that -- they're tax-related, but they're not all about taxes. You want to be able to show that you are bringing something to the table that many other tax preparers are not bringing to the table. You're raising questions. And not that you have all the answers to these questions, but get -- getting your client to think about these things, getting your client to understand that there's a lot more to just putting a tax return together than just the bottom line, what is the tax liability going to be, but rather it can bring out a lot of good questions for these folks to ponder, consider and take some time.
But as Scott was saying before, make some decisions before this year end, because tax rates, whatever, are going to change, and this is a time when you can help that client really prepare. And maybe you're going to be in touch with them all year long here. You might be finishing their return in February or March here. Maybe you're going to call them again in May or June to see if they have answers to those questions that you brought up while you were sitting down with them. Just --
LYLE BENSON: Yeah. Scott, I think you wanted to comment and add something to Ted's thoughts.
SCOTT SPRINKLE: Yeah, just a couple additional points to what Ted was talking about. I think his point of requesting investment statements, even if you're not managing the money per se for your client or you have other advisors that are out there, or maybe you don't manage money at all, but to manage -- to get copies of that allows you -- it's an invaluable resource. It can help you look at clients with allocations, determine if there's any turning of the account going on. You know, however you need to help this client go through this process and show that you're more than just a tax preparer.
I think a lot of things. You can also look at on schedule B the interest income. Any client right now, we all know interest income is kind of nonexistent, so any client that has a material amount of interest income, may be -- it may be an opportunity to help them with their investment allocations or look for other avenues that are still conservative that could help them out.
I also wanted to echo Ted's comments on long-term care. I think the old rule of thumb used to be if you had $2 million or more in investment assets that you could probably self-insure. I think our practice, we've seen from clients, parents that have gone into nursing care or clients now that are starting to get to that area that -- they're wishing they had some long-term care coverage. So having those discussions with clients when it's feasible to get that insurance in their 50s and 60s, maybe even their 40s, that's the time you should be having these conversations and get -- you need to bone up and get well versed on long-term care.
And then Ted's comment on the required minimum distributions and IRA distributions, I think this is an area that's missed by a lot of individuals. But if you have clients that are over 59 and a half and their in lower-income tax brackets, they should definitely be looking at taking early distributions to fill up those lower-income tax brackets, not necessarily spend the money, but set it aside for investment. It will reduce their tax burden down the road when they're looking at having to take required minimum distributions. For -- In a --
The other thing that you might want to consider is with the Roth conversion rules to do Roth conversions right now, to load up those lower brackets. It also basically reduces your required minimum distributions at 70 and a half, because Roth IRAs did not have that requirement. So there's a lot of planning techniques that come through from just going through the tax return, like Ted said.
LYLE BENSON: You can really see where the intersection of financial planning, investment strategy crosses over very closely with tax planning when it comes to retirement accounts, IRA RMDs and Roth conversions and all, and how that all fits together and really does create a situation where the CPA financial planner is in a great position to be able to address these kinds of issues.
Let's shift over and talk a little more about some of the itemized deductions area. Scott, any thoughts you've got? I know we're in an environment where interest rates are still at historically low levels. What does that mean for your clients in terms of their mortgage debt, other aspects of their -- of their itemized deductions?
SCOTT SPRINKLE: Right. Lyle, a few things. First, I want to talk a little bit about comp and benefits, and it's not really a deduction, but it's something clients -- a lot of clients have access to, and that's the deferred compensation elections. Again, right now what we're looking at is the opportunity. We're trying to accelerate income probably into 2012. That doesn't mean you forego deferral accounts, particularly when there's matching provisions.
But this is an area where a lot of clients have a lot of confusion. They don't understand non-qualified deferred comp. They don't understand that they're just -- if something happens to their company and if you had clients that worked for United Airlines or Enron or Circle K, you understand that once you go through bankruptcy that clients lose these deferred accounts. So you have to under -- They need to be schooled or taught what the rules are with regard to deferred compensation and what the credit rules are. But you also in these deferrals take an advantage of the matching provisions.
You also want to look at the political landscape. And so right now, where we might typically have clients doing short-term deferrals, trying to maximize matches, we're actually looking at the political landscape, and once you get through the election process here in November, you -- it might be to your benefit to do a deferral until the next presidency occurs, when you're going to have an opportunity maybe to have lower tax brackets. So that's one area you can look at with clients.
With regard to itemized deductions, Lyle, your point on interest rates right now, it's a huge avenue. We talked a little bit about the gifting and estate tax issues where low interest rates are really to your benefit for a lot of the techniques. But even the simple things, going -- looking at your client's mortgage statement, look at that Form 1098, look at the balance, look at the interest paid, back into what they're really paying from an interest perspective. Or talk to clients and just find out where -- what debt they have. But go through that process with them.
