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2007 Review of Tax Planning Systems

Every year, millions of Americans collectively groan when confronted with their taxes. For the growing number that are self-filing, well … you get what you pay for. But even those who use a tax professional or accountant often forgo one of the most effective means of minimizing their tax burden or increasing their refund — planning.

From the September 2007 Issue

Every year, millions of Americans collectively groan when confronted with their taxes. For the growing number that are self-filing, well … you get what you pay for. But even those who use a tax professional or accountant often forgo one of the most effective means of minimizing their tax burden or increasing their refund — planning.

Planning ahead for anything makes a difference, whether preparing for a road trip, constructing a building or booking a wedding hall. Knowing what the potential variables are and how they interact is essential to achieving the desired final result — a fun vacation, a new home, a perfect ceremony … or lessened tax liability.

In a market where tax preparation is becoming an increasingly commoditized, low-revenue-yielding service, tax planning offers firms an opportunity to offer a more valuable, higher profile and more visible role in their clients’ financial matters. Unfortunately, the profession has thus far failed to fully capitalize on tax planning services. Why? Communication is a key factor.

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Your clients know that strategic investment planning helps them grow wealth in the long term. They know that estate planning helps to preserve their wealth at the end of the “long term.” They need to realize that effective tax planning will help them keep more of their wealth in the comparably short term — the next tax season (or the next several tax years). By proactively preparing for expected or potential variables that can influence a client’s tax burden, the client not only benefits from having a forecast of their liability, but also can work with their financial and tax professionals to take steps to mitigate these factors, avoid potential penalties or the AMT, and hopefully lower their burden.

All of this is just jargon for the following: “No surprises on April 15. If we know what you’ll probably owe the IRS next April, we can find ways to make you owe less while we’re still in this tax year.” More than just making IRA contributions, this means really knowing how all of the various parts of various income, assets, deductions and credits come together to affect their taxes, and then creating a time-sensitive strategy to optimize these factors. Think of it as a financial tune-up.

That’s where tax planning systems like the ones reviewed here come in. These systems allow a tax professional to input a client’s real and anticipated future financial data. Most of the systems allow planning several years out, allowing the professional to input expected salary increases, potential low and high income years, farm income, projected unearned income variations, investment interest limitations and carryovers, medical and personal casualty loss deductions, passive losses, capital gains and losses, investment interest for alternative minimum tax purposes, and planned charitable giving. There are so many variables involved. By working on the current tax year, you may be able to help prevent a client from moving up a bracket because of just one of them, but the value in planning further out is also significant.

With the client’s data, the tax planner systems then build scenarios that can be easily changed to see the effects of one variable on tax over a period of time. With the professional’s tax knowledge and the planning program’s built-in tax information and ability to quickly crunch numbers, the professional can produce a client-ready plan that shows them where they are, what they can expect and what they need to do in order to get their taxes to the ideal scenario.

Most tax and accounting professionals don’t use a true planning system and instead rely upon their previous year tax system and inputting varying sums in areas that could help the client … if they do any planning at all. True tax planning systems go well beyond this and alert the professional to potential beneficial actions and incorporate the latest tax law information for the coming years.

Of the professionals who have embraced planning, the service has shown to be profitable and helps to strengthen client relationships. When choosing a system, it may be efficient to use a tax planning system from the maker of your tax preparation package (if they make one) because it will likely offer integration features that can help reduce data-entry time. But there are several programs on the market, and they range from basic programs that are better suited to planning more simple returns to robust systems that can delve more deeply into client data using advanced algorithms to find the most beneficial scenarios for even the most complex individual tax payers. So even if your tax prep vendor makes a planner, keep in mind the needs of your clients, and make your selection accordingly. After all, if a shovel can do the job, there’s no reason to buy a bulldozer.

If you are new to offering planning services to your clients, make sure you let your clients know why they need the service. Send out mail or e-mail to your client list with an example of how much they might be able to save. Be sure to use a disclaimer on this, though. Also, many professionals have found the most productive time for tax planning to be between September and early November, when it is still early enough for your clients to take necessary actions, but late enough in the year that they feel more urgency to take those actions. 

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BNA Software — BNA Income Tax Planner
The BNA Income Tax Planner offers planning capabilities for federal taxes and has an option to add planning for all income taxing states. In addition to scenario building and forecasting functions, the program includes various analytical tools and return review processes. BNA Software does not offer an income tax preparation system, but bridges exist for integration between the system and major tax preparation programs


CCH, a Wolters Kluwer business — ProSystem fx Planning
A part of CCH’s ProSystem fx suite of integrated programs for financial professionals, ProSystem fx Planning offers accounting and tax professionals individual income tax planning and estimating functions for federal returns as well as state tax planning, with preconfigured rates, deductions, exemptions and credits. The system allows the creation of multiple years with multiple scenarios each, calculating for differences in variables and allowing the user to easily see the corresponding effects on tax, AMT, capital gains and other end results.

Intuit Lacerte — Lacerte Tax Planner
Lacerte’s Tax Planner is offered as an add-on to the Lacerte 1040 professional tax preparation system, providing scenario-based federal and state planning options for multiple years and enabling professionals to easily input variables and view potential effects of life events and financial changes upon a client’s future tax liabilities.
TaxWorks — TaxPlanner
TaxWorks offers tax planning through its TaxPlanner program, an add-on to its tax preparation system that can also function separately as a stand-alone system. The program includes planned federal tax law phase-outs and phase-ins of future changes to tax and deduction rates, IRA contribution limits, capital gains, AMT and other items.
Thomson Tax & Accounting — Planner CS
Formerly under the Creative Solutions brand, which is now part of Thomson Tax & Accounting, Planner CS is part of the CS suite of tax, accounting and practice management programs. Planner CS provides individual income tax planning for federal and all states with an income tax and also supports non-resident income tax for most states.