Desperately Seeking Lower Taxes

AMT Meets The 3.8% Tax
This galling little levy can also affect planning for the alternative minimum tax, according to Jerry Yu, an accountant with Moss Adams LLP in Silicon Valley. Usually, clients who are subject to the AMT are advised to make their fourth-quarter state estimated tax payment when it’s due in mid-January, rather than in December. That’s because state income tax is not deductible under alt-min, so there’s no point in prepaying it in the current year.

“But a portion of the state tax payment may be deductible against income subject to the 3.8% tax,” Yu points out. “So we run a calculation to see whether it makes sense for AMT clients to prepay their state tax by December 31 to potentially reduce the 3.8% tax for this year,” he says.
Usually a significant portion of the client’s income must derive from investments in order for prepaying to be beneficial, Yu notes.

The Hidden Costs Of Alts
Keeping taxes in check is good. So is keeping a lid on accounting fees, and year-end planning is an opportunity to explore the tax implications of any alternative investments you’re considering for clients. The alts universe is vast, diverse and full of investments drenched with tax issues that can lead to higher tax-prep costs.

Rose, the Encino CPA, says, “One of my clients put $100,000 into an alt investment that ended up having some reportable items in relatively small dollar amounts. But they had to be reported, and that makes the tax return more complicated and more expensive to produce.”

At Moss Adams, Yu has noticed an uptick in U.S.-based hedge funds investing overseas or in other funds that then invest overseas. This can lead to potential disclosure requirements under tax code rules, including those involving passive foreign investment companies. “PFICs are one of those things that should scare people because of the tax-reporting complexity. They are tricky, and the disclosures can be very costly to the client,” Yu says.

The bottom line is that before piling clients into alts, it might be worth factoring tax accounting costs into the projected return. Rose adds that many alt vehicles are partnerships or limited liability companies, many of which don’t send tax-filing information to their investors until summer. That’s something clients who prefer to get their taxes in early need to consider.