November 2000

Year-end Tax Planning

The alternative minimum tax (AMT), capital gains and losses, and charitable gifts are some things that CPAs should consider when developing year-end tax strategies for their individual clients, according to tax practitioners.

Despite the clashing tax agendas set forth by both major parties in the recent elections, the lack of major changes in the tax laws for the 2000 income tax season has many CPAs revisiting the same year-end planning strategies that worked for them last year.

Tax professionals are telling their clients to accelerate deductions and postpone income until next year to reduce their tax liability.

“Traditional tax planning advice of deferring income and accelerating expenses still holds true,” said Vincent Vaccaro, the national director of personal tax consulting at PricewaterhouseCoopers.

“For many people, reducing taxable income in 2000 in anticipation of lower taxes in the future makes sense.”

Vaccaro recommends delaying bonuses until January 2001, deferring a portion of regular compensation until next year, and delaying the exercise of stock options. Deductions include maximizing charitable contributions, making next year’s mortgage payments in December of this year, and paying real estate taxes now, according to Vaccaro.

P. Gerard Sokolski, New York State Society of CPA president, said that donor advised funds allow his clients to take advantage of immediate deductions while making a contribution that is like setting up a charitable foundation.

Lawrence C. Adler, a tax practitioner with New York-based Marks, Paneth & Shron, emphasizes that CPAs should take a broader view of tax planning that looks beyond a client’s current tax needs. “I take a holistic approach in dealing with the whole individual,” said Adler, a member of the New York State Society of CPAs Taxation of Individuals Committee. “I consider not only the Income tax, but also the retirement, estate, and gift tax situation.”

Looking at all aspects of tax consequences is important because they are all interrelated, according to Adler. “You can give advice on one end, and have detrimental effects on the other end,” he said, referring to income and estate taxes.

An important step in advising the individual taxpayers of steps to take before the new year is to determine if the client was in the alternative minimum tax (AMT) bracket during the prior year. If the client was in the AMT last year, said Adler, he or she will likely be in the AMT again this year.

If the client pays the AMT, many tax deductions, including state income and real property taxes, are not deductible and therefore there is no need to accelerate their payment into this year, warn the tax professionals.

Adler, who mostly deals with high net-worth clients, also makes sure to advise them to fund their retirement plans consistently and to benefit from the $10,000 gift tax exclusion. “Gifting takes property out of your estate,” said Adler.