NEW YORK - One of Marty Murray's clients in his practice as a CPA made a decision to sell a piece of art, only to find herself waking up in the middle of the night in a cold sweat.
"She realized she would pay income tax," Murray told a room of about 40 planners at the FPA's spring retreat in New York, and she called Murray up.
"I said, 'Well, have your son sell it,'" Murray said, explaining that having the son complete the transaction allowed it to be taxed in his much-lower bracket rather than her higher one.
The downside, the CPA explained, is the client had to pay Murray to fill out a gift tax return to show the piece had moved out of her name and into her son's name. But, in the end, this strategy saved her money.
Murray, of Murray & Josephson, CPAs in New York and Boca Raton, Fla., offered a review of basic tax strategies with a few twists at his conference session this week. Other recommendations included:
- Focus on reducing your clients adjusted gross income. While an obvious goal, it's a central one that can get lost in other tax-planning strategies.
- To that end, have your clients put as much money as they can and will need for future medical expenses into health savings accounts, if they have them. "It's a great way to save for retirement," a woman in the audience said. Murray agreed, saying, "I look at it as more of a retirement thing. I don't think a lot of people are using that, but it's a great tool for reducing AGI."
- Try other ways to reduce AGI: Take an adjustment for student loan interest, both for your clients' loans and for those they are servicing for their children. Deduct moving expenses, although bear in mind that certain rules apply. (For instance, clients have to move at least 50 miles from their old house and closer to their work.) Deduct payments for self-employed health insurance. Urge clients to max out contributions to their retirement plans, including IRAs, simplified employee pensions (SEPs) and SIMPLE retirement plans. And if your clients sustain a loss due to a disaster like Hurricane Sandy, they can deduct that loss if it exceeds more than 10% of their AGI in a given year. Keep in mind that Congress may choose to change this rule to reduce that percentage.
- Convince your clients it's better that they write out a big check to the government as opposed to getting a large refund on the back end, so they can keep their money for as long as possible. To make that point, Murray says he keeps a refund check the IRS sent him for $1 (that he never cashed) to prove to his clients how he manages his own finances.
- If a client's child is making more than $15,000 a year and that client makes too much money to qualify for certain education and other child tax credits, consider having the child removed as a dependent. That way the child can qualify for the credits, and the family overall saves money.
- Manage your clients' tax brackets. Accelerate income in a low-earning year if you know the next year will bring a windfall, and push income into the next year when the windfall is this year. Strategies might include paying January's mortgage interest in December, making regular charitable contributions early and deferring income to the extent possible.
- Accelerate as much of a client's income as you can when the client falls under the AMT (alternative minimum tax) in a given year but knows he or she will escape the AMT by virtue of falling into a higher tax bracket the following year. "Accelerate it to the point where you are no longer in the AMT this year," Murray says.
- When it would benefit a client to have a Roth, have that client urge his employer to offer one. It costs companies very little to offer this as a benefit.
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