So, your tax clients say their daughter got into Harvard...
Your clients are ecstatic. Their daughter just got accepted to an Ivy League college. But they’re also worried because that top tier school is expensive. Concern doubles when they think about their 15-year-old son who just started at a private high school. He’ll be looking at colleges soon, too.
Many parents feel financial pressure when it comes to their children’s education. That’s not surprising considering that in 2016, the yearly estimated average cost of undergraduate tuition, fees, room and board was $16,757 at public institutions, $43,065 at private nonprofit institutions and $23,776 at private, for-profit institutions.
What can you as a tax practitioner do to prepare your clients for this financial milestone? Below, you’ll find four suggested talking points to put your clients’ minds at ease.
Discuss Coverdell Education Savings Accounts and changes to qualified tuition programs (QTPs)
Clients who have QTPs (529 plans) or Coverdell Education Savings Accounts (ESAs) may find that tax reform has changed how they’ll use these funds. So, you’ll need to discuss the pros and cons of each type of plan to ensure they’re still getting the most bang for their buck.
One benefit resulting from the new tax bill is that 529 plans can now be used to cover tuition at private K-12 schools up to $10,000 each year per beneficiary. That’s great news for parents with kids in private elementary and high schools, but your clients need to be aware of the downside of using these funds early. The longer the funds stay within the plan, the more growth opportunities the money will have.
While both ESAs and 529 plans are good ways to save money for education costs, ESAs can allow for more adaptability, such as very flexible investment choices. The downside of ESAs is that they are subject to higher income restrictions. Benefits phase out completely for joint filers for modified adjusted gross incomes (MAGI) of $220,000 — $110,000 for single filers — or above. Corporations and other such entities can make contributions to ESAs without income restrictions. Also note, the total amount of contributions to these ESAs cannot exceed $2,000 per year, while 529 plans are only limited to the amount necessary to provide qualified education expenses. Make sure your clients understand that there may be gift tax consequence if these contributions exceed $15,000 during the year.
Regardless of which option best fits your clients’ needs, encourage them to shop around to minimize fees.
Update your clients on the status of popular benefits
Good news for your clients! Many popular education incentives remain unchanged after tax reform.
- The American opportunity tax credit (AOTC) can still be used to obtain up to $2,500 of federal tax credits for expenses related to a four-year degree, and $1,000 of this is refundable.
- Scholarships may be excluded from income for tax purposes if they are used for approved expenses.
- Interest from income on savings bonds within an education savings bond program is also excluded from income.
- There is still an exception to the early distribution penalty for retirement account withdrawals if they’re made for education purposes.
Unfortunately, the tuition and fees deduction isn’t around anymore. That can be a blow to those clients who are used to claiming this deduction.
Remember the grownups who want to go back to school
According to the U.S. Department of Education, about eight million adults over the age of 25 are enrolled in college, which means it’s likely that you have clients who need to know about their options.
Recent tax reform did not alter the Lifetime Learning Credit, which offers up to a $2,000 federal tax credit for qualified education expenses paid for all eligible students included on the taxpayer’s return. There’s no limit on the number of years your clients can claim this credit, and there’s no minimum number of enrollment hours or degree requirements to qualify. However, if your clients qualify for the AOTC as well, it may be best for them to take that credit instead.
Adult students with children have even more benefits to choose from. For instance, a tax credit for child care expenses is available for those attending school full time, so long as the child is under the age of 13.
Many adults are still paying off student loans, which can make it difficult to afford more school. If their MAGI is less than $80,000 ($165,000 joint), they can write off up to $2,500 of interest on a loan without itemizing.
Help your clients see the big picture
Of course, paying for school extends beyond smart tax planning. Providing a holistic perspective on a person’s tax and financial situation is where CPAs shine. Just because something is good for tax planning doesn’t mean it’s the most beneficial overall.
Tax reform has likely influenced your clients’ taxes and possibly their overall financial health. Lower tax rates and expanded eligibility for the child care credit mean benefits for your clients, but tax reform also reduced or eliminated other long-standing favorites like the mortgage interest deduction and the alimony write-off.
