Summer 2015

Tax Perspective on Nonpublic Education Page 1 Sidney Kess CPA, J.D., LL.M

ACA - 1040 Reporting Requirements Page 2

Helping Clients Develop a Household Budget Page 9

Jerry Love CPA/PFS, CFP, CVA, ABV, CITP

The Great Migration to Cloud Services Page 4

Outsourcing Returns Allows More Sleep and More Money

T. Steel Rose, CPA

Page 7

TAX RETURN RETENTION POLICY

Planning Ideas for High Net Worth Clients Page 8

Charitable Tax Planning Consulting

VOL. 14, NO. 2

Julie Welch | Page 10

SUMMER 2015

CPAmagazine.com

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Martin M. Shenkman CPA, MBA, PFS, JD

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Sidney Kess, CPA, J.D., LL.M Executive Editor Sidney Kess is CPA-attorney, speaker and author of hundreds of tax books. The AICPA established the Sidney Kess Award for Excellence in Continuing Education in his honor, best-known for lecturing to over 700,000 practitioners on tax. Kess is counsel at Kostelanetz & Fink and is consulting editor to CCH.

Tax Perspective on Nonpublic Education

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oday, there are a growing number of primary and secondary students who are being educated outside of the public school system. Alternative education includes home schooling, private schools, and tutors. There are many personal and financial factors that impact a parent’s decision about a child’s education. The choice can raise tax issues that should be recognized.

Home Schooling

Today there are an estimated 1.77 million students being home schooled nationwide, according to U.S. Department of Education (http://www2.ed.gov/about/ offices/list/oii/nonpublic/statistics.html).

Parents assume the responsibility for educating their children at home for a variety of reasons, including concerns about the environment of schools and dissatisfaction with academic instruction.

Deduction for Home Schooling Costs While educators could deduct $250 of out-of-pocket classroom costs as an adjustment to gross income, parents who home school their children are not treated as educators for this purpose (Code Sec. 62(a)(1)(D); 2014 IRS Publication 529, page 4). Note: This deduction expired at the end of 2014 but could be extended for 2015 and beyond.

Impact on Alimony and Child Support Child support is not taxable to the parent who receives it on behalf of a child; alimony is taxable (assuming it meets the tax law requirements) (Code Sec. 71). When a single payment is made to cover both child support and alimony and the amount of the payment changes, it is not always easy to determine whether there been a reduction in child support or alimony.

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A reduction in child support results when there is a reduction in the designated amount or when there is a reduction that depends on the occurrence of a contingency related to the child (Code Sec. 71(c)(2)). Examples of contingencies include the child reaching a specified age or income level, the child leaving school, marrying, leaving the parent’s household, or beginning work.

However, in a recent case the Tax Court concluded that ending home schooling is not a contingency related to the child (Wish, TC Summary Opinion 201525). In the case, the parent stopped home schooling so she could return to the workforce for financial reasons; the child then went to public school. Thus, the reduction in the monthly amount was not related to child support. As a result, the parent making the payment had a smaller tax deduction for the reduced alimony payment.

Private Schools

Almost 4.5 million students are in private schools, according to the U.S. Department of Education (http://www2. ed.gov/about/offices/list/oii/nonpublic/ statistics.html). Again, a variety of factors come into play in deciding to send a child to a private school, including the opportunity for academic excellence, the need for unique training (e.g., help for special needs child), family scheduling, and other personal reasons.

Scholarships Scholarships to pay for private primary or secondary education are tax-free (Code Sec. 117). However, this exclusion applies only to tuition and fees; it does not apply to room and board, books, travel, and other costs covered by the scholarships (Code Sec. 117(b)(2)).

Medical Expense Deduction A child with a special physical, mental, or emotional condition may attend a private school able to treat the condition.

The cost of attendance (tuition, room and board, special counseling, etc.) may be a medical expense that can be deducted as an itemized deduction (Code Sec. 213(d)). Examples of conditions for which educational costs become a deductible medical expense: ■■ Dyslexia (Letter Ruling 200521003) ■■ Epilepsy (Shidler, 30 TCM 529

(1971)) ■■ Hearing impairment to learn lip

reading or visual impairment to learn Braille (see IRS Publication 502) ■■ Hyperactivity (Newkirk, CA-6, 611 F.2d 373 (1979)) To qualify as a deductible medical expense, the school must have a professional staff competent to provide help for the child’s condition. Also, the principle reason for attendance is medical care (not ordinary education). Finally, the schooling must be recommended by a physician to address the child’s condition.

Using Coverdell ESAs Coverdell Education Savings Accounts are savings programs that can be used for any level of education. Distributions from Coverdell ESAs are tax-free when used to pay qualified education costs for primary or secondary school (Code Sec. 530(d)(2)(A)). This is in contrast to other education breaks, such as the American opportunity credit and the abovethe-line deduction for tuition and fees, that are restricted to higher education.

This article is continued on www.CPAmagazine.com.

Manage, Enhance and Expand Your Practice S U M M E R 2 015 I 1

T A X S T R A T E G Y A D V I S O R

A C A A D V I S O R

Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA Jerry Love is the sole owner of Jerry Love CPA, LLC in Abilene, Texas. He graduated from Abilene Christian University.

