In 2002, CPA Magazine selected Tax All-Stars in various areas of specialization. Each CPA selected was provided with their own baseball card facsimile. Since then, CPA Magazine has recognized several tax gurus in its annual Top 40, 50 or 100 CPAs across this great country of ours. The Top 50 rankings only permitted about 25 words of tax advice from each of these beacons of tax tactics. The All-Star recognition provided a few more words on the back of the framed photo of the CPA All-Star.
For 2011, we searched for representative experts to guide our CPA readers based on the theme of each issue. This issue, the theme is personal tax, now personified by the form number, ‘1040 tax.’ To grace the pages of an authoritative print magazine in a decade where few printed magazines remain, each CPA All-Star in this issue unselfishly provided responses to very useful questions for our readers who extended returns for their clients and can still take advantage of this sage advice without amending.
The well deserving CPA All-Stars for this issue are: Bill Briggs, CPA, Lisa Foley, CPA and Jerry Love, CPA. If you have nominations for CPA All-Stars for Business Tax, Tax Research, Succession Planning or Tax Season, please contact us soon so everyone can benefit from their storehouse of tax acumen.
William “Bill” C. Briggs, CPA, is the head of the tax department at Citrin, Cooperman & Company, LLP in Philadelphia. With nearly 20 years of experience, Briggs specializes in tax planning and compliance services for closely held corporations, partnerships and high net-worth individuals.
Lisa DeVaughn Foley, CPA, is the president of Lisa DeVaughn Foley, PSC (a member of Baldwin CPAs, PLLC) in Richmond, KY. Lisa has been in the field of public accounting for over 16 years and is a member of the AICPA, Kentucky Society of CPAs and the Society’s Continuing Professional Education Committee.
Jerry Love, CPA, is the owner of Jerry Love CPA, LLC, a full service tax, accounting and business-consulting firm located in Abilene, TX. Over the past 35 years Love served as president or chairman of more than 14 nonprofit organizations. In 2009, CPA Magazine listed Mr. Love as one of the Top 40 Tax Advisors to Know During a Recession.
CPA Magazine: Personal taxes and 1040 tax prep affect all taxpayers; what attracted you to personal tax?
Briggs: What attracted me to personal income taxes was the fact that with proper planning you can potentially save people money, and on those occasions, when I am successful with an idea that saves someone money, it gives me a good feeling and sense of pride.
DeVaughn Foley: My main attraction to personal tax preparation was, first and foremost, being able to work with and help individuals by making a difference with their finances. Secondly, the ever-changing rules and regulations affecting 1040 tax preparation provide an environment of continued learning and growth that I see as challenging and rewarding.
Love: It seemed to be expected that if you are a CPA you know a lot about taxes. Add to this that it is a rewarding challenge to help someone minimize his or her tax liability.
CPA Magazine: Do you believe 2010 is one of the most complex years for tax planning and why?
Briggs: Each year seems complex, especially when there has been a recent tax change, but 2010 brings its own unique challenges. We have had several tax law changes in 2009, and the most recent tax law change was adopted very late in the year. Most of an individual’s tax planning is done throughout the year and in 2010, the rules changed near the end of the game.
DeVaughn Foley: 2010 is absolutely one of the most complex years for tax planning in recent times. A total of four tax bills were passed during the year with many changes that can significantly impact individual taxpayers. Additionally, the final bill now known as The Tax Relief Act of 2010 was passed in late December, leaving very little time to digest the bill and take action on planning opportunities for our clients for the current 2010-tax year.
Love: It is a very challenging year because of how late the Congress made changes and the fact that they made changes in so many of the bills that were passed. In the past, we often had one major tax bill that included most or all of the significant changes.
CPA Magazine: With 2010 behind us what is the most significant thing CPAs can do to prepare their clients for 2011, and how should they advise them?
Briggs: In 2011, there are significant benefits available as a result of the most recent tax law change. Informing clients about the benefits available and helping them plan throughout the year is the best way to help our clients prepare and hopefully, save money.