The AICPA offers a free podcast on tax reform’s effect on many tax and planning issues, including 529 plans, retirement plans, estate, gifts and trust considerations and other concerns. Find more useful tax and planning resources and tips on growing your business on the AICPA’s Planning & Tax Advisory page.
Whether it’s finally getting that Ph.D. or sending a child to Harvard, the more clients understand about how their tax decisions affect their overall financial health, the more likely they are to take the steps necessary to meet their goals. And you’re the person to help guide them.
Michael Ohanesian, CPA, MST, Tax manager - Parr & Associates. Michael lives in San Antonio, Texas, and is a member of the AICPA Tax Practice Management committee.
Help disaster survivors -- not scam artists
It’s a familiar cycle. A disaster like Hurricane Florence strikes, and the airwaves are inundated with news of people displaced and homes destroyed. And shortly afterwards, you’ll see friends and colleagues ‘sharing’ on social media that they’ve contributed money towards relief efforts on crowdfunding platforms such as GoFundMe and encouraging others to give what they can.
For many people, their sense of compassion kicks in and they are compelled to do what they can to help – which often means making a financial donation. In fact, charitable giving in the United States soared to a record $410.02 billion in 2017 according to Charity Navigator.
But CPAs who specialize in financial fraud detection and prevention warn that you should think twice before clicking that DONATE NOW button. Fraudsters often take advantage of people’s good will and look to rip them off as they try to help those in need.
In fact, post-disaster scams are often successful because they create a sense of urgency to act quickly. In the wake of Hurricanes Harvey and Irene, robocall and impersonator scams popped up tricking people into giving up their personal information and their money. And the numbers can be staggering. When Hurricane Katrine hit, it was reported that fraudsters walked away with nearly $500 million in a variety of schemes.
In the aftermath of Hurricane Florence, it’s critically important that people do their due diligence before they donate. To protect yourself from post-disaster scams, CPAs on AICPA’s Forensic & Litigation Services (FLS) Fraud Task Force recommend that you:
- Stick with charities you trust. If you want to donate your hard-earned money to a cause, consider going directly to a well-known and established charity that you’ve donated to in the past. Giving to a trusted source gives you peace of mind, as you’ll know exactly where your money is going when it leaves your bank account.
- Check it out thoroughly before donating. Confirm charitable organizations are actually 501(c)(3) nonprofits. Research the organization using Charity Navigator, GuideStar, CharityWatch or the BBB Wise Giving Alliance. If pledging on GoFundMe, review the company’s guidance on determining if a campaign is legit. You can also verify charitable organizations’ status with the IRS Tax Exempt Organization Search tool.
- Be suspicious of phone calls, texts or emails. If you receive a call, ask the solicitor if the organization is on GuideStar. If the answer is “What’s that?” hang up. The FTC’s website on avoiding charity scams gives additional tips, such as being aware that scammers typically want donations in cash, by gift card or by wiring money, so you’re better off paying by credit card or check.
- Make sure it’s not a knock-off of a real charity. Some fraudulent sources use names that sound very much like a real charity but are not, so be wary of solicitations. Check the name on the website and make sure it matches the web address. Be extra careful when clicking links from email or social media. And don’t trust your caller ID - modern-day scammers can tamper with caller ID to make it look like they’re calling from a different location or organization.
- Find out how Uncle Sam feels about it. Understand how the IRS views charitable contributions. To take a charitable tax deduction, your contribution must be made to a qualified organization. GoFundMe campaigns and related crowdfunding activities may not fall into that category. If the organization is qualified, consult your CPA to find out if there are limits on deducibility and what documentation is needed. As a rule of thumb, always get a receipt for your charitable donations.
The bottom line: Don’t stop giving to worthy causes that you feel called to support. Just be careful and do everything you can to make sure the charity is legitimate. If you suspect a charitable campaign of committing fraudulent activity, the best course of action is to contact your state charity regulator and file an online FTC complaint. Your donations can make a real difference in people’s lives … but only if the money makes it to them.
