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ACC 330 Module Six Tax Planning Case Study

Federal taxation i (acc330), southern new hampshire university.

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Preview text, acc 330 module six assignment template, begin by filing in the high-level infor-, mation for each of the clients in the, first category. then, dig deeper by, opening the 1040s for each of the, primary taxpayers. this will provide, deeper insights into their income, streams, deductions, and tax credits., complete all three parts of the, comparison for the first scenario., then, repeat this process using a sec-, ond category. once you have com-, pleted the table below you will have, enough information to determine, which category interests you most., choose one category to use for project, two, and enter the number of the, client set you plan to use under #4 be-.

Begin by filing in the high-level information for each of the clients in the first category. Then, dig deeper by opening the 1040s for each of the primary taxpayers. This will provide deeper insights into their income streams, deductions, and tax credits. Complete all three parts of the comparison for the first scenario. Then, repeat this process using a second category. Once you have completed the table below you will have enough information to determine which category interests you most. Choose one category to use for Project Two, and enter the number of the client set you plan to use under #4 below.

• Complete the high-level view of the client tax profiles. a. Identify the category type. b. Identify the client IDs. c. Enter taxpayer’s names. d. Enter filing status. e. Enter the spouse’s name if applicable. f. List the dependents.
• Perform an analysis based on reviews of the additional information from client profiles and Form 1040. a. Income Streams: Consider all forms of income, look at the AGI or taxable income. b. Deductions: Review deductions for the tax year. c. Tax Credits: Review tax credits for the tax year.
• List multiple tax planning factors.
• Make a category selection: Set 2

Tax Category Comparison Table of Two Client Profile Sets

Client Profile Set #

Set 2 Set 4

Category/ Scenario Type

Educations Credits IRA Contributions

Client ID # 1129 1132 1138 1139

Primary Taxpayer Name

Trilby Keller Robert James Carlos Quintero Daniel Hoffman

Filing Status Married Filing Jointly Married Filing Jointly Single Married Filing Jointly Spouse’s name (if applicable)

David Keller Nora James Jacinta Hoffman

Dependents (list)

Wyatt Keller Kris James Nolan James

Cristina Hoffman

1040 Income Streams (list)

Wages - Account Manager; Bookstore Manager

Wages – Psychologist; Office Manager

Wages, taxable interest, taxable dividends

Wages, business income

Deductions (list)

IRA Deduction - $6, Standard Deduction - $25,

Itemized Deduction - $31,338 Capital loss - $- IRA deduction - $6, Standard Deduction - $12,

Self-Employment tax deduction - $2, Standard Deduction - $25, Qualified Business Income Deduction - $6, 1040 Tax Credits (List)

Child Tax Credit -$ Education Credit $1, American Opportunity Credit

Child tax credit - $1,000 Child Tax Credit - $3, Child and Dependent Care Credit - $2,

Tax planning topics to research

IRA adjustment – Maxed

Child tax credit – maxed

IRA Adjustment – up to $6,000 reduction

IRA Adjustment – maxed

Pre-Tax 401k contributions –

• Multiple Choice

Course : Federal Taxation I (ACC330)

University : southern new hampshire university, this is a preview.

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TAX PLANNING CASE STUDY

Maximizing Tax Returns As An Integral Part Of  Comprehensive Financial Planning

When engaging with new clients we have found that they are commonly missing substantial tax saving opportunities because their previous the tax preparer’s approach can be too simple.

Clearstead is able to review a client’s portfolio: drilling down and picking apart every aspect of a client’s finances to find ways to leverage and build income. As part of our process, Clearstead’s tax specialists look at prior tax returns to determine whether a more comprehensive planning and compliance plan could benefit a client. By untangling prior filings, Clearstead could identify undetected savings.

IN SOME CASES WE HAVE OPPORTUNITIES TO EXCLUDE INCOME FROM TAXES IMPOSED BY THE AFFORDABLE CARE ACT.  THIS CAN BE AN AREA WHERE PRIVATE EQUITY CLIENTS FREQUENTLY PAY SIGNIFICANT TAXES ON INCOME GENERATED FROM THEIR FIRMS.

By implementing filing strategies that minimize taxes, our clients can potentially keep more assets in their accounts and reduce the amount investments they have to sell to pay taxes. It’s an example of how our firm’s comprehensive, service-focused approach can benefit clients and captures opportunities that can go undetected when different financial planning functions – especially taxes – are outsourced.

Here’s a look at other hidden opportunities and ways our team’s efforts can benefit our clients: 

Amended Tax Returns

Other hidden opportunities might include the small business stock capital gains exclusion. In these situations, a client might invest in a small C corporation, hold it for a period of time, and then sell the stock. The IRS code allows for exclusions of 50 to 100 percent of that gain depending on when it was bought and when it was sold. This type of analysis could create savings worth thousands of dollars by amending tax returns.

Income Deductions

Another frequently overlooked opportunity is the Ohio Business Income Deduction. In some situations, Clearstead has identified wage income that qualifies for the deduction but was not excluded in tax returns by the client’s previous accountant.

