30 tax questions to answer by the end of the year

November 6, 2023 11:13 AM

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One of the best times for financial advisors and tax professionals to display their value to clients comes at the end of the year, according to more than a half dozen experts.

The last quarter of the calendar presents opportunities for smart practice management, complex tax planning strategies and key questions around charitable giving and assets like businesses, retirement accounts and homes.

Financial Planning compiled the below list of 30 tax-related questions for financial advisors and their clients to consider by Dec. 31 through interviews with the following eight experts:

Liting Chuang, a certified public accountant who's the director of tax planning for Menlo Park, California-based Bordeaux Wealth Advisors
Adrienne Davis, a CPA and certified financial planner with Philadelphia-based Zenith Wealth Partners
Amy Irvine, an enrolled agent and CFP who's the founder of Corning, New York-based Rooted Planning Group
Rupa Pereira, an EA and founder of Apex, North Carolina-based FWJ Planning
Robert Keebler, a CPA and partner with Green Bay, Wisconsin-based Keebler & Associates
Corey Hulstein, a CPA who's the director of tax for Lenexa, Kansas-based Modern Wealth Management
Erin Wood, a CFP who's senior vice president of financial planning and advanced solutions for Omaha, Nebraska-based Carson Group
Elliott Brack, a CPA who's managing director of tax services for Los Angeles-based Manhattan West

Scroll down the slideshow to see their advice. For a look at the most important potentially expiring provisions of the Tax Cuts and Jobs Act, check here tomorrow. To view the video of a Leaders Forum discussion of year-end tax tips featuring two of the above experts, click here.

What are some of the most important questions?

Pereira listed the following general questions as looming largest for her clients' taxes at the end of the year:

"Based on my projected annual household income, what marginal tax bracket would I be in?" she said in an email. "Have I made estimated tax payments on my business income? Do I plan to itemize, or can I bunch those expenses for the following year? Am I on track to maximizing my workplace retirement contributions?"

Should advisors schedule a specific meeting with all clients?

Keebler views a year-end meeting with clients as a good idea in most cases, unless the customer's specific work keeps them too busy for one. Older and retired clients often like to talk through the next 12 months with their advisor or tax professionals, he noted.

"What all of us have to remember is, what might be simple to us is generally complex to our clients," Keebler said. "They probably want a face-to-face. We should try to make that happen."

Are advisors demonstrating value to their clients?

In the fourth quarter, advisors and their clients still have time "to implement some changes" in areas such as income acceleration, individual retirement accounts and federal tax withholdings on the customer's Form W-2, Chuang pointed out.

"We potentially could save them a few thousands of dollars in underpayment penalties," she said. "I think we provide a lot of value doing a year-end discussion, even if it's just a quick half an hour phone call."

Are advisory practices meeting their clients’ needs?

Advisors should remember that tax planning is "by far one of the most requested services" among clients, according to Wood.

"I always recommend to our advisors to start meeting with their clients early in the fourth quarter about tax planning," she said. "From a practice management perspective, I would encourage everyone to start talking to their clients about tax planning and making sure that they're giving services that their clients really want."

Are clients prepared to beat the ticking clock?

Brack's firm often sends clients a checklist of planning issues to resolve by the end of the year and schedules a meeting to discuss them, he said.

"If we want to do anything to be captured in the 2023 tax year, we've got to do it by Dec. 31," Brack said. "This time of year is very important for us to be reaching out to clients."

Are advisors and clients looking beyond next year?

Tax planning "should have a long-term focus" beyond this year and the next, according to Hulstein.

"Tax deferral doesn't necessarily equate to tax savings," he said. "It's looking for those arbitrages in the code where we can maximize our tax efficiency."

Are clients taking advantage of open enrollment season?

End-of-year meetings at Davis' firm revolve around "two different lenses" of looking at clients' financial plans: the potential tax liability based on their wages and other income and whether there are any opportunities in open enrollment season, she said.

"With our practice, the end of the year is very important when it comes to taxes," she said. "We like to have meetings to talk through what potential benefits they can opt into, especially the ones that potentially have tax benefits."

Could clients use a dependent care FSA through their employer?

Dependent care flexible spending accounts could enable clients with children to set aside as much as $5,000 per year from their paychecks without paying taxes on those wages or outlays for qualifying expenses, Wood noted. Those costs include medical care, babysitters, summer day camps or before- or after-school programs. The FSAs do usually require clients to spend down all of the money by the end of the plan year or March 15 of the next one.

"So many people don't realize that the dependent care FSA is available to them through their employer, and they completely miss it," Wood said.

Should clients consider an HSA?

Health savings accounts offer a method for clients eligible through their jobs' health insurance to use pre-tax contributions out of their paychecks to pay for deductibles, copays, coinsurance and certain other expenses without getting hit with taxes on the withdrawals. The accounts also gain value on a tax-free basis through interest or other yields, Chuang said.

"If a client is enrolled in a high-deductible plan, they should definitely consider maxing out their health savings accounts," she said. "It provides the trifecta of tax benefits. And unlike the FSA, it's not 'use it or lose it.' It just grows in your account until you need a distribution from it."