In addition to being a CPA, he has also earned the designations of PFS, CFP, CVA, ABV, CITP, CFF, and CFFA. In 2006-07, Jerry was the Chairman of the Texas Society of CPAs.

Affordable Care Act 1040 Reporting Requirements

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hen Congress passed the Affordable Care Act (ACA) in 2010, the impact on our tax practices seemed far away, and many of us expected the Supreme Court to rule it unconstitutional or for Congress to repeal it.

Tax season for 2014 introduced several requirements which must be reported on Form 1040, for all taxpayers of all ages as they report whether they have qualified health insurance for the entire year.

Remember, this requirement to obtain health insurance applies to each person as well as anyone claimed as a dependent on a taxpayer’s return. This is a significant change in what we must do to help our clients comply with tax laws and will certainly result in larger tax fees to the clients. We must be prepared to gather additional information from our clients in order to properly prepare Form 1040, and clients will have questions about ACA as it now becomes relevant to them.

The CPA is a client’s most trusted advisor, and this will be another element for which they will look to us to provide insight and guidance.

The Affordable Care Act was passed in 2010. It was passed with an expectation to overhaul certain aspects of the U.S. healthcare system and affects nearly all taxpayers, many employers, and various elements of the healthcare industry. ACA represents the most significant change to our healthcare laws since the passage of Medicaid and Medicare in 1965.

The fundamentals of ACA are that every U.S. citizen must have health insurance unless an individual meets one of the following exemptions: ■■ Financial hardship ■■ Religious objections 2 I S U M M E R 2 015

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American Indians Individuals without coverage for less than 3 months Aliens not lawfully present in the United States Incarcerated individuals Individuals whose lowest cost plan option exceeds 8% of household income Individuals with income below the tax filing threshold ($9,750 single; $19,500 married filing joint)

There are many options for obtaining health insurance: ■■ Job-based coverage ■■ Private policy ■■ Medicare or Medicaid ■■ Health insurance through one of the marketplace exchanges If an individual cannot afford health insurance, subsidies are given through a premium tax credit (PTC). The PTC is an advanceable, refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange. If a taxpayer chooses to have the credit paid in advance, it will be necessary to reconcile the amount paid in advance with the actual credit computed on their tax return.

Learn more about the Marketplace at https://www.healthcare.gov/ The PTC is based on household size, household income, and where it falls within the federal poverty line (FPL).

Subsidies are available up to 400% of the FPL. Up to 133% of the FPL, a family needs to devote 2% of its income toward

the premium, with the balance subsidized by the government. The subsidy then decreases as income goes up.

The 2013 amounts for the FPL are used to calculate eligibility for the PTC for 2014. For residents of one of the 48 contiguous states or Washington, D.C., the following illustrates when household income would be between 100 percent and 400 percent of the 2013 FPL: ■■ $11,490 (100%) up to $45,960

(400%) for one individual.

■■ $15,510 (100%) up to $62,040

(400%) for a family of two.

■■ $23,550 (100%) up to $94,200

(400%) for a family of four.

For the 2014 federal poverty line amounts which the PTC for 2015 will be based go to: https://www.healthcare.gov/ glossary/federal-poverty-level-FPL/ To measure income for the PTC, take the taxpayer’s modified adjusted gross income plus any income received by a qualified dependent who is required to file a federal income tax return. This will require the knowledge of income reported by dependents who file a separate return but are claimed by a different taxpayer. Modified adjusted gross income is the adjusted gross income on their federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI).

This article is continued on www.CPAmagazine.com.

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E N H A N C I N G Y O U R F I R M

T. Steel Rose, CPA Publishing CPA Magazine since 2002, T. Steel Rose began his career with Price Waterhouse leading to the start of Rose & Cash, CPAs. He was a VP for Solomon Software and launched CPA Software News in 1991.

The Great Migration to Cloud Services and Lower Cost Tax Software

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great migration for CPA firm software is beginning again. It’s reminiscent of the first major migration when stand-alone tax software took over the desktop in 1991 revolutionizing professional tax preparation.

By 1999 QuickBooks was described as a modern business miracle ushering in the operating system migration to Windows with or without our favorite tax software. A number of vendors decided not to make the technology investment and sold out.

The latest migration has the attention of CPA technologists who have been forecasting the coming of the cloud for the last five years. The cloud is not the only migration; a transition is also occurring which dramatically reduces the cost of tax software. The combination of stronger capability and lower price has created a great migration to affordable tax software. Small firm owners who have used several tax software packages over the years are now considering the cloud for tax prep. After several tax seasons they found their tax software solution acquired by a larger competitor. This provided a more robust tax prep feature set in most cases and, over time, a more robust price tag.

I talked with two CPA firm owners at the 2015 California Accounting & Business Show and Conference in Los Angeles who confirmed they had made the switch to tax software which cost them $1,100 a year versus the $16,000 they were paying annually. Both CPAs confirmed their prior vendor offered substantial discounts to retain them as customers but it was not enough to keep them from making the switch. Both said 4 I S U M M E R 2 015

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the support during tax season was a major improvement with the new software.

Research revealed ten more practitioners making the switch.