New Tax Code Deductions

With changes to the tax code enacted in December 2017, the Clearstead team is busy analyzing optimal positioning for clients, such as the 20 percent deduction for pass-through income. Already, Clearstead has identified opportunities under the increased estate tax exclusion to bring assets back into the estate and potentially give clients a stepped-up basis in assets and reduce unrealized capital gains. This strategy could save thousands of dollars in unnecessary tax payments.

We are also looking at itemized deductions that will be lost under the new tax code and creating strategies to help offset those losses.

Tax planning

While all CPAs will prepare quarterly tax estimates for clients, Clearstead prides itself on diving deeper into details. Throughout the year, we are analyzing data, talking to our clients, and working on ways to minimize tax payments. It is a continuous process, and the tax return is a byproduct of a yearlong analysis. But the only way to truly maximize these returns is to have a full understanding of the client’s financial portfolio, which is where Clearstead – and its clients – have realized their greatest success.

YOUR FUTURE IN FOCUS

At Clearstead, we create integrated, prudent, and custom strategies that bring clarity to you or your organization’s financial future.

Clearstead is an independent financial advisory firm serving wealthy families and leading institutions across the country. As a fiduciary, it provides wealth management services and investment consulting to help clients meet their financial objectives, achieve their aspirations, and build stronger futures.

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INSTITUTIONAL INVESTMENT CONSULTING

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1100 Superior Avenue East Suite 700 | Cleveland, Ohio 44114 216-621-1090

N22 W27847 EDGEWATER DRIVE, SUITE 101, PEWAUKEE, WI 53072-5260   |    262-814-1600    |    EMAIL US

Shakespeare Blog: View from the Lake

“Tax planning” sounds like something mysterious done only for the Rockefellers or Carnegies.  In reality, it’s an important part of every financial plan.  In an effort to make this typically opaque topic a little more real, we’ve created a case study that helps demonstrate how real people can save money throughout their lifetime using readily available strategies.

Tax Planning Clients

Meet Bob & Mary Ann. Bob and Mary Ann were recently referred to Shakespeare by their attorney after mentioning their pending retirement in two years.   They want to make sure their ‘financial house’ is in order before they sail off into their retirement sunset.  Let’s take a look at their tax situation and potential tax saving strategies as they prepare for life before and during retirement.

Note:  Although Bob and Mary Ann’s situation is similar to many clients we work with, they are fictitious people. Any similarities to you or anyone else you know are purely coincidental.

Retirement Income Planning Data

Bob is Vice President of a local company and Mary Ann is a nurse working 30 hours a week at a local hospital.  They both plan to retire in two years, although Bob plans on working 20-30 hours a week for a few years with one of his key customers, who has been trying to recruit him for years.   He expects to make $50,000 in his ‘retirement’ job.

Demographics

• Bob: DOB 4/1/1957
• Mary Ann: DOB 7/4/1961
• Bob Salary: $175,000
• Mary Ann Salary: $45,000
• Consulting Income: $50,000
• Bob IRA: $50,000
• Mary Ann IRA: $250,000
• JT Brokerage Assets:  $350,000
• Bob 401k: $600,000
• Mary 401k:  $160,000
• JT Bank Assets:  $100,000
• Deferred Comp: $150,000

Real Estate

• Home Value: $450,000
• Property Taxes: $6,000
• Mortgage: $200,000
• Cottage ‘Up North’: $250,000
• Property Taxes: $3,000
• HELOC: $18,000

Net-worth :

• Mortgage Interest: $8,000
• Charitable Contributions: $6,000

Tax Planning Strategies

Based on the facts listed above, let’s review a few tax saving strategies.

401k Deferral

Bob and Mary Ann have been contributing 10% to their 401ks since their kids were in high school, and have never revisited their saving strategy.  After further review, each of them is able to contribute the maximum to their retirement plans.  By boosting their savings to the maximum contribution limit, they will reduce their taxable income by over $30,000.  In doing so, they will defer almost $7,000 in federal taxes plus any state income taxes.  When they retire and are expected to be in a lower tax bracket, we’ll facilitate needed withdrawals to take advantage of this tax arbitrage opportunity.

Tax Deductions

Their current tax deductions are $26,000.  This includes State and local taxes = $10,000 (capped) + Mortgage Interest $8,000 + Charity $8,000 = $26,000.  With a standard deduction of $27,700 in 2023, they aren’t receiving any tax benefit from making charitable contributions (nor from any of their other deductible expenses).  If they double up on their charitable contributions (shift charitable contributions from year 2 into year 1), they will boost their itemized deductions to $34,000.  In year 2, they will use the standard deduction of $27,700.  By shifting next year’s charitable contributions into year 1, they have created $6,300 more tax deductions and will save approximately $1,400 in federal taxes.

