The fourth quar­ter can be a game changer

An ag­gres­sive pos­ture now can make all the dif­fer­ence

Accounting Today - - Financialplanning - By John P. Napoli­tano See QUAR­TER on 28

For any sports fans out there, un­less you have a one-sided blowout, you al­ready know that the fourth quar­ter is big. It can change the course of the prior three quar­ters when a team can make up ground for their lousy per­for­mance for 75 per­cent of the game.

As a fi­nan­cial ad­vi­sor, it seems as if the fourth quar­ter of the cal­en­dar year is al­ways the busiest time of year when it comes to new clients. I think it may be that clients be­gin tak­ing a ret­ro­spec­tive look at what they’ve done this year and, for­tu­nately for us, it fre­quently in­cludes a con­struc­tive eval­u­a­tion of their pro­fes­sional re­la­tion­ships and if they are be­ing well-served. The good news for us: They haven’t been well-served. The bad news for you: If your clients are un­der­served, you will even­tu­ally lose them.

I en­cour­age ev­ery­one read­ing this to ap­proach the fourth quar­ter as if it were a Su­per Bowl game and you only have this quar­ter left to win it all. Ex­cept the game in this sce­nario is your client re­la­tion­ship. I be­lieve that you can change the en­tire de­meanor of your client re­la­tion­ship by tak­ing an ag­gres­sive pos­ture here in the fourth quar­ter of the year. Of course, this also means that this may be one of the busiest times of your year.

If you’re a CPA who thinks the fourth quar­ter is your chance to recharge be­fore an­other tax sea­son floods you with work, then keep on recharg­ing. But if you are a CPA fi­nan­cial plan­ner who re­al­izes the sig­nif­i­cance of fi­nan­cial plan­ning in a CPA firm and wonders whether your tax busi­ness may get eaten alive by blockchain tech­nol­ogy and other tech­no­log­i­cal ef­fi­ciency gains, read on. The fourth quar­ter is your chance to make this a great year sim­ply by ex­ceed­ing your clients’ ex­pec­ta­tions.

Start with tax

To make this easy for CPA types, I think that the first topic for a fourth-quar­ter meet­ing will be tax plan­ning. You may feel that your clients are well-pre­pared for the up­com­ing close of the tax year, but they prob­a­bly wouldn’t know that un­less you told them. Your clients are pounded daily by mar­keters telling them about tax re­form and how this year may be dif­fer­ent. Whether the mar­keters pick the state and lo­cal tax de­duc­tion, 199A, or other very broad changes in the Tax Code, they’re get­ting your clients’ at­ten­tion.

To di­vert their at­ten­tion back to where it should be, in your firm, you may have to be more proac­tive. Start this by reach­ing out to your clients for a year-end tax review. In that meet­ing, you may want to show them how this year’s tax re­turn may vary from those in the past, fo­cus­ing on the ma­jor dis­tinc­tions be­tween the two tax years. Even be­yond tax re­form, the savvy plan­ner will choose to ex­pand the tax con­ver­sa­tion to sev­eral other per­ti­nent ar­eas with re­spect to your clients’ fi­nan­cial plan­ning op­tions.

I’d start with a base un­der­stand­ing of ex­actly where on the tax bracket scale they will be for 2018. Un­til you have that, you can’t in­tel­li­gently have a con­ver­sa­tion about ac­cel­er­at­ing, de­fer­ring or re­duc­ing tax­able in­come for this year. You may ex­pand this into a look at item­ized de­duc­tions ver­sus the newly ex­panded stan­dard de­duc­tion to de­ter­mine if they should con­sider bunch­ing cer­tain de­duc­tions this year or next to max­i­mize the delicate bal­ance be­tween item­ized de­duc­tions and the stan­dard de­duc­tion.

