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How Financial Professionals Should Use the Information in this Report to Become Your Client’s Trusted Advisor

If you succeed in becoming the trusted advisor to more clients, you will radically improve your business. I did. Your clients will give you gobs more business and refer you to their friends and colleagues. To realize that role, however, you must earn it.

One way to earn trust is to proactively contact your clients and provide them with valuable advice that will save them money.

This report will provide the basis for a sound year-end planning session that incorporates a response to the presidential election, recent tax changes and traditional year end planning. The key to benefiting from this report is establishing communication with your clients. The simple and obvious course is to write and/or call your clients and tell them it is time for their year-end reviews. Even if it has been your custom not to have year-end reviews, for most financial professionals, I think giving reviews to the top 10% of your clients (and more if time allows and seems worthwhile) should be a regular part of your practice.

Many advisors, including me, prefer writing to their clients before calling. Some advisors use post cards, some faxes, some email, some long sales letters, others use tapes and videos, and seminars and DVDs, and prerecorded messages. There are few limits to the types of methods you can use to communicate with your clients and potential clients. Different ways to communicate with your clients all have their place.

It is late, however, and at least for year-end meetings, it is possible all you will have time to do is call your clients and ask them to come in for a year-end review. Sometimes, though, good enough is good enough. You may prefer to write, but calling is better than doing nothing.

Start with some “B” clients just to practice your sales call. If you aren’t willing to make calls, have an assistant do it. Don’t be afraid of rejection. Even if your client doesn’t come in to see you, phrased properly, most clients will not see your call as an intrusive sales call but as an honest attempt to help them reduce their taxes. Since December is the toughest month to “sell,” you may not get a huge response that will instantly line your pockets with gold. You will, however, make enormous strides in becoming or securing your role as your client’s trusted advisor.

Tell your clients you would like to set up a meeting in your office. If you have other information to provide them, you could have several items on the agenda. Though in most cases you won’t be charging for the meeting, it will still be a “sale” to get a client to come to see you. Specific sales letters to clients and sample phone scripts are beyond the scope of this particular report.

As you read the report, think of one client and try to imagine what advice you would give him or her. Obviously different advice will be appropriate for different clients, but concentrate on specific suggestions you could offer one client. I recommend you print the report and highlight the areas you want to review with that one client. You should add other ideas that aren’t included in this report that may have nothing to do with year end planning.

Personally, I like to see a client’s list of assets and their tax return during our meeting. If I don’t have that information, I request a client bring it with them to the meeting. I also like to see their wills and the beneficiary designations of their IRAs and retirement plans.

One area not covered in this report that is relevant for year end planning is tax loss harvesting. If you provided us with all your contact information, we have sent you our special report “Tax Loss Harvesting: How to Offset Gains and Losses to Reduce Your Clients Taxes.” If you did not get that report and you would like a copy just call our office (1-800-387-1129) and ask to speak to Alice. She will take your information and either email you a copy or send one in the mail.

In addition to year end planning, any financial professional licensed to sell life insurance should inform their clients about the inevitable increases in the term life insurance pricing. Many clients should “lock in” their term certain insurance and universal guaranteed life coverage while rates are still low and underwriting is more generous. The low rates and easy underwriting might not last much beyond year end.

Some advisors just don’t like to attempt to sell in December and would prefer giving their clients some year end information and doing their “selling” after year end. In that case, providing your clients with our information would be a better choice than doing nothing.

What follows is an array of tax saving tips and techniques that can save your clients money.

Developing a “tax-smart” response to President Bush’s victory is not enough to achieve optimal planning. You must also consider The Working Families Tax Relief Act of 2004 and The American Job Creation Act of 2004. Finally, you need to incorporate traditional year-end planning. We combine all these elements in this special report.

President Bush’s Agenda for Income Taxes & What to Do with Constant or Lower Tax Rates in the Next Four Years

President Bush has made it quite clear that he wants to make most of his previous tax cuts permanent, including:

He believes that this tax relief must be made permanent so families and businesses can plan for the future with confidence. All indications are that President Bush will sustain his policy of cutting taxes for both middle class and wealthy taxpayers. So what should you be telling your clients?

Pay Taxes Later is our mantra. It defines our System; and all indications are that we should stay the course.