Concerns about making the change focused on the learning curve. After several staff members grow accustomed to the way the legacy tax prep software package works, they may be leery of making a change. “For 12 complicated returns, I still use my prior package on a per return basis,” one Woodland Hills CPA said.

The rhetoric to move to the cloud is no longer just a paperless promise.

Most CPAs absorb that software as a service (SaaS) is another way of saying, “you can never own this software; you can only rent it.” Nevertheless the cloud model is catching on. It would be hard to find a CPA who doesn’t utilize cloudbased payroll. The cool thing about payroll is the evolution of price and services.

Heffy Provost, the new vice president of product operations at CCH, recommended attendees of his presentation at the California Accounting Show visit the ZenPayroll exhibit. Provost suggested ZenPayroll commoditized payroll and believes tax prep could also be commoditized. To save you time, ZenPayroll offers very easy to use payroll at half the cost. I was intrigued by ZenPayroll’s price, but not enough to switch to it after seeing the job posting and HR functions in ADP. While all accounting functions may not move to the cloud because of security, there are advantages of gaining functionality that was once unavailable. AppRiver permits Office 365 Plus use on a per month basis. Gravity

Software provides the use of Microsoft Dynamics on a per month cloud delivery method. Early cloud pioneers seem to come from San Diego, take Cloud9 Real Time, and Abacus Data Systems for example. The original incentive was a way to cloud-host the desktop version of QuickBooks before Intuit crafted a desirable cloud-based QuickBooks system of their own. Companies like Gravity and Abacus Data offer robust accounting packages. Abacus Data Systems battle tested their cloud based accounting and time and billing in law office practice management.

Potential migrations were also predicted at the California Accounting Show by technology futurist Rick Richardson, CPA during his keynote presentation. Richardson said, “by 2020 there will be no more checkbooks or CDs and 25% of payments will be made with ApplePay.” Richardson spoke about Tableau Software and said it is better than Excel.

Any tool better than Excel should be music to an accountant’s ears. Tableau is a tool for Excel which displays data more graphically.

When contemplating migrating to the cloud consider the independent www.technologythisweek.net by Richardson and www.asaresearch.com by J. Carlton Collins, CPA. When it comes to migrating tax prep software and saving $14,900 a year consider the words of the Woodland Hills CPA who said, “What are you waiting for?”

Access additional articles on www.CPAmagazine.com.

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C L I E N T T A X T I P

Julie Welch, CPA, CFP Julie Welch (Runtz) is the Director of Tax Services for Meara, King & Co. She graduated from William Jewell College with a BS in Accounting and obtained a Masters in Taxation from the University of Missouri-Kansas City. She serves as a discussion leader for the AICPA National Tax Education Program. She is co-author of 101 Tax Saving Ideas.

You Can Use Health Savings Accounts to Reduce the Cost Of Your Medical Care

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ealth Savings Accounts (HSAs) are similar to individual retirement accounts (IRAs) for medical expenses. Both individuals and employers can contribute to HSAs for eligible individuals.

If you are eligible, you can make deductible contributions to an HSA that is administered by a financial institution or insurance company. The money in the plan, which you may invest in certificates of deposit, stocks, bonds, mutual funds, and similar investments, grows tax-free. Distributions you take to pay for qualified medical expenses are taxfree. If you take a distribution that you do not use to pay for qualified medical expenses, you must pay tax plus a 10% penalty on the distribution amount. The 10% penalty will not apply if you die, become disabled, or reach age 65.

First Qualifier

To be eligible for an HSA, you must meet several conditions. First, you must be covered under a high-deductible health insurance plan. For self-only coverage for 2015, the plan must have an annual deductible of at least $1,300 and annual out-of-pocket expenses (deductibles, copayments, and other amounts, but not premiums) not exceeding $6,450. For family coverage for 2015, the plan must have an annual deductible of at least $2,600 and annual out-ofpocket expenses not exceeding $12,900.

Except for preventive care, the plan may not pay benefits until you or your family has incurred annual covered medical expenses in excess of the minimum annual deductible.

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Second Qualifier

You may not be covered by any other health plan that is not a high-deductible health plan, including your spouse’s plan, your parent’s plan, or Medicare.

However, you may still be covered under workers’ compensation laws, insurance for your auto and home, insurance for a specified disease or illness, insurance that pays a fixed amount per day of hospitalization, and insurance covering accidents, disability, dental care, vision care, or long-term care.

Third Qualifier

You may not be claimed as a dependent on another person’s tax return.

Qualified medical expenses that you can pay using your HSA are those that would be deductible for tax purposes as medical expenses. These expenses may be for you, your spouse, or your dependents, but they cannot be covered by insurance. You cannot have your HSA pay your health insurance premiums, since they are not qualified medical expenses. However, your HSA can pay for qualified long-term care insurance, COBRA health care continuing coverage, and your spouse’s or dependents’ premiums for Medicare Part A or B coverage.

You may deduct your contribution to your HSA up to $3,350 for 2015 for self-only coverage ($6,650 for 2015 for family coverage). If you are 55 or older, you can contribute $1,000 extra to your HSA. You are 40 years old, single, and self-employed. You are covered under a high-deductible health insurance plan.