Will clients get a tax hit from their RSUs?

Restricted stock units may add to clients' incomes — and their taxes — in startling ways without proper planning, according to Irvine, whose firm recommends that those customers make an estimated payment or be ready for one come April.

"Many of our clients have RSUs and we never know what they are going to vest at — causing some surprises at tax return preparation time if we don't monitor those events," Irvine said in an email. "So we return estimates based on their current paystub, plus 'regular' pay, plus possible RSU prices that will vest. Some companies don't allow clients to change the withholding when the RSUs vest, and across the board they withhold 25% for federal and the top rate for the state. While it often results in a refund for the state, the 25% isn't sufficient for the federal."

Could clients qualify for energy efficiency credits?

Last year's Inflation Reduction Act and certain states have ratcheted up the rebates, credits and deductions available to clients for energy-efficient improvements to their homes and other means of reducing fossil fuel usage. The Inflation Reduction Act is "the single biggest tax bill that's been put in place around energy efficiency to date, and it's available to everyone," Wood said. For example, clients may decide to buy a new door for their home in the fourth quarter while installing new windows after the start of the next year.

"Doing some spreading out of projects is a great way of taking advantage of those credits every single year," Wood said. "If you're in a state that's doing rebates on top of the tax credit, that is even more impactful."

Should business owners consider a pass-through entity at the state level?

In response to the limit on the deduction for state and local taxes from the Tax Cuts and Jobs Act of 2017, California and many other states gave business owners the ability to use qualifying pass-through entities to reduce their taxable income at the federal level, Brack noted. Using California's elective tax rate of 9.3% and the top federal bracket of 37%, he calculated that a partnership or S-corporation that earned $1 million in a year would slash the owner's federal income by $93,000 and reduce their payment to the IRS by $34,000.

"That's a powerful deduction that we don't want to miss or waste, because that's a deduction for 37 cents on the dollar for federal taxes," Brack said. "That deduction is really powerful to get reported this year so that they get a benefit on their 2023 taxes."

Is your client’s income nearing the ceiling for state property tax relief programs?

State-level property tax relief often phases out based on a client's income, according to Irvine, who called that issue one of the most important questions to consider by the end of the year.

"Will your income put you over any property tax credit programs your state may have?" she said. "If so, are there actions you can take that will lower your income, especially if you are getting an 'enhanced' property tax credit because you are over age 65? If you are close to the max, we may recommend that you change where your income flows from for the last few months of the year. Sometimes capital gains can push you over, so watching this and for offsets might be extra important."

Could a charitable contribution make itemized deductions advantageous?

Fewer taxpayers itemize after the Tax Cuts and Jobs Act nearly doubled the standard deduction. Charitable contributions before the end of the year, including those to donor-advised funds, could pose potential savings for clients who can add their mortgage interest payments to the deductions as well, Davis said.

"Sometimes it looks like, 'Hey what amount of charitable contributions do we need in order to get over the threshold from standard to itemized?'" she said, noting the particular advantages of donor-advised funds. "You are able to take the entire deduction in that year and then you can allocate it as you see fit."

Does a client have highly appreciated stock to send to a donor-advised fund?

Contributing a stock that has gained a lot of value to a donor-advised fund gives clients a way to count the higher donation toward their deduction without "having to realize the gain on your return," Hulstein said.

"You get the deduction on the front end," he said. "You no longer own the assets, but you have control of the assets. So you can send them to the charity whenever you want to."

What will be the strategy for any required minimum distributions?

Since clients aged 73 or over must make required minimum distributions from their retirement accounts, advisors can consider multiple approaches. If clients donate the sum directly to charity, they won't be eligible for a deduction, but they will reduce their income and their Medicare premium to lower levels than if they kept the distributions for themselves, Chuang said. They could also boost the withdrawals from their accounts.

"They can take out more if it makes sense to do so," Chuang said. "If 2024 is a low income year, they may want to take out more than the RMD."

What’s the impact of getting to RMD age?

A client's age and RMD status often determine the best course of action for charitable gifts, according to Irvine.

"If clients are charitably inclined and RMD age, we recommend making the year-end gifts with their RMDs to reduce their taxable income," she said. "If clients are charitably inclined and not RMD age, then we run scenarios on gifts they might want to make and determine if that would help them itemize their return. For some clients, we recommend gifting low-cost basis stock either to the charity directly or to donor advised funds."

Is the client eligible for a qualified charitable distribution?

Clients aged 70½ or older can maximize their tax-free giving by making a qualified charitable distribution of up to $100,000 out of their IRAs.

"If we want to, we can make a donation to a charitable organization directly out of the account," Hulstein said. "It's most effective when we utilize the RMD."

How do the projections for Tax Day look?

Advisors and tax professionals should compile projections of clients' taxes for this year based on potential loss-harvesting, trust planning, charitable gifts and IRAs, Keebler said.

"These are all things that should be wrapped into your equation," he said. "It's a matter of getting the client to give you the details in a secure email, and then putting that into the right software package."