Your clients should consider shifting income from 2004 to 2005 since their tax rates are likely to be the same in 2005 as in 2004. This recommendation is consistent with traditional planning where deductions are accelerated and income is postponed. This strategy is important for taxpayers with lower incomes as well as higher incomes. Many of the ideas mentioned below under Other Ideas to Reduce Taxable Income and Reduce Taxes provide specific ideas to accomplish this.

President Bush has made it clear that simplification of the income tax code is high on his list of priorities. Specific details of how this will be accomplished are not available and may not even have been determined yet.

In over 25 years as a practicing CPA and attorney, I have rarely seen effective tax simplification. One exception was when the Treasury, without consultation with Congress or the President, simplified the archaic IRA minimum distribution rules in 2001.

I think it is fair to say we will have lots more changes ahead, but don’t bank on “simplification.”

We have always recommended maximizing retirement savings on a tax-deferred basis by putting as much as possible into pension and profit sharing plans at work. This strategy continues to make sense today. One exception to our “Pay Taxes Later” strategy is Roth IRAs and Roth IRA conversions.

Qualifying Taxpayers Should Consider Roth IRA Contributions and/or Converting a Portion of their Traditional IRA to a Roth IRA

The benefits of converting a traditional IRA to a Roth IRA are discussed at length in our peer-reviewed article, Roth IRAs: Accumulating Tax Free Wealth. You can find the article on our web site, www.paytaxeslater.com in the recommended reading section under the Articles/Resources tab. The conversion must be completed before year-end and many brokerage houses recommend getting the Roth IRA conversion form to their offices by December 15 to qualify for a year 2004 conversion.

If you seriously think there will be an elimination of, or drastic reduction of, the income tax in favor of a national sales tax system, then the Roth IRA conversion is not for you. For most of us, however, small targeted Roth IRA conversions are still appropriate. Larger conversions are also appropriate for some taxpayers.

Some advisors are telling their clients to stop making Roth IRA conversions. I disagree. Even if President Bush doesn’t want to raise taxes, I still maintain that Roth IRA conversions play an important role for certain taxpayers.

2005 and Beyond: Special Years for Taxpayers Who Failed to Qualify for a Roth Conversion in the Past

Starting in 2005, income from an IRA owners minimum required distribution is no longer a factor in determining whether you are eligible for a Roth IRA conversion.

If you are over 70 and ½ and were previously unable to make a Roth IRA conversion because your minimum distribution from your IRA pushed you over the $100,000 limitation, starting 2005 you will be eligible to make a Roth IRA conversion.

Roth IRA conversions are of course most beneficial when the investments increase in value after the conversion. This uncertainty, however, should not prevent you from considering a conversion. If your investment results are not as beneficial as desired, the rules permit a subsequent cancellation of the conversion if it is done by the extended due date of the income tax return. A complete discussion of converting and unconverting Roth IRAs can be found in the article, Roth IRA Conversions: An Aggressive Strategy. The techniques discussed in this article can help taxpayers get the most bang for their conversion buck by jump starting the growth of the converted Roth IRA.

If you delay taking your first required minimum distribution during the year you turn 70½ (which is permissible), you will be required to take two minimum distributions during the following year. Although this is a good strategy for delaying taxes if all other factors are equal, lower income taxpayers may discover that this pushes them into a higher tax bracket, or even worse, causes some of their social security benefits to become taxable. For higher income taxpayers, the delaying process may be more prudent.

This Act was signed into law by President Bush on October 4, 2004, but much of its effect will be transparent to taxpayers when comparing their 2004 taxes with 2005. This is because the primary features of this Act are to extend deduction amounts and tax credits in place for 2004 to year 2005. Under previous plans, several provisions were set to expire after 2004 or revert to prior amounts. Other technical corrections to tax laws are also included under this Act.

Continue the $1,000 Child Tax Credit from 2004 into 2005 through 2010. Without this Act, the credit would have been only $700 in 2005-2008. The Act still sunsets the credit back to $500 in 2011.
Continue marriage penalty relief by making the standard deduction for married taxpayers twice that of single individuals and by making the size of the 15% tax bracket for married taxpayers twice that of single individuals. Without this change, the 2005 amounts would have reverted to lower amounts according to the sunset provisions of prior law.
The expanded 10% income tax rate bracket is extended from 2004 through 2010. Without this change, the 2005 amounts would have reverted to lower amounts according to sunset provisions of prior law.
The Alternative Minimum Tax exemption amount ($58,000 for married couples) is extended through 2005. Without this change, the 2005 amounts would have reverted to lower amounts according to the sunset provisions of prior law. Sunset provisions which lower this amount still apply for years after 2005.
The Educator’s Expense deduction, up to $250 of teaching expenses, was extended from 2003 to 2004 and 2005.
Delay the phase-out of the $2,000 deduction for clean burning vehicle purchases such as gas/electric hybrid automobiles. Without this change, the 2004 and 2005 deduction amounts would have been reduced to $1,500 and $1,000. Sunset provisions which lower this amount to $500 in 2006 and eliminate it thereafter still apply.
The Research credit is extended from 2004 to 2005.
The Work Opportunity and Welfare-to-Work credits are extended from 2003 to 2004 and 2005.
Various other tax credits and deductions were also extended through 2005.