In January, you open an HSA at your local bank by depositing $1,500, the annual deductible for your high-deductible health plan. You direct the bank to invest the $1,500 in a mutual fund, which has $100 of earnings for the year. During the year, you pay $700 for qualified medical expenses. You can deduct the $1,500 you contributed to the account. You do not pay tax on the $100 earned from the mutual fund or the $700 you withdrew to pay for medical expenses.

Similar to IRAs, you have until April 15th to make an HSA contribution for the previous year. If you make your HSA contribution between January 1st and April 15th of the following year, you must indicate that you want your contribution to apply to the prior year or it will automatically be applied to the current year.

Once during your lifetime, you may fund your HSA with a tax-free rollover from your IRA. The rollover amount is limited to the maximum deductible contribution to your HSA. This may be beneficial if you do not have the cash to put into your HSA. You may also be able to roll over amounts in your Flexible Spending Accounts and Health Reimbursement Accounts into your HSA in certain circumstances.

NOTE: Your employer may contribute to your HSA and can pay the premiums for your high-deductible health plan on a deductible basis. Your employer’s contributions are not taxable to you. This approach provides income tax and employment tax savings to you and your employer.

T. Steel Rose, CPA Publishing CPA Magazine since 2002, T. Steel Rose began his career with Price Waterhouse leading to the start of Rose & Cash, CPAs. He was a VP for Solomon Software and launched CPA Software News in 1991.

Outsourcing Returns Allows More Sleep and More Money

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he recent 2015 California Accounting & Business Show and Conference featured presentations covering new developments and best practices from leading accounting professionals.

One particularly profound presentation was made by Chris Frederikson, CPA of 2020 Group USA and FrederiksonCrawford CPAs about new technology including outsourcing tax returns to increase revenue. Frederiksen has been engaged in public accounting for over 50 years and as CEO of 2020 Group USA has spread his knowledge with seminars and consulting.

Over the course of his presentation, Frederiksen made several points about becoming more efficient as a CPA saying one of the biggest mistakes CPAs make is, “not investing in technology.”

I felt the real game-changing information for many CPAs was about how all of the tax return preparation in his firm is outsourced. Frederiksen mentioned two companies which handle outsourcing: SurePrep and Xpitax.

SurePrep is based out of Irvine, California and Xpitax is out of Braintree, Massachusetts. A third firm, Pransform, is based in Chicago. SurePrep and Xpitax outsource returns to tax preparers in India. Pransform utilizes tax preparers based in Thailand. This outsourcing raises the issue of data security. Pransform’s Chief Operating Officer, Hitendra R. Patil, addressed the subject for Pransform’s solutions stating, “We do not keep any client data on our office servers overseas. We simply securely remote login to our clients’ tax software to prepare the returns.

In other words, the data always remains with the CPA firms.”

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Thomas E. Huckabee, CPA has been in practice for 35 years and outsources returns using Pransform. Based out of San Diego, Huckabee’s specialty includes trusts, and counseling small businesses. Huckabee feels the pressure all tax accountants do because tax returns all come due at the same time.

“Technology helped until 2013, when previous technology applications failed. During tax season 2013 we had to produce returns on a manual basis,” said Huckabee. The system was not working to produce accurate stock transactions, W-2s and 1099s. His clients have a lot of stock transactions, but in 2013 it did not populate correctly. His tax provider suggested solutions but could not correct it.

For two years it worked well, but did not in 2013. “The scanning in process was not working. Admin time was spent on Adobe, and our network, and our computers, but it was still not close to accurate,” said Huckabee.

Whether it was the computers, the network, or the software, technology did not solve the problem turning tax season into a nightmare. To solve the problem Huckabee decided to work with humans, rather than just depend on technology.

Huckabee asked his IT people to check the systems and security of Pransform.

“Most of the accountants are in Thailand,” noted Huckabee. “They work while I sleep.” Each day his CPA firm reviews the returns and gets them ready for delivery.

Huckabee’s firm uses a standardized method to organize and turn source documents into pdfs and deliver them to Pransform. They have limited access to Huckabee’s network for his tax program

and QuickBooks to compile the tax return. Pransform provides core proficiencies to produce 1120s, 1065s, 1040s and 1041s and perform QuickBooks work, highlighting open issues in a memo.

“We provide a consent notice to clients to meet IRS requirements,” Huckabee said. “A larger notice for 1040s and a smaller one for business clients explaining we are sending the data off shore. It is a signed consent form.”

“The experience has been only positive,” Huckabee continued. “In 2012 all the admin time produced no results from technology. Communications with Pransform continue to enhance results.

The other benefit is I don’t have to train them. I had the best tax season in terms of hours and profitability.”

Huckabee can actually talk to the person working on the return but often does not need to. “We can all go home at 6 p.m., while the Thai accountants begin their work day,” Huckabee reported.

When complications did occur, Huckabee noted their response. The 2014 tax season was especially tough because his mother entered hospice. Pransform’s production was not working as well as he hoped and he needed more from them. He called and Pransform responded positively. The result was “more production, more sleep and more money,” Huckabee said.

Huckabee’s advice for other CPAs concerning offshore work is to vet the tax prep outsource vendor and ensure top notch data security. There is a normal reluctance to change, but as Frederiksen advised in his presentation, when a solution is this obvious, “get over it and get on with it.”