Now is the time where all clients should have refinanced. Most of them probably have. But they may not realize that if they refinanced at 5.5%, they should be doing it again today at about 4%, and perhaps lower if they're going to be moving into -- if there's an appropriate strategy where maybe you can get into a seven-year ARM or a five-year ARM, if they don't think they're going to be in the property for a long period of time. So make sure clients are taking advantage of that.
Also, make sure -- Have the discussion with them as to what other debt they might have. If they have credit card debt, that should be the first thing that we should be working on helping them get rid of, and it may make sense to refinance or do a home equity line to take out credit card debt and maybe auto loans. But it's a chance to have that discussion with clients. Again, show the breadth of your knowledge.
With 2012, if they do -- if the President's itemized deduction reduction and the kind of hidden tax, if you will, if they'd limit your itemized deductions for high-net-worth individuals to 28%, you still probably have the benefits of a mortgage, although your benefits are reduced. But you also need to talk to clients about charitable contributions. If you have clients that are -- make large charitable contributions, you might want to look at signing up for some of these charitable funds through a Charles Schwab or a Fidelity or doing a donor-advised fund through one of your local charities, because what you're going to want clients to do, if they typically make large charitable donations, it may behoove them to set up one of these plans and make a very large contribution.
We have some clients looking at funding five years' worth of charitable contributions in 2012 just because they're concerned that these deductions might go -- be reduced, and they know that they're going to give the money over the next five years anyway, so we're talking about doing one, two, three to five-year fundings into these charitable funds where you get the deduction up front. You could take advantage at a much higher tax bracket, maybe 35, 39.6 today versus being limited to 28% in the future. So that's an area you can look at with clients.
The other thing that we're working with clients on is accelerating your miscellaneous itemized deductions. Again, we don't have the limitation for itemized deductions in 2012, so we have clients looking at with their miscellaneous itemized deductions prepaying expenses, making sure that they're billed for services, financial planning services that you're providing before year end, making sure that they're getting above the 2% limit. All this from a planning perspective, when you're looking at the benefits, gets back to that tax projection that you prepared when you did their tax return.
You need to look at the alternative minimum tax situation, and are they going to be in alternative minimum tax, or we're going to get benefit? Another item we can look at, real estate taxes, personal property taxes. Does it make sense to prepay those before year end? If you're not in AMT, it probably benefits you in this year more than most years to prepay those expenses. However, if you're in AMT, prepaying those expenses didn't do anything. It just took money out of your client's pockets a little bit early. So it's all a matter of making sure, again, you're geared up, ready to do the financial planning or the tax planning at year end.
LYLE BENSON: I think it really -- this shows the importance of that flexibility in the tax planning, too. We don't know if rates are going to go up next year. We don't know if itemized deductions may be lost under proposals that are out there. Knowing -- You know, being in a flexible position at the end of the year to be able to make last-minute decisions is going to be really critical this year.
Let's shift over to the investment side once again and talk about the new cost basis reporting rules. Ted, can you give us some thoughts on how that impacts people from a planning standpoint?
TED SARENSKI: Sure, Lyle. This year, 2011, is the first year that anyone who handles investments -- the wire houses, RIAs, whoever -- they have to report cost basis for assets purchased starting in 2011. So the 1099 that will be coming from the brokerage industry will not only have the sale price and sale date, but also the cost date and purchase price if they were purchased after 2011. So this is going to take away some of that planning that many of us had done in the past where no one knew the basis, we kind of made it up, and nobody had too much in gains, we might see more capital gains now because these cost bases have to start being reported.
So now it's going to be a problem because you've got assets purchased in the past where you have maybe no cost basis or you've got a cost basis that you were told by your client many years ago for that purchase. They're going to be reconciling all of these, so you really have to make sure that when you're talking about these things with cost basis, how is the cost basis being reported on that report from the brokerage firm? Is it average cost basis of all the stocks you've purchased of that type or a mutual fund that you've purchased from 2011 on? Is it first in, first out? Is it specific lot?
The brokerage firm or the -- whoever's managing the assets will be putting one type of way to handle that individual's basis in those investments that they have. So you need to know, how is that being computed so that you can then say, "Okay, if I had bought this mutual fund in 2010, and now I added a position in 2011, how are they accounting for that 2011 purchase? Because that could affect the basis I'm going to use for my 2010 that's not being reported on that 1099-B. So these are some things we've got to work out that we didn't have to worry about in the past.
So that's something that, especially when we're talking about making this year a year that you might have these capital gains be realized for the tax rate of 15%, you want to make sure that you're going to be using the right numbers and not hurting the client, even that the, you know, the cost basis you're using for things purchased prior isn't significantly different, or you're taking into consideration the cost basis that's being used for the purchases starting in 2011.