Brokerage Assets

After reviewing their brokerage account, we learned they owned several individual securities that were at a loss. By selling these securities, we realized $20,000 of capital losses. We used these losses to sell several of their mutual funds which were at a gain. These funds were generating unwanted year-end capital gain distributions and were adding $10,000 to their taxable income each year.  We invested the proceeds of these sales into Exchange Traded Funds, which are more tax efficient and provide greater tax control. We will leverage this tax control as they enter retirement and we need to begin structuring their income sources. See Householding below. The potential tax savings from this strategy is approximately $1,500 – $2,000 per year.

Social Security Planning

Although Bob has reached full retirement age, we elected to defer his social security benefit until he reaches age 70 (year 4).  This was done for two reasons.  First, the added income from Social Security would increase their tax liability while they are still working and would likely push them into the 24% federal income tax bracket.  By deferring the benefit until Bob’s age 70, they will likely be in a lower tax bracket and keep more of this income.  In addition, the benefit will grow by 8% each year he waits to file.  That larger amount will also be the survivor benefit, which will be paid out over both their lives. This provides longevity protection, in addition to tax planning benefits, in the event one of them lives well into their 80s or 90s.  Mary Ann will begin her benefit as soon as she retires or reaches full retirement age, whichever comes first.

Charitable Planning

Mary Ann’s deferred compensation plan is slated to payout six months after her retirement (year 3).  This windfall will increase their tax liability in year 3 and was also a factor that influenced the deferral of Bob’s Social Security Benefit (above) to age 70 (year 4).  Much like we accelerated charitable contributions from year 2 into year 1, so too will we accelerate charitable contributions into year 3.  After reviewing all future income sources and deductions, it was determined that we should accelerate charitable contribution for several years (4-8) into year 3 using a Donor Advised Fund.  This was done because year 3 should be the highest tax year for the foreseeable future and Bob and Mary Ann are expected use the standard deduction in all other years.

RMD Planning

In year 6, Bob turns 72 and would need to begin taking Required Minimum Distributions (RMDs). This would generate approximately $25,000 – $30,000 of additional taxable income.  As Bob would still be working, it was identified his new employers plan accepts 401k rollovers.  Because he’s not a 5% or greater owner of the company and he’s still employed, he’s able to defer all of his RMDs in his 401k until he’s fully retired. This deferral provides for greater tax planning opportunities, both now and in the future. We’ll use Mary Ann’s retirement accounts for Roth Conversion opportunities (see below) and will take her RMDs when she turns 72.

Roth Conversions and Capital Gains

We’ll be evaluating Bob and Mary Ann’s taxable income each year relative to their tax bracket.  In low tax years, if they have room between their taxable income and the top of their respective tax bracket, we’ll accelerate income by doing Roth Conversions or harvesting Capital Gains.  Although it may sound counterintuitive to generate additional taxes through these techniques, so long as they are in a similar to lower bracket than future years, this strategy may make sense.

Householding

A sophisticated strategy to lower lifetime taxes entails the placement of tax inefficient assets such as bonds into retirement accounts first, and then allocate tax efficient assets such as equity ETFs into brokerage accounts.   This is a complex strategy, but when coupled with the other strategies above, is another tool in controlling taxes.  Note, sophisticated software and a knowledgeable financial advisor are required to implement this strategy efficiently.

Medicare Planning

Bob is on Medicare and Mary Ann has health insurance coverage through work until she turns 65.  Their Medicare premiums will be a function of their previous years Modified Adjusted Gross Income (MAGI).  There are several income thresholds that will determine their premium.  If they exceed a given threshold by $1, their premium jumps to the next higher amount.  As a married couple on Medicare, if their MAGI exceed the $194,000 threshold (2023) by $1, their overall Medicare premium will increase by almost $1,900 per year.  We consider this premium increase to be a tax that should be avoided if possible. It will be important for Bob and Mary Ann to avoid exceeding these thresholds, which can happen when they or their advisor unnecessarily realize capital gains, own tax inefficient assets in brokerage accounts, or take unneeded IRA withdrawals.

The Future of Tax Planning

Keep in mind our current tax code is in effect until December, 2025. After that point, we revert to a more onerous tax structure, so any tax saving strategies that we can do between now and then will be amplified when the tax law changes. Each of the above strategies does not exist in a vacuum, but rather they are intertwined together. Using multiple strategies together accentuates the benefits of tax planning but requires great skill and planning to achieve the best results. To learn more, give us a call at 262-814-1600.

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PwC Tax Case Studies

The PwC Tax Case Studies provide students with realistic fact situations in which a number of tax problems and opportunities can be identified. The cases include prospective as well as completed business transactions, so that students can incorporate a certain amount of tax planning into their solutions. The case studies cover various topical areas, summarized in the index, typically encountered in a second university tax course, or in a business-school graduate tax program. Law-school and LLM-Taxation students also find the cases to be a useful integrative exercise, although they often take a different approach to the issues and deliverables than do their business-school counterparts. For more information, please review the introduction and index document . To request the detailed PwC Tax Case Study materials, click  here .

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