E X P A N D I N G Y O U R F I R M

H I G H N E T W O R T H C L I E N T A D V I S O R

Martin M. Shenkman, CPA, MBA, PFS, JD Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

Planning Ideas for High Net Worth Clients

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igh net worth clients require a different nature of planning than other clients. Practitioners serving these clients need to address a range of sophisticated estate tax minimization steps that are simultaneously designed to minimize income tax impact to these clients. While high net worth does not necessarily imply high income, it often does, so for purposes of this article it will be presumed that it does. While most of the planning points are targeted at the ultra-high net worth client, many are applicable to the merely wealthy client as well.

Review FLP/LLC Agreements

High net worth clients commonly have entities that own investment and business interests. In the event of a death, the ability to step-up the inside basis of the membership interest in an entity is important to preserve. If the governing legal document for the entity does not mandate that the entity will make the election to step-up basis under IRC Sec. 754 your client may not obtain this benefit. The optimal time to negotiate for such a provision to be included in the partnership or operating agreement is before it is necessary. One of the most important and universally overlooked steps is for the client, CPA and attorney (and in some instances other advisers) to periodically review the partnership or operating agreement for an FLP/LLC or the shareholder’s agreement for a family S corporation to see what operational mandates it provides for. CPA practitioners will often maintain accounting records for a client entity, prepare tax filings and provide general planning advice while never reviewing the actual governing legal document. What might be sound tax planning, compliance or 8 I S U M M E R 2 015

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business advice might prove contradictory to the terms of a form shareholders’ agreement the family signed a decade ago and no one has looked at since. Why might anyone care? If there is a lawsuit or claim and an effort is made to pierce the entity to reach personal assets of the client, ongoing operation of the entity in direct contradiction of the terms of the governing instrument could be a potent line of attack. If a family member/equity holder divorces it is assured that counsel for the ex-spouse will review the governing agreement with the proverbial “finetooth comb” looking for hooks for lines of attack. The only sensible approach, which in most instances will never occur absent the CPA practitioner insisting on it, is to have a meeting to review the operational aspects of the document. What must the client, the CPA, and others do each year to comply with the terms of the governing agreement (or in turn if the governing agreement provisions are no longer reasonable, what steps should be taken to update it). What are some of the many actions that might be governed by a partnership agreement: ■■ Compensation for equity owners

and their family. You may have taken great precaution to corroborate the arm’s-length nature of a salary for a child but if the agreement prohibits or caps compensation there is a problem irrespective of your diligent efforts.

■■ Related party transactions and payments for them. Some boilerplate prohibits related party payments, some require a super-majority (e.g.

2/3rds approval by partners) for a related party payment. The boilerplate in other agreements merely requires it be arm’s length. You cannot advise

■■

a client as to how to operate, plan for income taxes, or support related party transactions, without first understanding what the governing instrument provides for.

Distributions are typically made

whenever the primary client decides they are made. But if the agreement mandates first assuring an “adequate working capital” (or any other prerequisite) then no distribution should be made until the CPA practitioner has helped the client corroborate that those prerequisites have been complied with.

Example: The client has substantial operating business interests and real estate held in a family LLC. 40% of the LLC interests were sold to a dynasty trust in a note sale transaction. 35% of the LLC interest was gifted to a tier of grantor retained annuity trusts (GRATs). The attorney for the family carefully delineated that the client as manager of the family LLC must carry out all functions with due regard to her fiduciary obligations to the LLC and to the members of the LLC. That provision should help deflect an IRS attack that the LLC should be pulled back into the client’s estate under IRC Sec. 2036 by virtue of her being the manager and controlling distributions. The client dies and the IRS audits the estate.

The examining agent reviews the operating agreement on the estate tax audit and the pattern of distributions, and identifies that all distributions were made in contradiction of the express terms of the operating agreement.

This article is continued on www.CPAmagazine.com.

Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA Jerry Love is the sole owner of Jerry Love CPA, LLC in Abilene, Texas. He graduated from Abilene Christian University.

In addition to being a CPA, he has also earned the designations of PFS, CFP, CVA, ABV, CITP, CFF, and CFFA. In 2006-07, Jerry was the Chairman of the Texas Society of CPAs.

Helping Clients Develop a Household Budget

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am frequently asked by clients to help them develop a household budget. As most CPAs know all too well, that question can be a very difficult one because it depends on many factors and there is not a “one size fits all” budget.

However, when clients are asking this question, they generally want some guidance. Therefore, this article is designed to give you some of my thoughts on how to approach this question and some resources that may help you give them some guidance.

The first thing I ask them to do is to summarize what they are currently spending. I generally want at least three months summarized, but six to twelve months is even better. I tell them they can develop this summary in one of several ways: 1) pencil, paper and adding machine, 2) a spreadsheet such as Excel (there are some templates that might help), or 3) one of several programs like Quicken. The primary purpose of the exercise is to identify where they are currently spending their money. I find very few families have a clue where the money is going and are surprised at the results of this exercise.

Spreadsheet Style

Here are some sources for free templates for spreadsheets:

1. www.Squawkfox.com. Kerry K. Tay-

lor is the creator and lone blogger at Squawkfox.com. She started Squawkfox in 2008 as a financially fun newsletter for friends. She has a spreadsheet that is very easy to understand, to use and allows the person to add rows for household expenses unique to their spending.