This Act was signed into law by President Bush on October 22, 2004. This Act focuses on providing tax incentives and tax cuts for major corporations. However, there are several changes that will have a more direct effect on individuals and small business owners.

This election is effective for 2004. The sales tax deduction can either be the actual sales tax, as documented by the taxpayer’s receipts or an amount determined from tables prepared by the IRS, PLUS any sales tax paid on the purchase of a vehicle, boat or other items specifically listed by the IRS.

Tax planning actions would include making a planned purchase of a vehicle by year-end if you anticipate that your sales taxes will be higher than state and local income taxes. For bigger than average spenders, saving all receipts for the year in order to add up actual sales tax may actually save you money on taxes (but the paperwork may prevent this from being cost effective if you are not organized).

Caution should be given here related to the alternative minimum tax (AMT) effects. This sales tax deduction is likely to be an AMT preference item, so if the AMT applies to you, this extra deduction will not help you save on the total tax. Also, it may make some people subject to AMT where they previously were not, thereby limiting the savings.

Many individuals have previously received significant tax benefits by deducting a value for a donated vehicle based on a valuation method other than its actual sale by the charity. Beginning in 2005, this will no longer be permitted when donating a vehicle valued at more than $500.

Effective January 1, 2005, charities receiving vehicle donations are now required to provide a written acknowledgement report to the donor within 30 days of the donation or date of sale of the vehicle by the charity. The report will state, among other things, whether the vehicle was sold by the charity and how much it received from the sale. The donor cannot deduct more than this amount as a charitable contribution.

In the past, some taxpayers had used other substantiation methods to value the donated vehicle such as ‘blue book value.’ The values determined this way may have been higher than actual subsequent sale proceeds because there is no guarantee the actual sale amount will be the highest price possible or as much as the blue book value. If you had planned on donating your vehicle to charity, you may be better off doing so by year-end 2004. Actual sales proceeds on the sale of the vehicles by the charities may limit your deduction in 2005 and beyond.

This Act extends to years 2006 and 2007 the higher amount of eligible property that may be expensed under Section 179. The higher amount is $100,000 in 2003 with inflation adjustments thereafter. The Act puts off for two more years, until 2008, the sunset provisions that will return the maximum Section 179 deduction to $25,000.

These rules allow taxpayers to reduce income taxes by fully expensing purchases of qualifying assets used in business (such as computers and other equipment) in the year of purchase.

For new businesses, if total start-up and organizational costs for the year do not exceed $50,000, the Act allows a full deduction of up to $5,000 of start-up costs and, for corporations and partnerships, up to $5,000 of organizational expenditures paid or incurred after October 22, 2004. Each $5,000 amount must be reduced when the total of these costs exceed $50,000. The Act imposes a 15-year amortization period (up from 60 months or 5 years) for business start-up costs and organization costs not deducted in the first year under these rules. This provides additional incentive to pay all new business organization and start-up costs by year-end.

Deducting Attorneys Fees and Court Costs in Discrimination and Certain Other Suits

The full award amount from certain lawsuits, primarily discrimination cases, is considered income for tax purposes in many jurisdictions. The related attorney fees and costs, which can be a substantial part of the award, were previously deducted as miscellaneous itemized deductions and were an AMT preference item. This has previously produced gross inequities for the wronged individual.

We have seen cases where a wronged individual has won an award in a suit, but had to pay a large percentage in attorney fees and, due to the AMT effects, such a large amount in income taxes resulting in an otherwise sizable award to be reduced to a negligible amount. The AMT and 2% itemized deduction limitation rules minimized the deduction for legal fees, and the income tax on the full award was basically the difference between the award less the legal fees. The victim got practically nothing.