As mentioned in an AICPA Insights post on hurricane preparedness earlier this month, if you’re an AICPA member facing financial hardship because of a natural disaster, you can apply for assistance through the AICPA Benevolent Fund. And if you want to help others in need, you can make a charitable contribution to the Fund.
Brian Simpson, Manager, Public Relations, Association of International Certified Professional Accountants
Planning, valuation could have saved Franklin’s heirs $20mil
Aretha Franklin, the “Queen of Soul,” passed away last month in her birthplace of Detroit after six decades reigning the music industry. The first woman inducted into the Rock and Roll Hall of Fame, Ms. Franklin leaves behind legendary hits and performances and a legacy many entertainers only dream of achieving. What she didn’t leave behind, however, is a will.
Without a will in place, it’s now up to the state of Michigan to determine how her reported, yet unconfirmed, $80 million net worth is divided among her four children. And that amount could rise as her estate is valued. In hindsight, with some tax and financial planning, and a quality valuation—even just a few months ago—Ms. Franklin’s beneficiaries could have saved more than $27M in estate taxes.
Tax and financial planning:
First of all, avoiding this type of situation is exactly why CPAs should mention the importance of an estate plan if they sense a client’s resistance to writing a will. When faced with an estate challenge, the family of the individual (or, in this particular case, the entertainer’s agent) should become involved to protect the client’s interest. One of the first steps to take is the review of titles to property, employing any state laws that allow the passing of real property through transfer-on-death elections on deeds. This is one of the simplest, yet most effective, means of transferring real property to heirs without the need for probate.
Also, it is imperative to account for the net worth of the client annually. By maintaining accurate records that reflect cost basis, it is far easier to initiate a valuation after the owner is deceased. That’s where the need for experienced professionals in valuation, a growing advisory service, comes into play.
Assigning an estimated value to intangibles like publicity, brand, image rights and music royalties can be very complicated. More and more, firms of all sizes rely on valuation experts like Accredited in Business Valuation (ABV) credential holders to play a key role in determining the value of these assets, but it’s important they do so in a justifiable manner that will prevent the IRS from challenging its value.
Intangible assets are typically the most significant assets owned by an entertainer’s estate. From a financial planner’s perspective, the values of such assets are necessary to assist in creating cash flow that may be required to liquidate estate taxes. This cash flow could also help continue the function of the artist’s business ventures as well as the payment of any business debts triggered for repayment upon the death of the entertainer.
At the time of death, the estates of celebrities like Ms. Franklin go through a complex valuation process. Today, continuous payments to an artist from digital streaming royalties can be more valuable than any physical asset. And what if a musician leaves behind a secret vault of unreleased or unpublished recordings, like the legendary artist Prince did after his untimely death in 2016? How is the ownership of these tracks determined? In Ms. Franklin’s case, these considerations will be evaluated and can inflate the value of her estate.
Another trick to valuing a celebrity estate is public interest, which typically skyrockets after death. That could mean an uptick in fans streaming Ms. Franklin’s music, publicity and, ultimately, a higher visibility for her brand. In addition, the state of Michigan has a postmortem right of publicity, meaning heirs can legally protect Ms. Franklin's image from unauthorized use.
Saving Loved Ones More Than Grief
You don’t have to be a celebrity with an $80 million estate to understand the importance of estate planning. In fact, many Americans do not have a will in place and could, unintentionally, cost their loved ones more than heartache and delayed distribution of assets. The lessons learned by failing to properly plan an estate are multiplied for an estate the size of Ms. Franklin’s. To mitigate this dysfunction for any estate, we recommend the planning process start during a client’s career, and appropriate individuals be appointed in case of his or her incapability or incapacity. In many states, a revocable trust, pour-over will, physician’s directive and durable power of attorney would be adequate to accomplish most transactions of an estate. You can accomplish a tremendous amount of pre-mortem planning for a lot less than $27M!