What areas have clients overlooked?

Clients often miss significant planning considerations toward the end of a given year, Pereira said.

"In my experience, I've seen clients not maximize on their pretax employer-based retirement contributions through the year," she said. "They're also unaware of Roth contribution limits therefore having to reclassify or do a backdoor Roth. Under-withholding on wages or self-employment income is another area of concern."

What else could affect clients’ taxes, retirement plans and income next year?

The last few months of the year call for advisors and their clients to answer several questions surrounding 401(k) plans, student loans and health insurance plans, Irvine said.

"Should you and can you maximize your 401k contributions; and if your plan has a Roth 401k or after-tax component, should you contribute to that side more or less?" she said. "Now that student loans are back in repayment status, how will your income affect any plan that you are on? Do you need to make sure you are putting more in pretax to lower your payment? If you are on the health care exchange, how will your income affect your premium? Are there any changes that can be made prior to the end of the year to make sure you get the premium tax credit, if applicable?"

Can older clients who may get an estate tax hit dispose of any retirement accounts?

Clients with enough wealth to be subject to the estate tax at their death should look closely at their IRAs or other retirement savings to "start draining those accounts," Brack said.

"Retirement accounts get hit really hard when they go through the estate taxes process," he said, noting that heirs could be paying income and estate taxes when getting the assets. "The taxes just start adding up when there are retirement accounts in taxable estates."

How will a client’s Social Security checks affect their RMD?

Some clients could save on taxes and find an income bridge toward delaying Social Security payments for the largest benefits by taking distributions from IRAs starting at age 59½, Wood noted. That would reduce the RMD and the taxes on the smaller income, as well as the Social Security benefits.

"These people are most likely drawing Social Security, and so there is a lot of tax planning that needs to go into when you are taking money out," Wood said.

What are the client’s capital gains for the year?

Irvine's team searches for opportunities to harvest losses against any capital gains for clients who may have to pay taxes on them.

"In some cases, we might rebalance a portfolio when there are losses to offset gains that were recognized (or capital gain distributions that are estimated)," she said. "In other cases, we might recognize capital gains if the client is in a low tax bracket, possibly filling up the 0% capital gains bucket. If there are not portfolio rebalancing opportunities or no need to rebalance, then we look at the capital-gain distribution estimates and build those into the projections (something we don't know until the end of the year) and determine if an estimated payment should be made for the fourth quarter (i.e. January 15th of the following year)."

Where are the tax-loss harvesting opportunities?

Direct indexing and other means of tapping into tax-loss harvesting enables some clients to slash their liabilities, Wood noted.

"This is where working with your tax professional or your advisor can be really impactful," she said. "Most clients are very open to that approach, where they're still investing similarly but able to take some tax losses."

Will the client be taking 529 distributions or qualifying for education tax credits?

Any clients paying for their children's college should closely compare potential withdrawals from 529 savings plans to the tuition and consider the education tax credit, Irvine said.

"If you have a college student, make sure any 529 distributions match up to the tuition bill you receive," Irvine said. "Don't make the withdrawal this year, but then make the payment next year; this could result in paying penalty and tax on the withdrawal. Along those same lines, if you might be eligible for the education tax credits, do the math! Are there things you can do to help you qualify (i.e. reducing your income through deferrals, HSA contributions, reducing capital gains), if the answer is 'no' for this year, could it be 'yes' for next year? If so, can you push off paying tuition into 2024?"

How should business owners time their depreciation expenses?

While business owners often accelerate their depreciation expenses to defer some tax liabilities into the future, the potential sunsetting of the higher standardized deduction from the Tax Cuts and Jobs Act at the end of 2025 might make straight-line depreciation a better choice, Hulstein noted.

"Those deductions become more valuable to us in 2026 than they are today," he said. "Does it really make more sense to expedite a bunch of expenses this year, when they could potentially have more value for us in the future?"

What kind of a year did small business owners have?

Irvine's team often adjusts small business owner clients' plans for the next year based on their earnings for this one, she said.

"For our small business clients, we look at their profit-loss statement and compare those to the projections from earlier this year and determine any variances," Irvine said. "If they have a better year than expected, we look at future plans they have and determine if making that investment in their business now will be helpful to them from a tax perspective."

What was the client’s interest income for the year?

Rising interest rates have buffeted savings accounts, loans, credit cards and other areas of the economy tied to the Fed's decisions, Davis noted. Advisors and clients will need to calculate whether that has made an impact on the year-end income.

"I do see that there's a lot more interest income that they need to account for, as opposed to the prior year," Davis said.

What other assets did the clients forget to mention?

Around the end of the year, Brack's firm checks with clients about whether there have been "any extraordinary gains or losses" in accounts held outside their advisory practice, he noted.

"Oftentimes our clients have assets in other places that we don't have clarity on or know much about, so it's important for us to ask those questions to make sure we aren't hit with a surprise come next March or April," Brack said. "We don't like to be in that behind-the-eight-ball position in March or April."