Another thing I like about her spreadsheet is it has a column for each month.

One shortcoming to this spreadsheet 9 I S U M M E R 2 015

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is it requires the person to summarize their transactions in some manner to then enter a total in the column for the month.

2. This spreadsheet could resolve the

shortcoming of the Squawkfox template and give your client a spreadsheet that is easy to learn, modify and use. https://docs.google.com/spreadsheet/ccc ?key=0Av84vhVmyqhUdEQyV0hCQV otMEdrMFZrb0dzMTBBMUE This template was created by Aman Siddiqi and is posted in the Google Docs Template Gallery. With this template you can help the client determine the headings for each category and they can post an unlimited number of transactions. Of course those of us old enough to recall the days of posting expenses on the “13 column green pads” will recognize this as that spreadsheet. I would set the template up with a separate worksheet for each month.

3. This template was created by Bohdan

Rohbock and is posted in the Google Docs Template Gallery. https://docs.google.com/spreadsheet/ccc ?key=0Av84vhVmyqhUdGU5NGVNU 0ozRnR1LVQ1ejNkb1hna2c#gid=12 With this template you can change the expense category in the column headings and they can post an unlimited number of transactions. However, it is not very easy to add more columns because the existing columns are linked. It does have the twelve months already set up for you.

It is important for the client to summarize their cash expenditures. Ideally, they will be able to put them into categories that have been identified. However, if they are going back over the prior year it is highly unlikely they can classify all their cash expenditures. In which case, I

usually set up a category for “cash expenditures.” This is an area where the Generation X and Y far excel over the Baby Boomers. I find that Generation X & Y may not even carry much cash. Instead they are using their debit card, which will show up on their bank statements with the identification of what they are spending. For the Baby Boomers, I usually ask them to carry a small pad and write down all their cash expenditures for a month or two so we can get a handle on where they are spending their cash.

Using Personal Finance Software

Of course, it would be much easier to summarize the client’s expenditures with the use of one of the personal financial software options on the market.

1. The starter edition of Quicken normally

retails for $40 and will accomplish the task with very little set-up or training time.

This is the option I generally make to clients because our staff knows how to use it and they can help the clients in the set up and answer questions if they are stumped.

Quicken is very easy to use and complete.

2. Microsoft Money Plus Sunset is also an option.

3. A quick search for “Personal Finance

Software” brings up this site: http://personal-finance-softwarereview.toptenreviews.com/ This site lists nine different software options (including Quicken) and rates their features. All of these software options are under $60.

This article is continued on www.CPAmagazine.com.

Manage, Enhance and Expand Your Practice S U M M E R 2 015 I 9

F I N A N C I A L P L A N N I N G A D V I S O R

M A N A G I N G Y O U R F I R M

Julie Welch, CPA, CFP Julie Welch (Runtz) is the Director of Tax Services for Meara, King & Co. She graduated from William Jewell College with a BS in Accounting and obtained a Masters in Taxation from the University of Missouri-Kansas City. She serves as a discussion leader for the AICPA National Tax Education Program. She is co-author of 101 Tax Saving Ideas.

Tax Return Retention Policy “

H

ow long should my client keep his/her tax returns and supporting documentation?” is a frequently asked question. The safe, quick answer is keep old tax returns, W-2s, and information with tax planning relevance permanently. Keep less important supporting documentation for seven years.

Generally, the IRS has three years from the due date of the return to audit and adjust the return. Similarly, your client has three years following the due date to amend his return.

The due date for your 2014 tax return is April 15, 2015. Even if you file a return on March 1, 2015, the IRS has until April 15, 2018, to audit the return.

You have until April 15, 2018, to amend the return. If you extend the due date of the return, the period of time the IRS has to audit your client’s return and the period of time you have to amend the return are also extended.

Sometimes the IRS has longer than three years to audit a return. For example, the IRS has six years to audit a return if a person fails to report over 25% of gross income. If a return is not filed, or a fraudulent return has been filed, the IRS can audit records for that tax year at any time.

Supporting documentation should be kept, including summaries, cancelled checks, receipts, and 1099s for at least the three years following the due date of the tax return. To be safe, many advisers recommend these records be kept for seven years.

Tax returns and W-2s should be kept permanently. Keeping a tax return permanently provides support if the IRS contends your client did not file a return or filed a fraudulent return. Furthermore, you may need to refer to an old 10 I S U M M E R 2 015

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return to obtain information about: Home purchases and sales Depreciation of a home office, rental property, or business equipment ■■ Individual retirement account (IRA) contributions ■■ The purchase price of stocks, bonds, and mutual funds ■■ The taxability of pensions and annuities

Keep W-2s permanently because they include important information about Social Security wages and withholdings and income tax withholdings.

If you ever need to prove earnings or Social Security and Medicare contributions, you will have the records if W-2s are kept.

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Supporting documentation

Generally, most records can be destroyed after seven years. For tax planning support, however, there are countless situations when it is desirable to have records from earlier years. For example, when a client sells a home, it is necessary to calculate their gain. To calculate the gain, you need records of the cost of the home, improvements to the home, and depreciation of the home. For some people, this information may go back forty years or more. Furthermore, if you rolled over the gain on the pre-1998 sale of your prior home, it is necessary to have records for the prior home.