This Act now permits these attorney fees and costs in discrimination and certain other cases (but not all types of cases) to be deducted directly from adjusted gross income and the deductions are no longer a preference item for AMT. Therefore the awarded individual can realize the equitable benefit anticipated in the court decision. There is now additional incentive to settle these cases and pay these costs.

Financial Planners, this section could be a goldmine for you. A good planner will memorize the limits.

Retirement savings incentives and pension plan reform reflect increased contribution limits for 2004 and 2005. The 2004 limits for elective deferrals to 401(k)s, 403(b)s, and section 457 retirement plans is $13,000 ($16,000 for individuals age 50 and over). The 2005 limits for elective deferrals to 401(k)s, 403(b)s, and section 457 retirement plans increase to $14,000 ($18,000 for individuals age 50 and over).

Now is your last chance to review with your plan administrator options for additional deductions from your December pay to maximize your tax deferred contributions for 2004. If your tax rates are higher in 2005, there will be all the more reason to take full advantage of all your allowable retirement savings deductions.

Keep in mind that contributions to elective deferral retirement plans and self-employed retirement plans will reduce your adjusted gross income. Because certain limitations on deductions and tax credits are based on your adjusted gross income, you have the chance to further trim 2004 income taxes by hundreds or thousands of dollars.

Small business owners have been waiting for a plan that would allow them to set aside more money, with tax-favored treatment, for retirement. The biggest potential benefit of the one-person 401(k) goes to one-person businesses earning between $50,000 and $160,000. An unincorporated business owner earning $50,000 could shelter roughly $22,200 in 2004 or 44% of earnings! (For owners over age 50, these amounts are roughly $25,200 or over half of earnings). This plan must be established and funded with all elective deferrals no later than December 31, 2004 in order to make a contribution based on 2004 earnings.

Individuals already participating in 401(k) or 403(b) elective deferral plans at work, while earning additional income from a side business, are not the best suited to take advantage of this type of plan because of limitations on combined retirement contributions.

Sole proprietors earning less money should consider a SIMPLE. For 2004 you can deduct up to $9,000 (or $10,500 if 50 or older) and it increases to $10,000 for 2005 (or $12,000 if 50 or older). Your income only needs to be equal to or greater than the deduction amount to make the full contribution.

Many readers will have capital loss carry-forwards to use in 2004 and possibly beyond. Using losses to reduce taxable gains by offsetting the losses against the gains is referred to as “tax-loss harvesting or tax-loss selling.” Now is the time to review your investment portfolio and make some decisions that will generate tax savings.

The best losses to have are short-term capital losses. This is because the IRS forces you to match short-term gains against short-term losses and long-term gains against long-term losses first. Only then can you use your excess short-term losses to offset long-term gains. If all your losses are long-term losses, and you have no short-term losses to soak up your short-term capital gains, you will be taxed on your short-term capital gains at ordinary income rates. This rate might be twice as high as you pay on your long-term capital gains.

Many investors fail to maximize the benefits by specific lot selling. Keeping track of your stock purchases at lot levels (instead of the First-In, First-Out default method) allows for greater control when instructing your broker to sell shares.

If your losses exceed your profits, you can deduct up to $3,000 of losses against ordinary income. That adds up to an $840 tax savings for an individual who is in a 28% tax bracket. Be careful to avoid a wash sale, i.e., buying the same security within 30 days of the time you sell the shares—the tax rules will disallow the loss.

Harvesting your investment losses can reduce your capital gain income to zero. It’s a great way to increase the after-tax rate-of-return on your portfolio without the risks of active trading. In combination with a good asset allocation and reallocation strategy, you can add value to your investment portfolio without increasing your investment risk.

Very few people including the IRS understand the Alternative Minimum Tax. Unfortunately more people, and not necessarily only the wealthy, are falling victim to its prey. In general, you compute your tax liability using both regular tax rates and the AMT tax rates and pay the higher of the two.

Although prior tax laws provided some limited AMT relief by increasing the exemption deduction, recent legislation has only extended those same exemption amounts for 2003 and 2004 to 2005.

If you determine that you may be a victim of the AMT in 2004 but not 2005, holding off paying certain deductible expenses such as state and local taxes, medical expenses, real estate taxes, and miscellaneous itemized deductions until 2005 may prove to be of benefit in lowering 2005 taxes.