More than ever before, the need for both trusted advisers and valuation professionals is clear. These experts can help plan ahead and make sure clients’ wishes are carried out. The AICPA can help, if you’re looking for information on expanding your practice into the planning or valuation arena.
Jimmy J. Williams, CPA/PFS. Jimmy is the CEO/President of Compass Capital Management, LLC, a registered investment adviser and wealth management firm with offices in Tulsa and McAlester, Oklahoma.
Do you know these three tax client types?
Your tax practice sees a lot of traffic, no doubt. Clients of every stripe pass through your doors seeking your guidance on all kinds of things. While every CPA tax practitioner is at the ready with good advice and service on all things tax, many go above and beyond with additional planning services. There’s even the occasional left-field question about the best restaurant in town or which university seems best suited to their kids. Over time, you’ve come to identify the personalities of your clients, and you might have noticed that many fit into some broad client types. Do you recognize any of these?
You might have sent them an organizer, followed up with a call or email or even seen them around town. But despite your efforts to remind them (or perhaps because of their own busy lives), you don’t seem to be able to get their information until late in the season. Sometimes a little too late.
There could be many reasons clients run behind getting their information to you. That includes receiving their own paperwork late from employers, partnerships, etc. But that doesn’t help you when it comes to crunch time. Stacks of returns remain to be completed and make it hard to work with a client who just walked in the door with proverbial seconds left on the clock.
Maybe it’s time to talk to this client about an extension. With tax reform making its prime-time debut, the 2019 filing season is expected to be one of the most extended in recent memory. Using this handy FAQ, you can quickly walk them through the process of why they might need to extend.
The Family-Oriented Client
You probably have a whole group of clients who have become fixtures for your practice. Maybe even friends. You know their kids’ names, where they’re thinking about vacationing or perhaps even what kind of new car they bought.
The family-oriented client is a treasure for you. They’re fun to work with, friendly and rock-steady. They might also be trying to tell you something. You’ve seen their tax returns. You know what they’re facing financially. Maybe during those conversations talking about the son or daughter going off to college in a few years, you could offer more than a friendly ear?
You can better serve your clients and get even more from these client relationships — and others — by taking the time to ask a few well-placed questions and listening carefully. This guide on growing client relationships through expanded services will help you get things moving in the right direction.
You know these clients well. They’re curious, sharp and have a strong command of tax issues. They even keep an eye on the news and ask you questions about recent legislation. They might lay out scenarios for you to ask what the change might be to their tax exposure, cash flow or risk.
These clients appreciate your expertise in ways that can get you very excited about your work. When someone “gets it,” it’s easier to explain your assertions and guide them in the right direction. Because they’re able to see the big picture, they might enjoy the information you can offer them in the tax reform quick reference guide, an overview of some of the major changes in tax law for the 2019 filing season. The guide is available to Tax and PFP section members as well as those with the PFS credential.
It’s true there are far more than three types of clients, and some seem to fit their own categories, as well. Since you’re always speaking with different clients with different needs, there are additional resources available to all AICPA members in the Tax Practitioner’s Marketing Toolkit that can address a broad range of clients and their situations. Make your next client interaction one that everyone can benefit from.
Adam Eric Junkroski, Lead Manager, Communications, Tax, PFP, S&C — Public Accounting, Association of International Certified Professional Accountants
Are you ‘more dumber’ than your smartphone?
Chances are, you love your smartphone.
No. I mean: You really love your smartphone.
MRI studies show that when we hold our smartphones, we almost feel as though they’re holding us back. Our brains produce a veritable love potion of chemicals – namely dopamine and oxytocin, the same chemicals released during cuddling. I guess that makes sense. Our smartphones, after all, make great partners. They keep us updated on the weather, the news, the stock market. They advise us where to go for dinner, how to get there, and (thanks to social media apps) whom we should invite – even if we end up ignoring that person the entire time by catching up on emails or playing Fortnite Mobile. Smartphones and other devices typically don’t argue with us, and – provided they’re well charged – they’re there for us when we need them.