Another example of when earlier records are helpful is when your client sells mutual funds. There are several planning strategies you can use to reduce your client’s gain in this situation. To use them, however, it is necessary to have information about purchases, distributions, and sales from earlier years.

In summary, you should never throw out tax returns; W-2s, and records might have future tax relevance.

In particular, you should keep all home records, brokers’ statements for securities you still own, and retirement plan information. You should keep other taxrelated records for seven years.

NOTE: A current Earnings and Benefit Statement can be requested on the Internet at www.socialsecurity.gov. Earnings records should be verified frequently.

Errors discovered after three years have passed are difficult to correct. Also, socialsecurity.gov can be used to get an estimate of future Social Security benefits based on an actual Social Security earnings record.

Access additional articles on www.CPAmagazine.com.

SUMMER 2015 Volume 14, No. 2

The opinions given by contributing authors are their own and are not necessarily the opinion of our staff and management.

All trademarks used are the property of their respective owner.

CPA Magazine (ISSN# 2378-7481) is published four times a year by CPA Magazine, P.O. Box 92342, Southlake, TX 76092, 817-416-6650 and 888-610-1144 Standard Mail postage paid at Sussex, WI 53089 ©2015 All Rights Reserved CPA Magazine Printed in the U.S.A.

Martin M. Shenkman, CPA, MBA, PFS, JD Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

Charitable Tax Planning Consulting Charitable Planning Should Address Personal Goals

Charitable giving is too often focused on tax benefits or legal decisions. Practitioners can help clients refocus on “people” decisions. This is especially important for testamentary bequests since so few clients will face an estate tax that few will realize any estate tax benefit from charitable planning. Only 3-4,000 decedents/year will pay a federal estate tax. For the vast majority of clients estate planning will refocus on non-estate tax factors, including income tax minimization and human aspects of planning. However, even lifetime gifts can provide important personal as well as income tax planning benefits.

Help Clients Plan Donations to Enhance Personal Objectives

There are many ways, depending on the client’s particular interest and goals, who is affected, and with what, to tailor a donation to meet client personal objectives.

A key step in many cases is to structure a donor agreement between the donor and the charity in advance of the charitable gift. Consider the following: ■■ Specify how the donation will be used.

■■ For long term gifts (e.g., a fund

that will continue for decades, or an agreement to donate a set amount each year for many years) what investment management or other fees might the charity charge the fund?

Will the charity allocate a portion of the initial gift or each year’s withdrawals to general charitable administrative expenses? Can that fee be negotiated so that more of the donation is applied to the objectives the client is hoping to achieve?

■■ Reach an agreement as to how a gift/bequest will be named, what 11 I S U M M E R 2 015

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prominence will be given, how it will be displayed, what happens if the facility moves. Should the client/donor’s name be on a plaque inside the building, prominently on the outside of the building?

What is agreeable?

What happens if the purpose of the gift is no longer relevant?

Address other issues to assure client’s objectives are met.

Example of Donation Coordinated with Personal Goals Example: For prostate cancer the overall 5-year relative survival for 2003-2009 from 18 SEER geographic areas was 99.2%. The median age at diagnosis for cancer of the prostate was 66 years of age.

Purchasing a charitable gift annuity that will benefit the American Cancer Society and provide an annuity for life, for these older clients, may be a simple and ideal planning step to address cash flow needs in retirement, charitable intent and more for this group of clients.

For pancreatic cancer the overall 5-year relative survival for 2003-2009 from 18 SEER geographic areas was only 6.0%. For a client diagnosed with pancreatic cancer, creating a QTIP trust with a remainder to the American Cancer Society may provide the personal goal of ultimately benefiting the American Cancer Society, but assuring no matter what, maximum protection for a surviving spouse.

Simple Bequest

A very common charitable gift is a bequest under the client’s will. Even though there may be no estate tax benefit, bequests will remain common as many clients for personal reason wish to make a last bequest to charity. These gifts can also be used to

create a powerful message for heirs. Estate planning is not only about the transmission of wealth, but about the transmission of values. A simple bequest to a charity in a will can demonstrate commitment, values and more. A personal letter of instruction can help.

Example: “Dear children, I wanted to explain to you that after my father’s miraculous struggle with pancreatic cancer, I have made a bequest in my will to the Charity Name to fund research that will hopefully [describe objective]. I also hope by this bequest to encourage you to each find ways to give back to charity to demonstrate gratitude.”

Example: Add phrase to the testamentary bequest, “I have made this bequest to charity to demonstrate the importance to my heirs of making a contribution back to society,” or whatever drives home the client’s point.

Charitable Gift Annuities Help Meet Personal Goals and Charitable Goals

A gift annuity is a contract between the donor and his or her favorite charity in which the client gives the charity a onetime payment and receives a contractual commitment for a periodic payment, an annuity, for life. The amount of the annuity is determined at inception, without modification (worries) about investment performance/volatility. If your client, or a loved one, is facing the challenges of aging generally, or a specific health challenge, committing some component of his/her investments and expenses to a charitable gift annuity can put some of their finances on auto-pilot, can provide certainty and simplicity.