Consider transferring stock to your child. For example, assume you are in a 25% tax bracket and are planning to sell some appreciated long-term stock to pay for your child’s education. Your child is in a 10% tax bracket. Consider making a gift and transferring the stock to your child who subsequently sells the stock. You have effectively shifted long-term capital gains from a 15% taxation rate to your child’s long-term capital gains tax rate of 5%.

The tax rate schedules under current tax laws for married taxpayers filing jointly are exactly twice the amount as married taxpayers filing separately. This change may create opportunities for married taxpayers who choose to file separately. Some deductions are limited by a percent of your AGI. For example, your medical deductions are allowed only to the extent they exceed 7.5% of your AGI. Miscellaneous itemized deductions must exceed 2% of your AGI before they're allowed. In the right situation, one spouse may have substantial deductions that are erased by the income of the other spouse.

Make or Increase Retirement Plan Contributions: Business owners can reduce AGI by increasing contributions to pre-existing retirement plans or establishing a new plan such as 401(k) plans, SIMPLE pension plans, SEPs, Keogh plans, or regular (deductible) IRAs. Most self-employed retirement plans allow for deductions in tax year 2004, although payment can be postponed until the extended due date for filing the return. In other words, payment of 2004 deductible retirement plan contributions can be postponed until August 15, 2005 or possibly October 15, 2005 in certain cases.

Maximize Loss Situations: If you are experiencing an unusual tax year where you may be in a much lower tax bracket than usual or even in jeopardy if wasting itemized deductions and personal exemptions, careful tax planning can be more crucial than ever. Make sure you project your taxable income before the year-end has passed and examine all your alternatives.

Calculate Medical Expenses: If this year’s out-of-pocket medical expenses are larger than usual and your company doesn’t offer a flexible spending account, it makes sense to compute if you’re eligible to write-off your medical expenses. The total medical expenses must exceed 7.5% of your adjusted gross income to qualify. Because very few people normally beat the 7.5% test, be sure to pay as much as you can before the year-end in a year that you qualify for medical itemized deductions.

Take Advantage of Pre-Tax Parking Breaks: If your employer offers pre-tax dollars to be used for parking, mass transit or van pools, take advantage of the tax savings. Many individuals are not afforded the luxury of being able to deduct personal parking costs.

Make a Roth IRA Contribution: If you qualify, making an annual $3,000 Roth IRA contribution for 2004 (up to $3,500 if over the age of 50 by the end of 2004) both for you and your spouse will help you accumulate tax-free wealth. The contribution limits are increased for 2005 up to $4,000 (up to $4,500 if over the age of 50 by the end of 2005). You have until April 15, 2005 to fund a 2004 Roth IRA.

Make your Non-Cash Charitable Deductions before December 31: The IRS allows you to deduct either the cost or the fair market value, which ever is lower, for your non-cash contributions. Please remember to ask for a receipt. You must prepare an additional tax form if your non-cash contributions exceed $500.

Donate Appreciated Stock Instead of Cash to your Favorite Charity: If you hold appreciated publicly traded stock for more than one-year, you can donate the stock and get a charitable deduction for the full market value of the stock and avoid paying any capital gains tax. You must give the stock directly to the charity. The opposite is true for stocks that have gone down in value. Never donate stocks that have declined in value, but rather sell the stock at a loss and donate the cash to charity.

Self-Employed Individuals Should Consider Employing their Child(ren): Employing your child (age permitting) offers great tax-saving opportunities. Assuming your child has no unearned income, the parent could pay the child wages up to $4,850 in 2004, and the child would not have to pay any federal income taxes. The next $7,000 would be subject to a 10% tax rate. If the parents’ marginal income tax bracket were 25%, the $11,750 wage deduction would generate $2,934 in federal income tax savings. Furthermore, when you employ a child under 18-years-old, neither the employer nor the employee is subject to social security tax on the child’s wages. The wages your child earns will qualify as earned income for the purpose of establishing a Roth IRA. A Roth IRA will provide your child with an exceptional opportunity to accumulate money with tax-free growth.

Self-Employed Individuals with No Employees Should Consider Employing Their Spouse: A self-employed individual may be able to deduct all of his or her health insurance premiums and medical expenses by setting up a medical reimbursement plan with his/her spouse as the only employee of his/her business. Self-employment taxes could then be saved on all the deductions under the medical reimbursement plan. Your spouse must become a bona fide employee of your business. Theoretically, that means your spouse will be working under your control. Good luck.

I hope you enjoyed this report and, more importantly, are motivated to take appropriate action. I wish you and your family health, happiness and a profitable New Year.