Is it a surprise, then, that we’re sacrificing our personal relationships for our relationships with devices? And in doing so, we’re also sacrificing something else: our humanness. As technologies get smarter, we become more reliant, which can actually chip away at our own intelligence.
Take what happened on September 6, 2012:
A happy couple meandered through the scenic subarctic hinterlands of Alaska on their way to the Fairbanks International Airport. Although a human was at the wheel, the role of navigator belonged solely to Siri, the iPhone’s virtual assistant. This couple put all confidence in Siri’s ability. When ‘she’ instructed them to turn right, they turned right. When ‘she’ told them to turn left, they complied. They had so much faith in Siri, in fact, that when her instructions guided them through the airport’s motion-activated security gate and down a mile’s worth of flashing warning lights and a series of signs reading no cars allowed, they drove on, ultimately parking on the airport’s landing field. A737 careened dangerously close to them but luckily avoided what could quite possibly have been the worst t-boning in the history of man.
And this isn’t an isolated incident. Two weeks later, another motorist ended up on the same runway for the same reason. Dozens of other similar instances have been noted as well, including one that took place a half a world away when a group of travelers attempting to drive through Victoria, Australia capitulated to Siri’s demands and ended up stranded overnight, gasless and starving, in the middle of a state park.
But the ‘dumbest’ thing isn’t our blind faith in our smartphones’ abilities; it’s our complete devotion – or addiction – to them. Some studies show that, on average, people spend about 90 minutes a day on their devices. Maybe for some of you, that doesn’t seem so bad, but that ends up being approximately 23 days per year and about 1797 days per lifetime. That’s almost five years of one’s life where you’re most likely doing nothing substantive, and – let me remind you – you already spend about 26 years of your life sleeping. That’s over 30 years of your life devoted to unproductivity.
If you feel you’re starting to surrender your actual intelligence to the artificial kind, here are a few things you can do break your smart device reliance – or at least make it worth your while.
- Read a book: In a recent blog post, I sang the praises of The First 15 program, which encourages participants to unplug for just 15 minutes a day to read a bona fide, complete-with-flippable-pages, three-dimensional book. Firms that have instituted this program have seen incredible returns in productivity, revenue and morale. When I gave the program a try, I became more focused, my memory improved, and I began communicating better.
- Ditch the device: We’ve created self-imposed expectations on how quickly we’ll answer texts and emails, and as a society, we’ve developed a legitimate fear of missing out. But often, texts, emails, tweets, news and other attention-hogs can wait. Whether you’re at the office or at dinner with friends, leave your smartphone in the glovebox. You’ll connect more with your surroundings and the people in your life, and you’ll get so much more accomplished in the process.
- Notifications off: Not ready to ditch the device? Even in small intervals? At the very least, turn off all your notifications. They’re just distractions. If you’re worried about emergency calls, most smartphones have an override option that kicks in when the same number calls you twice in a row.
- Track your usage: Smartphone addiction has become such a problem, certain applications have incorporated tracking features that chart your usage (in most cases, over usage) infographically. If you’re not convinced you have a problem, be sure to capitalize on these features. You may be surprised just how often you check your Twitter account.
- Use your smartphone to get smarter: Even if you’re not willing to put down your phone, you can at least find a better use of your time than posting pictures of your latest cappuccino to Instagram. Try learning a new language with Duolingo or start meditating daily with Headspace. You can even make the most of morning commutes by listening to informative podcasts like Radiolab, Stuff You Should Know, or the Association of International Certified Professional Accountants’ Beyond disruption series.
So if you’re spending all your time on your smartphone, consider some of the options above. Whether you try the ‘cold turkey’ approach or you merely repurpose your device’s power to power you up, don’t be a dummy. Consider making a substantive change. It’s the smart thing to do.
Brock Faucette, Manager – Member Communications, Association of International Certified Professional Accountants