DeVaughn Foley: I will be focusing on income tax rates with my clients moving forward. We now know with certainty what the regular income tax and capital gain/dividend rates are through at least 2012, so shifting taxable income into 2011 and 2012 will be important as rates will most likely have to increase at some point in the near future including the looming Medicare tax on net investment income in 2013.
I will also be focusing on estate and gift planning for clients in 2011 and 2012. The Tax Relief Act of 2010 provides a $5 million exemption per individual for estate and gift taxes, which will need to be considered for current gifting opportunities.
Love: If the client has a potentially taxable estate, they need to address estate planning.
CPA Magazine: For taxpayers extending until October 17, what is the best advice CPAs can provide their clients for 2010?
Briggs: Extensions are merely an extension of time to file. It is not an extension of time to pay. Even if a client is planning to extend, we should get an idea of what they are going to owe and pay by April 15 in order to avoid penalties and interest.
DeVaughn Foley: Remember the extension is for filing only! We need to work with our clients to properly estimate any tax due and pay that balance on April 18, 2011 to avoid costly penalties. Also, encourage your clients to gather their information as soon as possible so any tax issues are addressed early or tax planning opportunities are not lost due to passage of time.
Love: Get as much of the client’s information together and to their CPA several weeks before April 18 so that an adequate estimate of their taxes can be made to allow the client to make a full payment of the estimated taxes with the extension.
CPA Magazine: In 2010, converting to a Roth IRA was recommended to pay taxes before they increased and to keep income out of estates. Without a tax increase and a $5M exemption for estates, what is the situation for clients who converted from traditional IRAs in your view?
Briggs: First off, an individual can reverse their decision regarding the conversion by the due date of the return (including extensions). With that said, the conversion, under the right circumstances, makes sense because the future growth would be earned tax-free. Also, the idea that taxes will not increase is not necessarily correct. The current freeze on the Bush Tax Cuts is only for two years, so the conversion now may save taxes in the future.
DeVaughn Foley: A Roth conversion, despite no tax increases and the new $5 million estate exemption, still has many benefits. First and foremost, post-death distributions from the Roth IRA to beneficiaries are tax-free. Clients will have paid tax at the low rates in existence now and will be able to leave tax-free money to their heirs who could possibly be in a higher bracket upon receipt of a taxable, traditional IRA regardless of the $5 million estate exemption.
Secondly, tax rates are going up at some point, so converting at lower rates makes sense and thus any earnings can continue to grow tax-free in the Roth format. Lastly, Roth distributions, if taken (not required, unlike RMD rules for traditional IRAs), will not factor into the 3.8% Medicare surtax in 2013.
Love: I believe the Roth conversion is a complex area that requires careful consideration on a client-by-client basis. To some extent, the consideration is a financial analysis of the time value of money in addition to the need to make estimates for what future tax laws will set the tax rates for income taxes and if there will be further changes to the estate taxes.
CPA Magazine: The American Recovery Act of 2009 expanded the HOPE education credit and renamed it the American Opportunity Tax Credit (AOTC). How do clients take advantage of this credit for 2010?
Briggs: The American Opportunity Credit is available for 2010. The credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and expenses plus 25 percent of the next $2,000 of tuition paid for a maximum credit of $2,500. The credit amount phases out ratably for taxpayers with adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for joint filers).
A big benefit to this credit is that up to 40 percent of the credit amount is refundable should a taxpayer’s tax liability be insufficient to offset the credit. In other words, a student could get 40 percent of his/her credit even when his/her tax liability is less than $2,500.
DeVaughn Foley: The AOTC is allowed for qualified tuition and related expenses paid for each student’s first four years of college. The credit is 100% of the first $2,000 of expenses and 25% of the next $2,000 for a maximum credit of $2,500. The credit phases out for single taxpayers with MAGI of $80,000 to $90,000 and for married filing jointly MAGI of $160,000 to $180,000. The credit is computed on Form 8863 and 40% of the credit amount is refundable.
Love: By filing Form 8863 with their return (or amended return) to claim a maximum credit of $2,500 against their tax liability subject to the credit being phased out based on adjusted gross income. Subject to an exception, 40% of the credit for 2010 is refundable.
