7 Questions You Should Ask Your CPA at Tax Time

My friend, Jerry Reiter, from BriteLine Wealth Management Group, gave me this list of questions that you should ask your tax advisor this season.

7 Questions You Should Ask Your CPA at Tax Time

By Elaine Floyd, CFP

1. Will I be subject to the alternative minimum tax in 2010?

For some clients, the answer will be a clear “Yes.” Barring a major change in their personal finances or a complete overhaul of the tax system by Congress, anyone who was subject to the AMT in 2009 is likely to be subject to it in 2010.

But for many other clients, the answer will have to be “Maybe,” because Congress hasn’t passed an AMT patch for 2010. If the AMT exemption amounts revert to 1986 levels—$33,750 for single taxpayers and $45,000 for joint filers (compared with 2009 exemption amounts of $46,700 and $70,950, respectively)—some clients who were not subject to the AMT for 2009 may be subject to it in 2010.

If it is not clear whether clients will be subject to the AMT in 2010, they should ask their tax advisors how to deal with this uncertainty when carrying out investment and financial planning activities during the rest of the year. When contemplating the tax on the next dollar of income, should they assume the AMT maximum rate of 28% or one of the regular tax rates (see next question)? Should they assign odds to their AMT susceptibility? Should they defer any major tax decisions until the AMT picture clears up? Let the CPA make the call on this, and plan your investment and financial planning strategies accordingly.

2. What will my tax bracket be in 2010?

Financial advisors are used to quickly determining a client’s tax bracket by looking at last year’s taxable income and checking the latest tax rate schedule as posted in our chart of key data for the year. This tells you the rate at which the last dollar of income will be taxed, enabling you to calculate the tax impact of various investment or financial planning proposals.

But their situation might be different this year. The taxable income they end up reporting on their 2010 return might put them into a different bracket than the one suggested by their 2009 taxable income. If clients and their CPAs take a few minutes after their 2009 taxes are prepared to talk about what will be different this year, the CPA can give them a more accurate estimate of their taxable income (see next question) and tell them more precisely what bracket they will be in.

 3. Can you help me estimate my income for 2010?

If “income” were simply a matter of wages, no one is in a better position than the client to answer this question. But as we know, there are many forms of income. Gross income may comprise salary, bonuses, investment income, the taxable portion of Social Security benefits, alimony, gambling winnings, and more.

And it’s not enough to know gross income. It’s also important to have an estimate of adjusted gross income, modifications to adjusted gross income, and taxable income. Each of these types of income is dependent on various deductions and/or credits that need to be estimated in order to come up with projections for 2010. These in turn will determine if a client can do certain things, such as contribute to a Roth IRA or a deductible IRA. An accurate estimate of 2010 income will enable clients to make these contributions early in the year, rather than waiting until their 2010 taxes are prepared.

In order to estimate the various forms of income for 2010, the tax advisor will need to quiz clients about their situation and plans for the rest of the year and then crunch the numbers. For example, the CPA might look at clients’ 2009 deduction for charitable contributions and ask if they plan to make the same contributions in 2010. Or, if a client reported a one-off event, such as an asset sale, in 2009, the CPA will need to adjust the 2010 estimate accordingly.

Since investment activity has a bearing on the amount of income a client will report, the CPA might need to talk to you. For example, if a client has a lot of loss carry forwards (see next question), how those losses are or are not absorbed can affect the CPA’s estimate of the client’s 2010 income.

4. Do I have any remaining loss carry forwards going into 2010?

You can determine this by looking at clients’ 2009 tax return, but it’s good for clients to take this question to their CPAs in order to better understand how investment activity affects their tax situation. When you suggest that they sell some assets to absorb some of these previous losses, they will understand your rationale. Tax loss harvesting is traditionally a year-end activity, but it really should take place throughout the year as investment opportunities present themselves.

5. If I were to do a Roth conversion in 2010, what would my tax liability be?

If you read my recent article on the nuts and bolts of a Roth conversion analysis, you may recall the difficulty I had computing the taxes on a Roth conversion done in 2010 when all I had to go on was my 2008 tax return (I hadn’t done my 2009 taxes yet).

By prepping your clients before they see their CPAs, you can avoid my dilemma and hopefully get a more accurate estimate of what the taxes on a potential Roth conversion done in 2010 might be. Of course, you can determine the taxes yourself by obtaining answers to the preceding questions—but again, it’s good to have the information come from the CPA.

In addition to having clients ask their CPAs what their tax liability would be on a complete Roth conversion, also have them ask about partial conversions—say, one that brings them up to the top of their current tax bracket. The CPA’s estimate of the bracket-completion amount is likely to be more accurate than the number you might generate based on incomplete information.

While they’re at it, have clients ask if their CPA thinks a Roth conversion is a good idea. CPAs generally have a positive view of Roth IRAs and Roth conversions, so if you are looking for support, you are likely to get it from your clients’ tax advisors. This is not to mention the relief you get by having the CPA make the decision. Then he gets to help the client face the big tax bill when the conversion income is reported at tax time next year.

6. Do you have any recommendations for reducing my 2010 taxes? What about 2011 and beyond?

If you have some specific ideas for the client, such as bond swaps, send them along with the client so the CPA can comment on them. Any strategy that is primarily designed to reduce taxes should have the CPA’s blessing, and the tax preparation appointment is the perfect time to get it.

This is also a good time to consider future taxes. With the expiration of current tax rates at the end of 2010, many people are expecting tax rates to rise for higher-income taxpayers. Is there anything the client could do this year to get ready for potentially higher rates—perhaps recognizing gains to take advantage of the historically low 15% long-term capital gains tax rate, or taking larger IRA distributions before tax rates go up?

7. Is there anything my financial advisor can do to help my tax situation?

This open-ended question could result in some good instructions for you that you may not have thought about before. It could also lead to a meeting between you and the CPA to talk about your mutual client, learn more about each other’s services and capabilities, and perhaps consider some joint marketing programs.

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