The 8 Habits of Highly Effective Tax Planners


Over 30 years ago, Stephen Covey published “The 7 Habits of Highly Effective People.” The book became a bestseller and is often referenced to this day. While those habits work well for any business person, there are also eight habits of highly effective tax planners. Let’s explore each of them.

Habit #1: Effective Tax Planners Look to Maximize Deductions.

Whenever you’re seeking to save a client money in taxes, you should start by maximizing tax deductions. One example of maximizing a deduction is the home office deduction.

Imagine your client is a doctor with a home office used to work on bookkeeping, billing and reviewing patient files. As this client’s tax planner, if you can establish this space as an administrative office, then the client would be able to deduct the mileage between the home office and the practice where patients are seen. This would add a deduction, thereby lowering taxable income.

Habit #2: Effective Tax Planners Look for More Efficient Entity Structures.

If your client is a business owner, after maximizing deductions you’ll want to determine if the business is organized using the best possible structure. It is possible to generate significant tax savings simply by changing the type of entity.

For example, many small businesses are organized as a Schedule C. However, many times a Schedule C is not the most tax efficient business entity. If your client can change structures to an S corporation, or even C-corporation, you might be able to significantly reduce the tax burden for that client.

Top tax planning professionals look for any potential business entity changes that their clients can benefit from.

Habit #3: Effective Tax Planners Look for Retirement Accounts and Insurance Deductions.

Look to ask questions regarding your prospect’s retirement accounts and insurance deductions to check for any possible tax savings there. Often, significant tax savings in retirement can be found with the right planning.

For example, a client may have an IRA account, which only allows for limited contributions each year. If your client is contributing to an IRA, you might consider moving over to a Simplified Employee Pension (or SEP) or a 401(k), which could potentially result in a bigger deduction and more tax savings.

Additionally, ask what type of insurance a client has and make sure health and dental insurance deductions are being used to the fullest. Note that life insurance does not fall under this category, because life insurance premiums are not tax deductible. However, other forms of insurance can be deductible and could result in even more tax savings.

Habit #4: Effective Tax Planners Look for Niche-Specific Strategies.

Good tax planners know that certain niches can have specific tax saving strategies. For example, the real estate niche can make use of Sec. 1031 exchanges and cost segregation to avoid capital gains and increase depreciation. Restaurants could apply the FICA tip credit. Companies that innovate on products or processes can take advantage of research and development credits.

Understand your client’s niche and employ those strategies. There are many different niches out there, so to help your clients save money on taxes, this may require a little research on your part.

Habit #5: Effective Tax Planners Look for Advanced Tax Strategies

While many tax professionals know about basic strategies, few go deep into more advanced strategies. Two examples of more advanced strategies would be the Employee Retention Tax Credit and captive insurance.

The ERTC is a refundable tax credit authorized by Congress as part of the CARES Act of 2020 to encourage businesses to keep employees on the payroll despite business disruption. The American Rescue Plan extended the credit into the third and fourth quarters of 2021 and made it available to businesses receiving PPP loans. This is an advanced strategy because of the many variables involved, including whether the employer qualifies in a given quarter, which wages qualify, creating estimates of current and future quarters and then reconciling actual credits received versus credits requested—among others.

Captive insurance is another advanced strategy. This is a form of self-insurance where the insurer is owned by the insured. To leverage this strategy a business must have fairly high income—over $500,000 annually. However, for companies that qualify, it’s a great advanced strategy that could potentially result in large tax savings.

Habit #6: Effective Tax Planners Look for Key Areas of Opportunity.

Tax planning is really about identifying key areas of opportunity for more tax savings. You want to focus on what will make the biggest impact for your client. For example, if your client uses a room at home as an office, it might lead to savings of a few thousands dollars. If, however, the client is eligible for Qualified Small Business Stock treatment, the QSBS strategy could be used to eliminate $100,000 of capital gain, which, multiplied by his 20% capital gains tax rate, would save $20,000.

The strategy that saves $20,000 should be prioritized over the one that only saves a few thousand dollars because both take some effort on behalf of the client to implement. While effective tax planners try to identify all possible strategies, the best tax planners prioritize those tax strategies that will result in the largest savings.

Habit #7: Effective Tax Planners Look for New Technology to Become More Efficient.

Tax planning can be difficult. A shifting regulatory landscape, evolving legislation, multiple variables and inputs, and the quantity of research needed can all be prohibitive. But highly effective tax planners know that the research and review involved can become much more efficient with the right technology. While some use spreadsheets and old-fashioned calculators, many have begun leveraging specialized tax planning software.

In 2021, there are many tools available to help you find tax planning strategies and even automatically calculate potential savings with client-ready deliverables.

Whatever type of technology you decide to use, make sure your process is efficient and scalable.

Habit #8: Effective Tax Planners Stay Up-to-Date on the Latest Legislation.

Tax planning is never static. Each year brings new laws and regulations. Sometimes old laws expire or are updated. These changes must be taken into account. What worked one year may not be available the next.

For example, in 2020 we saw many COVID-19 relief opportunities. This year, some of those have expired while others have been extended. For this reason, tax planners need to keep their finger on the pulse of what’s happening in Washington as well as in their state capitals.

Tax planning is a rapidly growing service within the tax and accounting industry. Time and time again, these eight habits have proven to help ordinary tax planners become highly efficient tax planners.

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