CPA Magazine: The Qualified Principal Indebtedness Exclusion of up to $2 million of cancellation of debt income for mortgage foreclosures in 2010 if used to acquire, construct or improve the taxpayer’s principal residence, but not for all foreclosures. How do you advise clients with foreclosures not included in this Exclusion?
Briggs: A foreclosure is the same as a sale for the balance of the mortgage and keeping track of what the potential gain or loss on that foreclosure is key. In dealing with the issue of cancelation of indebtedness, there are a number of exceptions to having to recognize that income. I work with my clients, who are unfortunately in those situations, to explore those exceptions and if the exceptions are not available, work on the timing of the transaction.
Love: If a client had discharge of indebtedness related to their personal residence in 2010, they should bring all relevant information to their CPA for analysis. The CPA needs to determine the amount of the discharge to ascertain if it was less than $2 million or more than $1 million if married filing separate.
Next, the CPA should ascertain that the discharged indebtedness was incurred in the acquisition, construction, or substantial improvement of a principal residence. It also includes refinancing of debt to the extent the amount does not exceed the amount of the indebtedness being refinanced.
The CPA should also verify with the client that the residence meets the definition of their “principal residence” as defined under the exclusion of the gain for the sale of their personal residence (Code Sec. 108(h)(5)).
And finally the CPA should document for the client that their tax basis in the residence is reduced by the excluded amount but not below zero. The form to complete and attach to the return is Form 982.
CPA Magazine: The credit for home energy-efficient upgrades, such as new windows and doors was worth up to $1,500 in 2010 but has been reduced for 2011; did clients take advantage of this credit, and how can they in 2011?
Briggs: In my experience, many clients did take advantage of the credit in 2010. There was quite a bit of advertising on these benefits, and it appears that many of my clients did take advantage before limitations were put in place in 2011 and beyond.
DeVaughn Foley: Many of our clients have taken advantage of the $1,500 credit over the 2009 and 2010 tax years mainly on qualifying windows, doors and/or heating units. A big factor in encouraging this credit has been the knowledge of vendors to use this credit as incentive in their sales pitch.
The Tax Relief Act of 2010 did extend the credit, but in a much-reduced state. For 2011, the credit is a lifetime credit of $500 (including previous years) which can be made up of no more than $200 for windows, $150 for certain furnaces and $300 for any other item of energy-efficient property meeting minimum energy standards.
An important note to keep in mind for 2011 is that if a taxpayer has taken an energy credit in any prior year totaling $500 then no further energy credit will be allowed on a 2011 return.
Love: I have had several clients who have installed energy efficient storm windows or have replaced either hot water heaters or central air conditioning units and will be able to claim the credit.
Many of these clients were making the replacement out of necessity and were informed by the service technicians that the equipment would qualify for a tax credit and the client was calling to verify this. A few saw advertising or heard about the storm windows qualifying and decided it was time to replace some windows.
CPA Magazine: 1099 reporting for payments over $600, non-credit card vendors in 2012, is a concern for most small businesses; how do you advise clients to deal with it?
Briggs: Hopefully, the expanded 1099 reporting will be repealed. The President said as much in the State of the address. However, if it is not repealed, small business owners should keep account of amounts paid by vendor and get Employer ID Numbers from those vendors.
DeVaughn Foley: We have been warning our clients since summer that 1099 reporting requirements are about to change — BIG TIME! We hope to see some changes or repeal in this area, but there are no guarantees. We have to plan on what we know. We are encouraging our clients to go ahead and start obtaining W-9s for vendors as they pay bills in 2011 in an effort to lessen the burden as 2012 rolls closer.
Love: We have been informing clients about this and the potential need to keep information by vendor in order to comply, including getting W-9 info from each vendor. However it looks like the Congress may repeal this. So we are continuing to hope for repeal of the requirement.
CPA Magazine: How do you advise clients taking the home office deduction on depreciation and decorating?
Briggs: Regarding the home office deduction, the taxpayer should keep a record of the square footage of the office as compared to the house in total. With regard to depreciation, keep track of the basis of the house including improvements. Decorating expenses should be limited to the actual office itself.