I know that when we ac­quire a new high-net-worth client whose CPA has led them into a low tax bracket that this wasn’t dis­cussed. This can hap­pen when some­one re­tires and isn’t col­lect­ing So­cial Se­cu­rity or liv­ing on af­ter-tax sav­ings and in­vest­ments. For many of these clients, this is merely a tem­po­rary sit­u­a­tion un­til they are hit with re­quired min­i­mum dis­tri­bu­tions. Maybe a bet­ter idea would be to uti­lize those low-bracket op­por­tu­ni­ties by cre­at­ing in­come. You can cre­ate in­come by al­ter­ing in­vest­ments, cre­at­ing short-term cap­i­tal gains, or tak­ing dis­tri­bu­tions from re­tire­ment ac­counts. Per­haps bet­ter than an IRA dis­tri­bu­tion, con­sider a Roth con­ver­sion to use up the low-bracket tax­able in­come.

For clients al­ready sub­ject to RMDS, en­sure that they’ve taken those dis­tri­bu­tions to avoid the oner­ous tax penalty for un­der-with­drawal. This con­ver­sa­tion may also lead to re­veal­ing for­got­ten re­tire­ment ac­counts that may cause a with­drawal to be less than it should be. On the other hand, if a client is tak­ing RMDS and doesn’t need the money, per­haps they’re a can­di­date to do­nate the RMD to a char­ity.

Ex­am­ine your client’s gift­ing strate­gies. Of course you al­ways have the RMD idea and the op­tion of gift­ing ap­pre­ci­ated se­cu­ri­ties. But look at their char­i­ta­ble strate­gies in light of the new stan­dard de­duc­tion. Your client may con­sider bunch­ing their con­tri­bu­tions so that they will clearly ex­ceed the stan­dard de­duc­tion and pro­vide them the max­i­mum tax ben­e­fit. This con­tri­bu­tion can also be made to a char­i­ta­ble gift trust ac­count so that you get the de­duc­tion when you write the check but can con­trol the ac­tual dis­tri­bu­tion from the gift trust to the char­i­ties so that the gift goes at the pace your client wants.

Look through your client’s in­vest­ment state­ments. Are there op­por­tu­ni­ties for loss har­vest­ing or a need to cre­ate cap­i­tal gains? Most clients have a knee-jerk re­ac­tion where they don’t do any­thing in fear of run­ning up their tax bill and thereby leave some of these ba­sic plan­ning con­cepts on the ta­ble year af­ter year. It re­ally blows me away when I meet a client who is still car­ry­ing for­ward cap­i­tal losses from the last mar­ket melt­down — now al­most 10 years ago!

Sim­i­larly, if you have a client with net op­er­at­ing losses car­ry­ing for­ward, you may have op­por­tu­ni­ties right in front of you to uti­lize those NOLS this year. The most ob­vi­ous choice may be Roth con­ver­sions, which could end up com­pletely tax-free if the NOL is sub­stan­tial enough.

Your big­ger clients are all ex­cited about the 199A de­duc­tion for qual­i­fied busi­ness in­come. They know that it may be good for them, but they may not know whether they qual­ify or will ben­e­fit from it. Due to the com­plex mov­ing parts here, a de­tailed fore­cast is es­sen­tial. The good news is that they still may have enough time in 2018 to re-en­gi­neer the profit and W-2 wages to max­i­mize this new pro­vi­sion. I haven’t yet seen any dis­qual­i­fied tax­pay­ers will­ing to con­vert to a C cor­po­ra­tion for the lower rates. Most cite the sun­set pro­vi­sion and the in­her­ent dou­ble tax­a­tion of C corps as the most sig­nif­i­cant im­ped­i­ments.

While this may sound like a lot of work, the most suc­cess­ful prac­ti­tion­ers know that for your best clients, this type of proac­tive ser­vice is sim­ply the ta­ble stakes. Ne­glect­ing to do this for them will prob­a­bly re­sult in you not hav­ing many rav­ing fans.

Go­ing deeper

Now I’d like to take you to other fourth-quar­ter ser­vices that you can en­gage in or­der to have your clients know

John P. Napoli­tano, CFP, CPA, PFS, MST, is CEO of U.S. Wealth Man­age­ment (www. uswealth­napoli­ in Brain­tree, Mass. Reach him at Johnpnapoli­tano on Linkedin or (781) 849-9200.

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