This article is continued on www.CPAmagazine.com.

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C H A R I T A B L E P L A N N I N G A D I V S O R

Summer 2015 CPE Quiz If you need CPE today, study this issue, circle the answers and fax to 817-756-7252

Instructional Method: Self-study Field of Study: Taxes (3 hours) Program Prerequisites: A basic understanding of tax preparation Recommended CPE Credit: 3 hours CPE Quiz Expiration: February 1, 2016 You may earn CPE by studying the articles in CPA Magazine. To be eligible for continuing professional education credit, you should spend approximately three to six hours reading, reviewing and studying the material in the current issue.

Then answer the self-study test questions. Certify that you have completed the study requirement for this exam by submitting the test online, or mailing or faxing a signed copy of the test to 817-756-7252. A certificate documenting the CPE credits will be issued for each examination score of 70% or higher.

1. Tax-free scholarships to pay for private primary or secondary education are applicable for the following expenses: A. Books B. Tuition/Fees C. Room and board D. Both A and B 2. The cost of attendance to a private school able to treat a condition may be a medical expense that can be deducted as an itemized deduction.

Which of the following is not such a condition?

A. Dyslexia B. Hyperactivity C. Hearing impairment D. Oppositional defiant disorder 3. Which of the following is a savings program that can be used for any level of education?

A. Coverdell Education Savings Account B. American Opportunity Tax Credit C. Lifetime Learning Credit D. Tomorrow Education Relief Account 4. The fundamentals of ACA are that every U.S. citizen must have health insurance unless an individual meets any of the following exemptions except: A. Financial hardship

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Certified Public Accountants: Your State Board of Accountancy has final authority on the acceptance of any course for CPE credit for CPAs. Contact your state board if you have any questions concerning their CPE requirements. The student is responsible for selecting courses which meet the board requirements.

The CPA Magazine CPE sponsor ID is shown where applicable: AK, AL*, AZ, CA, CT, DC, DE, GA, HI, IA, ID, IN, KY, MA, MD, ME, MI, MO, MT*, ND, NE, NM, NV, OH, RI, SD, UT, VA, VT, WA, WI, WY *Report 50% of the CPE credit shown on CPE certificate

B. Religious objections C. Aliens lawfully present in the United States D. Individuals with income below the tax filing threshold ($9,750 single; $19,500 married filing joint) 5. A _______ is an advanceable, refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace.

A. Baseline Tax Credit B. Advance Medication Tax Credit C. Health Coverage Tax Credit D. Premium Tax Credit 6. Which one of the following statements regarding FPL and calculation for eligibility of the PTC is true?

A. To calculate eligibility for the 2014 PTC, the FPL amounts can be used from as far back as 2012.

B. In Alaska, when household income for one individual is between 100% and 400% of the FPL, it would be between $11,490 and $45,960 respectively.

C. In Washington D.C., when household income for a family of two is between 100% and 400% the FPL, it would be between $17,820 and $62,040 respectively.

D. In California, when household income for a family of four is between 100%

and 400% the FPL, it would be between $23,550 and $94,200 respectively.

7. What would lead to a 10% penalty on a distribution to a HSA? A. If the distribution is not used to pay for qualified medical expenses B. If the distribution to the account is invested in stocks C. If the owner dies before the distribution D. None of the above 8. To be eligible for an HSA, a person with self-only coverage in 2015 must have annual deductible of: A. $1,250 B. $1,300 C. $1,350 D. $1,400 9. Which of the following are not expenses that can be paid using an HSA? A. Your health insurance premiums B. A spouse’s premium for Medicare Part B coverage C. COBRA health care continuing coverage D. A dependent’s premium for Medicare Part A coverage 10. Contributions to an HSA may be deducted up to $3,350 in 2015 for ______ coverage.

A. Family coverage B. Self-only coverage

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C. Spousal D. Transferred 11. The due date for a 2014 tax return is April 15, 2015. The return was filed on March 1, 2015. You have until ___________, to amend the return.

A. December 31, 2015 B. March 1, 2017 C. April 15, 2018 D. None of the above 12. The IRS has six years to audit a return if a person fails to report over ______ of gross income.

A. 10% B. 15% C. 20% D. None of the above

13. Which of the following is not information for which you may need to refer to an old tax return?

A. Depreciation of a home B. The purchase price of stocks, bonds, and mutual funds C. Depreciation of a home office, rental property, or business equipment D. The taxability of pensions and annuities

C. IRC Sec. 754 D. IRC Sec. 826 15. The attorney for a family delineated that the client as manager of the family LLC must carry out all functions with due regard to his/her fiduciary obligations to the LLC and to the members of the LLC. That provision should help deflect an IRS attack that the LLC should be pulled back into the client’s estate under _________ by virtue of he/her being the manager and controlling distributions.

A. IRC Sec. 654 B. IRC Sec. 2036 C. IRC Sec. 743 D. IRC Sec. 731

14. Your client may not obtain the ability to step-up the inside basis of the membership interest in an entity if the governing legal document for the entity does not mandate that the entity will make the election to step-up basis under _________.

A. IRC Sec. 2036 B. IRC Sec. 743

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