DeVaughn Foley: The main hurdle in the home office deduction is supporting the deduction with proof of exclusive and regular use of the space as a principal place of business or as a place to meet or deal with clients and customers in the normal course of business. If you meet this requirement, then the home office deduction is available to the taxpayer, which includes depreciation of the portion of the home so utilized over 39 years.
Once depreciated, this part of your home no longer qualifies for personal residence gain exclusion upon sale and depreciation will have to be recaptured at a current maximum rate of 25%. The depreciation portion of the home office is not optional — depreciation must be considered on gain calculations whether or not deducted on prior returns. Decorating expense of the home office is a depreciable item as well. Taxpayers must carefully consider the gain consequences of having a home office versus the current benefit of the tax deduction in their decision to claim a home office deduction.
Love: Generally, we advise clients to not depreciate their home because of the ability to exclude the gain when they sell it. We also talk to them about the nature of the home office and the extent that regulations require the exclusive use of the office space for business purposes.
CPA Magazine: How do you advise clients who take business travel deductions for foreign travel or educational cruises?
Briggs: Regarding foreign travel and education cruises, it pays to be smart and make an allocation between the cost that is related to the education or business as compared to the personal portion. It never pays to deduct 100 percent of the cost.
Love: As I understand this issue, the taxpayer has a burden of proof that the primary reason for the expenditure is for educational purposes related to their job or business. Therefore, they need to have supporting documentation that would support how much time they spent in the conference and the nature of the program including who sponsored it and the relevance to their production of income.
CPA Magazine: What are the most overlooked deductions by high-wealth taxpayers in your experience?
Briggs: Investment related expenses as well as business expenses that they incur and pay for personally related to their business.
DeVaughn Foley: High-wealth taxpayers with earned income often fail to realize they can setup a defined-benefit (DB) pension plan that can allow for very large current tax deductions. For instance, if a taxpayer over age 50 has $100,000 of earned income, they could possibly contribute the entire $100,000 into the pension and thus pay no tax on that income. DB plans involve many actuarial calculations so they can be expensive to maintain but for some wealthy clients, DBs provide a great tax deduction.
CPA Magazine: Are Health Saving Accounts (HSAs) benefitting small business clients, since the Health Insurance bill was enacted?
Briggs: I have seen Health Savings Accounts being utilized by many small businesses, especially with the cost of health insurance continuing to skyrocket.
DeVaughn Foley: We have not seen a big increase in usage of HSAs since the Health Care Reform Act was passed in 2010. The increase in HSA usage with our clients has been spurred more by economic factors than the Reform or tax deductions. Our clients have moved to HSAs as a way to control health insurance expenses for their small businesses. HSAs do provide a great way to put money away with tax-free growth for future medical expenses.
Love: Yes, I am seeing many more businesses establish health saving accounts as a method to contain the cost of health insurance, and I see many individuals participating.
CPA Magazine: What problems do you expect in the perception of Registered Tax Return Preparers compared to CPAs?
Briggs: I don’t see any problems in my experience in this area.
DeVaughn Foley: I fear the public perception that a “registered” preparer is comparable to a CPA will have a very negative effect on our industry. CPAs understand that the test for “registered” preparers is not stringent enough for this perception, but educating the public of the differences will be a difficult task.
As individual CPAs we need to stress the expertise difference in our local communities as well as seek support from State and National organizations to promote the value of being a CPA in response to new IRS registrations.
Love: I see the public being further confused by national advertising that implies that any one registered is competent when that will clearly not be the case.
CPA Magazine: How do you spend your free time when you are not dealing with taxes?
Briggs: In my free time, which is becoming less and less, I like to play golf, read and work on my model trains.
DeVaughn Foley: In my free time, I enjoy cooking and traveling with family and friends and attending and watching college football and basketball. Go UK Wildcats!
Love: My wife and I enjoy ballroom dancing and are members of a local group called Learn to Dance Club, which meets monthly to have a group lesson, dinner and time to practice our ballroom dancing. It is a great way to get some exercise while insuring at least one date per month. My wife is the President/CEO and I am the Treasurer.
Comments powered by CComment