Before the Year Runs Out . . .

With only a month left in this tax year, there are a few things advisors should know when it comes to tax planning. Dealing with the Alternative Minimum Tax [AMT] and making the most of retirement contributions should be at the top of your list.

Surprisingly however, there is one issue that, for at least the next 12 months, is likely to demand little or no discussion with your clients: new tax legislation.

We recently spoke with Maureen McGetrick, senior tax manager with Chicago’s BDO Seidman, LLP, a national middle market accounting firm that serves both businesses and high-net-worth individuals, about year-end tax planning and what not to expect in 2005.

What are the most important year-end tax steps that advisors should recommend to their clients, especially their higher-net-worth ones? We advise our clients to do a projection for the year to determine, in the high-net-worth arena particularly, where their tax liability is going to be in the AMT. This is something that we are finding a growing number of people trapped in. If a client does fall under the AMT, although there is not a lot you can do to prevent it, there might be some things you can do to minimize its effects.

It might be in the best interest of the client to push some deductions into the following year. Additionally, you wouldn’t want to prepay income taxes, which some advisors might normally advise their high-net-worth clients to do in December. If your clients are in AMT, clearly you don’t want to do that because the deductions will have no benefit for them.

To alleviate some of the strain caused by AMT, you might suggest pushing off business-related expenses to the following year as well, even though these items are not deductible for AMT purposes. Real estate tax is another item you may have to play with that wouldn’t be deductible for AMT.

At year end, individuals will also want to look at maximizing retirement plan contributions. Review the [investment] portfolio and look for any gains that should be realized prior to year end. Find out if there are any losses that have already been realized that will offset the gains, or if there is a capital loss carryforward from the prior year that will offset the gains.

Many advisors complain that the AMT is a monster that’s unfairly devouring U.S. taxpayers. What steps should advisors recommend to limit AMT exposure? Do you expect the new Congress to pass, and President Bush to sign, any tax legislation that would address the issue, perhaps extending the increased AMT exemption amounts, and indexing them for inflation? All of that is true. The AMT is gobbling up more and more taxpayers, particularly with the reduced rates on capital gains and dividends. Although those rates apply for purposes of AMT, as an individual’s effective rate lowers as a result of deductions, the AMT will kick in. If you have a taxpayer that is in AMT, then look at the timing of your client’s deductions and whether or not there are items that can be pushed off into the following year when perhaps they will not be in AMT.

Incentive stock options are an AMT adjustment item. For individuals in that situation, plan timing of those exercises to minimize the impact.

In terms of legislation to deal with AMT, what has been passed so far has really been very minimal. They have only increased the exemption amounts by a small fraction. So if you are dealing with a high-net-worth individual, that has very little impact.

Any changes that have been made were intended to remedy the effects on middle-income taxpayers. Everyone at the IRS and the Treasury Department has acknowledged that it’s a problem. But how do they replace that revenue? I don’t think legislation has addressed that issue.

What is the most common mistake that wealthy folks and their advisors make with regard to taxes? What do they fail to consider that could not only lower their clients’ taxes in a given year, but also position themselves to keep more of their hard-earned money over time? I don’t know that I would say this is a common mistake, but something that would position people to keep more of their money is looking at their investments and how their investments are being taxed. Find out if your clients are really maximizing their after-tax rate of return. The recent change in dividend rates has allowed for more flexibility [in that area].

Another thing for high-net-worth individuals is determining charitable contribution deductions. Should they be making solely cash contributions? Could they make some property contributions–say of appreciated stock–to make those contributions work more efficiently for them?

How would you recommend that advisors stay current on tax code changes, legislation, and IRS rulings, especially for those who aren’t CPAs but yet must be knowledgeable enough to spot tax issues for their clients before it’s too late? A good way to stay current is constant communication with a tax advisor and working with your clients’ accountants to determine if there is something you should be looking at at year end.

Find out if there were issues with last year’s tax return, if there is a deduction they wouldn’t get a benefit from, and if there are any issues of capital loss carryforwards.