Tax brackets

[JimmyTheMan]

As far as tax planning is concerned. Why won't you help us discover those clients where a simple IRA move would help them lower a Tax bracket? You can say its easy all you want but many find it difficult. You could add it easily if you wanted to???

[PhoebeRoberts]

IRA savings is either trivial math (current marginal rate times IRA contribution), or it's very complex (for the large number of situations where there's some benefit with a cliff, like the Saver's credit or APTC). The situation you're talking about, where the client is on the edge of a tax bracket and wants to make the IRA contribution that saves them maximum 22% tax but no 12% tax falls into one category (look at the tax brackets and subtract) or the other (capital gains / qualified dividend rate means the number to compare to the brackets isn't obvious).

When it's complex, my method is to have the software calculate the tax with the maximum IRA deduction and with no IRA deduction, then I do the math to calculate the percentage of tax saved. If that's the current marginal rate, it's a trivial one - every dollar saves you that same percentage. If it's complex, I ask the client if they're interested in making an IRA contribution that could save them a disproportionate amount of tax - because plenty of people in that situation don't have the cash flow no matter how much tax it saves. If they're interested, I plug some intermediate numbers in for the IRA deduction and see if there's an obvious break point.

I don't think this would be a trivial item to code into the software.

[sjrcpa]

Someone here has, or had, a tag line that said Tax software is no substitute for a Tax Professional (or similar language).

This one instance where you can add value as a tax professional.

[abctax55]

Susan... that was me.  I 'stole' it from someone from the old Tax Almanac Forum.  When I used it here, there was one occasion where a newbie thought I was insulting them specifically with it 😉

[abctax55]

I believe Lacerte does provide similar info with the 'analysis' tab.   Perhaps a case of 'you get what you pay for'; Lacerte does have more bells & whistles than PTO.  That's shy Lacerte costs more.

My m.o. is similar to Phoebe's.   I reconcile the entire return, then do *what if's* with retirement contributions. 

Changing AGI by funding retirement (IRA or otherwise...) impacts many computations for more complicated returns.  So the programing wouldn't be 'that' simple.

[sjrcpa]

Anna - I thought it was you but you're using the HumanKind one now.

I didn't see Phoebe's excellent answer when I posted.

[Intuit_Kallana]

ProConnect is not a tax planning software.  As indicated by another individual, Lacerte does have analysis tools built into it.  For tax planning, you would want to utilize the tax planner inside ProConnect or the Intuit Tax Advisor program that is integrated within it.  It will recommend strategies and you can play with it to see the different impacts.  However, in the end it will still be up to you as the preparer to know what is best for your client's situation. 

[BobKamman]

A lot of tax "planning" can be divided into two categories:

1)  People do the right thing for the wrong reasons.

Should people save for retirement? Yes.  Should the amount they save be determined by some external incentive, like whether the tax savings is 12% or 22%?  No.  If they ask you, "how much can I contribute to an IRA for a net $5,000 cost?", then the tax bracket is important.  But people who wait until April to contribute to IRA, often pay the 10% penalty for withdrawing it a few years later. 

2) People do stupid things just to save money on taxes. 

The best example of this was back when a tax credit was enacted for solar water heaters.  They were selling for less than $2,000 each, because that was the cost to produce them plus a reasonable profit.  Then with tax credits, people waited in line to pay $3,500 or more, because it was going to save them $1,500 in taxes.  Great for the vendors, and I suppose if it makes people think they have put one over on the government, there's really no harm.