LYLE BENSON: Great, great. Great overview, Ted. I appreciate that. Let's shift now to talk a little bit about some practice management issues. And I want to first talk about some tips in terms of how to communicate the value of the financial planning work you do for clients. Both of you have very robust financial planning practices that you've developed over many year, but if you can think back a little ways to when you were building that practice and really starting to expand your services in that area, Ted, I'd be curious as to your thoughts on how you communicate the value of financial planning to clients, especially when others out there seem to offer similar services for free or for very low cost, and how do you really show clients the value in what you do?
TED SARENSKI: Well, first, Lyle, I think I probably was in that camp that said, "How can I -- How can I charge for this?" You know? The client asks me a question, so I answer it, because that's what we do as CPAs. They have questions, we have answers.
And it's -- I started to realize that I was getting more and more of those kinds of questions. I was getting them from a lot of different clients in a lot of different areas, and I sat back and said, you know, a lot of these questions don't have to do with their -- They have to do with their tax situation, but they don't have to do with their tax situation. They're asking things deeper than just the tax situation. They're asking questions about, how do I handle certain things? And they wanted my input on should they do A or B? Which would be better for them in the future?
And I started to realize that here's something that here's something that they're coming to us as a trusted advisor for, and we need not necessarily to have the answers, but have the ability to talk to them about it and have them develop their own answer by asking questions of them and getting them to understand that -- how to solve this problem. Which should I choose, A or B? What are the things you need to look at behind the scenes? Putting in one column the positive aspects and the other column the negative aspects, and work through a situation with them. Not necessarily giving them the answers that we were used to as being a CPA, but rather, raising questions that maybe they didn't think about when they're looking at A and B and assisting them in coming to an answer that they would then act on.
Because if we just give them answers, if they say, "Well, should I start Social Security at 62 or at 66," and we just say, "Start at 62," they have to be comfortable with that. They have to buy into that. And if all we do is give them a quick answer and don't discuss why is it important to maybe wait to 66 instead of starting at 62, talking about what I mentioned before, the positive aspects and the negative aspects of each of those, so that when you do end up with the answer -- and maybe the answer is 62 -- that they feel comfortable with that answer, that they understand what you thought of to get there.
And when you go through that process, where you're asking questions and you're getting them to participate in this give-and-take discussion, there's a value to that that goes beyond the tax preparer. And when you do that kind of interaction with your client, believe it or not, they're going to come back to you with more and more issues that they never thought of asking you before because they -- they thought you were only tax-oriented.
So I think it was more of an evolution rather than a light bulb going off in my head one day. But I guess the light bulb went off that this is an extra service that we could do something separate and really have the client rewarded for it.
LYLE BENSON: I think you're absolutely right. I think putting it in that perspective is really important, and helping clients understand that there -- that there are not easy answers to some of these questions. There are not simple answers to a lot of these, and they involve a number of different disciplines in many cases, and they need to get pooled together and be well thought out to make decisions along these lines.
Scott, I'd love to hear your thoughts on -- along those lines and how to get paid for the work you're providing as you try to provide these services for clients, and also try to increase the billing that you can -- you're able to do with clients.
SCOTT SPRINKLE: Sure, Lyle. I think one of the things, when you're looking at getting paid for these types of services, you have to educate your clients. They have to understand the value. They have to see the value. You know, Ted's point, you can't just give them an answer and say, "Go with this." You have to show them the answer and show them the value behind the answer. The estate planning techniques right now, you know, it's -- for your large-net-worth clients or high-net-worth clients, you need to talk to them and say, "Okay, if we were to do some giving strategies, we could save hundreds of thousands of dollars in estate tax if we were to implement some of these strategies."
Take it down even to, you know, lower levels, just doing the tax projections, showing them, you know, if you pay me 300, 500, $1,000 now, we might save thousands of dollars by just implementing some of this tax planning before year end. And if we don't do this -- do some of this planning now, when we go to try to do it at year end, it's going to be much more expensive.
So I think you look at quantifying some of these deductions. The charitable contribution analysis with clients. If you have clients that are making large charitable contributions, you might save them 10, 12% on taxes by pushing these terrible contributions through in 2012. Well, if they're making 50, maybe $100,000 charitable contributions, that adds up real quickly, so to show them that value.
I think the other thing that you have to be prepared to do -- we talked a little bit about long-term care or some of the estate planning techniques. You need -- Refinancing mortgages. You need to have contacts that you trust and that are going to treat your clients fairly and that are going to be organized. So you need to have insurance individuals that you've worked with, that you're comfortable with, that you've used.
Mortgage. On the mortgage side, have somebody that -- a broker that you're comfortable with, again, that's going to take care of your clients, make sure things get done and nothing gets dropped. But clients will see the value of this, and it's easy to bill them once they see the value.
LYLE BENSON: Ted, you had a comment to add to that.
