Using technology to assist with year-end tax planning

By Brandon Lagarde, CPA, J.D., LL.M.

Editor: Michael W. Crisler, CPA

The CPA's role in the new digital environment is ever-changing. Technology has helped to automate certain functions that were historically performed manually. This trend in automation will continue to evolve. However, CPAs can never lose sight of what makes them valuable—being trusted advisers.

Increased automation will allow CPAs to dedicate more time and energy to the value-added services that clients desire and need. Automation and big data tools will allow CPAs of the future to spend more time critically thinking about a client's tax positions and issues that could help mitigate tax liability. Has a client ever asked a CPA how to pay more taxes? None of the clients the author has worked with have. The more common question is, "Why am I paying so much in tax this year?" Clients want their trusted adviser to be proactive in the tax planning process.

Comprehensive and proactive year-end tax planning can be overwhelming. Over the past several years, CPAs have been faced with last-minute tax-extender legislation, the prospect of comprehensive tax reform, and a changing political climate that has made it extremely difficult to properly plan. This year is no different. Comprehensive tax reform is on the agenda again. In addition, Congress will have to address several tax-extender items at the end of the year if tax reform is not accomplished. However, despite the uncertainty, CPAs, as trusted advisers, must continue to proactively plan for clients.

The most effective tax planning solutions are those that are tailored to a particular client. If the CPA sends out a general, year-end tax planning letter, clients are less likely to understand the tax implications of each item or whether a particular strategy may help them reduce taxes. The client may very likely read the letter but not act on the information. With the proper use of technology, a CPA can become the trusted tax adviser that all clients want and need. This column focuses on developing a year-end tax planning strategy by using technology to maximize effectiveness and efficiency.

Develop a year-end communication plan

Many CPAs have "stock" letters or other year-end tax planning materials that they send to clients toward the end of the year. This material often covers a wide variety of topics, ranging from timing of income and expenses to gift tax planning and everything in between. However, this material is generic. In many cases, the material is also too long to keep most clients' attention. In addition, it is not tailored for a particular client's situation.

This type of year-end planning might be sufficient for some clients. But be careful with thinking that this satisfies a client's desire for proactive tax planning. A common complaint CPAs hear from clients who are switching firms is that they only heard from their CPA once a year—when the tax return was being prepared. This is true even if the former CPA sent a generic year-end tax planning communication. Clients want to feel as if they receive special attention.

The first step in developing a year-end tax planning strategy is to develop a communication plan, consisting of a list of clients with the type of communication the CPA intends to provide to each client. For example, some clients may want to have a face-to-face meeting to discuss their taxes for the year and any planning opportunities. Some clients may be satisfied with a tailored plan that their CPA mails or emails to them. This plan could include their current tax projection for the year and any planning strategies that they may want to consider before the end of the year, tailored to their individual circumstances so it is more effective. Some clients may find the generic, year-end planning information acceptable. Regardless of the type of communication, start with a communication plan for each client. Once the CPA develops a communication plan, the next step is to determine how to efficiently and effectively create tailored plans for those clients who want more than a generic plan.

Understand the client's current tax situation

To provide effective tax planning, the CPA must understand the client's current tax situation before the end of the year. This means that the CPA must have a clear understanding of how the current tax law is affecting his or her client's tax situation and what, if anything, will change the following year if the client defers or accelerates an item of income or expense. This is one area where technology can help.

The first step in this process is to create a projection of the client's current-year tax situation. A tax projection is only one step in the process. Calculating a taxpayer's projected tax liability for the year or any future year is not proactive tax planning. Unfortunately, this is where many CPAs stop. They project the taxpayer's tax liability, provide that number to the client, and have very little discussion about improving the client's tax situation. When clients ask the reactive CPA why they owe so much in tax, the CPA may respond, "Because you make a lot of money." Many CPAs have said this at one point in their career.

After getting a clear picture of the client's current tax situation by using tax projection software, review any relevant proposed or enacted changes in the law. This part of the process can be difficult if Congress waits until the very last day (or sometimes into the next year) to vote on tax extenders. Prepare a list of law changes sorted by line items on the tax return. This list will help identify key items to focus on. For example, if the tax rate on dividend income is set to increase the following year, the CPA may want to focus on planning for those clients who receive substantial dividend income, and determine whether there is a way to accelerate that income into the current year to avoid the higher rate. Alternatively, if a deduction is going to be reduced or eliminated in the following year, the CPA should consider advising a client to accelerate the deduction.

Create a tax planning matrix based on tax return line items

Continue to map out the tax return for each line item and begin building a database of tax planning items mapped to the line items on the tax return. As an example, a portion of the worksheet could look like the "Form 1040 Line Item Summary" chart below.

Form 1040 line item summary

This mapping should continue for each line item on pages 1 and 2 of Form 1040, U.S. Individual Income Tax Return (and possibly Schedule A, Itemized Deductions); at least one strategy or idea should accompany each line item. The "Form 1040 Line Item Summary" chart is an illustration of a tax planning road map that a CPA can create and modify for each client.

A CPA may want to include additional line items. Technology can make the process of populating this matrix more efficient. Most tax preparation or planning software allows the user to export client tax information to another program like Microsoft Excel or similar software. Once exported from the tax software, the data can easily be manipulated, sorted, and imported into the tax planning matrix based on how the CPA uses the matrix.

Using the tax planning matrix

CPAs can use the tax planning matrix in two ways. First, it can be employed using the tax information of one particular client, and it could help identify an area a CPA may want to explore further for that client. For example, if all of the taxpayer's information is imported into the matrix, a line-by-line review can be performed to identify the best tax planning ideas for that client. The client may have a substantial amount of rental real estate income on Schedule E, Supplemental Income and Loss, making it appropriate to review the taxpayer's grouping elections for his or her rental real estate activities. Or the client may have substantial wage income, but the CPA may not be sure whether the client is maximizing retirement plan options.

The other way to use the matrix is to identify a particular line item and locate all the clients that fit certain criteria that warrant additional review. For example, most tax software allows queries to be generated regarding clients with $X included on certain lines of a tax return. If the CPA were to obtain a list of all clients with $X included on line 15 (IRA distributions) of Form 1040, this would create an opportunity to go to those clients and discuss the tax planning idea identified for that line item.

The goal of the tax planning matrix is to make tax planning less overwhelming, more organized, more proactive, and more targeted to a client's particular situation. In addition, since this matrix will be saved electronically in the client's file, it can be readily updated from year to year with minimum effort.

Being a trusted adviser in an evolving world

Technology changes in the world of accounting are coming, and they are coming fast. Clients are demanding more from CPAs based in large part on the technology tools that are now available. The next time a competing CPA asks another firm's clients, "What has your current CPA done for you lately?," the client can proudly say that his or her CPA provided a tax-saving strategy that was tailored for him or her and saved tons of money! Or the client can at least say the current CPA applied an innovative approach to get the best results.   



Brandon Lagarde is a director in the tax services group of Postlethwaite & Netterville in Baton Rouge, La. Michael W. Crisler is a member and the chief manager of Crisler CPA PLLC in Hendersonville, Tenn. Mr. Crisler is the chair and Mr. Lagarde is a member of the AICPA Tax Practice Management Committee. For more information about this column, contact


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