TED SARENSKI: Yes. Scott was speaking about estate planning and showing the client maybe how they can gift or different techniques they might use to lower the estate tax. And one of the things, again, about not having all the answers is that you show them maybe five, six different variations of estate planning, and get into the -- get from them, what are they really trying to accomplish by this? You know, what they want to have for their heirs down the road? What do they want to have for the charities?
And then looking at all the various estate planning tools you can use and saying, "Well, you know, then -- then A and B don't fit, but let's -- So let's narrow it down to C, D and E." So it's not a matter of, again, just giving them an answer, it's a matter of guiding them down the path to say, "Here's all the options you have. Now, which one of these options makes the most sense for you and what you want to do?"
LYLE BENSON: Great, absolutely. Good way to -- That's a good perspective to put on it. Let me talk a little bit about some of the resources that are out there for you practicing in this area that you can tap into over the course of the next few months. All of us are busy. Obviously tax season's a horrible time to try to think about adding additional services or doing anything extra beyond what needs to get done in that time frame. So the AICPA Personal Financial Planning Division has put together some resources that are helpful in this regard.
On the website under the Pathway section, there's a checklist for going from a tax return to give you financial planning ideas. The checklist was developed about a year or so ago. It's a great tool to have in front of you as you do tax returns to capture ideas, capture planning ideas, whether you put them in the place now or put them in the place later on. We used that last -- the last two years during our tax seasons, and it was a great tool to come up with clients that, even though we've got a fairly active financial planning practice, some clients we hadn't done as much as we could with. And that helped us find those opportunities during the course of tax season.
Throughout the tax season, you'll get Personal Financial Planning Section updates. The financial planning -- the weekly news that comes out Wednesday or Thursday of each week has information in it regarding the things that might be helpful for you in your practice in this area.
Just the Forefield content that many Financial Planning Division members use is a great tool and a great quick and easy resource, if a client has a question about something during tax season, that you can turn to that and get information that you can use in your practice, sending it out to clients without having to recreate the wheel yourself. On the Tax Return to Financial Planning Checklist I mentioned earlier, that's on the website, aicpa.org/pfp/pathway, so you can find the resource there.
There's also a recent podcast that Bob Keebler, whom many of you have heard in the past, did on the Obama budget proposal, to put that in perspective of what kinds of things are being talked about, even though the likelihood of it moving forward and passing intact obviously is very low. But there are a lot of ideas in there that are going to be food for discussion over the course of the rest of this election cycle.
And then finally, a resource we want to offer to everyone is, on May 9th we'll be doing a webinar to follow up this podcast discussion today, taking this to the next level. Essentially, now you've gotten through tax season, or at least the first part, the April 15th part of tax season. How can you take those ideas and put them into action, use them in your practice and really expand your services in the financial planning area and really help clients and deepen those relationships? So May 9th, we'll have information coming out about that shortly. But put that on your calendars.
What I'd like to do now as we close, I'd like to give Scott and Ted a chance to have any closing comments that they might have. Scott, anything from your side?
SCOTT SPRINKLE: Yeah, Lyle. I think that, again, the thing that people need to understand is 2012 is going to be like no planning year that you've ever had in your career. You need to be nimble. There's going to be a lot of opportunities here, and you need to listen to your clients, like Ted said. Understand what their needs and objectives are, but don't let this opportunity go by the wayside. This is a chance for you to really differentiate your firm, differentiate your services and show that you understand these financial issues and can provide significant value to your clients.
LYLE BENSON: Great, Scott. Ted, any thoughts you've got as we close things up?
TED SARENSKI: Lyle, one of the things you mentioned was that checklist, when you're going through the tax return you've got that checklist in front of you. It's not necessarily to talk to that client when they come in to pick up that return or you're going to deliver it, or however you get the return to them. But it's a great way to then follow up on some of these things. Every return you look at, you should come up with one or two ideas that -- We've given you hopefully quite a few in this podcast of ideas that you could use to talk to your clients further throughout the year.
So using that checklist, jotting down one or two ideas each time you look at a return, and then starting in May, after you've taken the rest of April off to relax and get back into a normal pace of life, starting in May, start making some phone calls. And you'll find that the clients will be very excited that you're calling them outside of tax season. Maybe it's the first time you've ever done that with some of these folks, and they're going to really appreciate it, and I believe you could really expand your practice.
LYLE BENSON: Great. Well, I'd like to thank Scott and Ted today for helping to pull this together, and also thank Andrea Miller from the Personal Financial Planning Division, who helped us with the concept and pulling this all together. Good luck with your tax season over the next two months. Keep financial planning in mind as you talk with and meet with clients to set the stage for expanded services and deeper relationships with those clients in this area, and we will see you again on May 9th, 1 to 2:30 Eastern time for a followup webinar. Thank you very much.