We are very pleased to announce that Chad McKinney, CPA/PFS, our firm founder, is now a Dave Ramsey Tax ELP (Endorsed Local Provider) for Southern, Middle Tennessee.
High profile billionaire, Warren Buffett, has been quite vocal in arguing that the rich should be taxed more. He sat down with Tom Brokaw back in 2007 on the NBC Nightly News discussing this very matter and, later, on August 14, 2011, The New York Times published an op-ed headlined “Stop Coddling the Super-Rich” written by none other. It was this editorial that ignited a focus on the tax treatment of millionaires. In it, Buffet speaks of his staff paying more in taxes, as a percentage of income, than he does. According to his calculations, his 2010 tax rate was 17.40% while his staff’s average was 36%.
To add to the momentum, when Mitt Romney, presidential candidate, recently released his income tax returns to the general public, they revealed a tax rate of 13.90%, far less than his $21.70 million income would suggest.
How can this be? Certain investment income, including long-term capital gains and qualified dividends, is subject to a maximum tax rate of 15 percent. In the extreme case, if all of a taxpayer’s income is derived from these sources, their overall tax rate could be 0 or 15%, depending on the amount of income.
As a result, the President’s latest tax proposal is affectionately coined the Buffett Rule. The proposal would require those with income in excess of $1 million pay at least 30 percent in taxes. Rather than raising the tax rates on long-term capital gains and qualified dividends, the proposal would create a new 30 percent alternative minimum tax (AMT) for the high earners.
So, here we have two very successful individuals who are taxed, almost exclusively, at the 15% rate. Are they the exception or the rule for America’s highest earners? According to 2009 data released by the Internal Revenue Service’s Individual Returns Analysis Section, those with income in excess of $1 million are paying, on average, 24.40%. That is actually up from 23.30% in 2008 and with the exception of those making $500,000 – $1,000,000, there is not another income level paying, on average, over 20%. Further, of the 140.50 million tax returns filed for 2009, the average tax rate was 11.40%.
So, what do all of these numbers mean? Generally, the more you make, the more you pay. On a lot of levels, Buffett and Romney are the exception rather than the rule. It is the nature of their business rather than the massive income of their business that allows for favorable tax treatment. What can we learn from this?
From a planning standpoint, because we’re in an environment of hyper-gridlock, don’t expect to see the President’s proposal passed into law. However, if Congress does not change the law, the expiration of the Bush-era tax cuts will boost the maximum tax rate on such investment income to 25 percent in 2013. What tomorrow brings is anybody’s guess. For now, taking advantage of the current rates may make good sense, whether you make $1 million a year or not.
I recently read a blog where the author referred to his CPA as a scorekeeper. That is, the CPA is “reactive…dealing with last year’s numbers”. Further, “The CPA and, for most families, the attorney, are always dealing in what has happened, not what will happen in the future.” I have trouble with this because…he is right! I recently had a friend tell me that CPAs always look at history.
Certainly, there is value in an accurately prepared tax return, financial statement or audit, all of which we do, but I believe my greatest value to a client lies between April 16th and December 31st, when we can sit down and proactively plan for their future. Although it seems a logical extension of our core services, few in my profession focus on this even though I believe the CPA is one of the most aptly equipped to do so.
I’ll have to confess that I have been that guy - the CPA who always looked at history. Back when I managed a much larger firm, we simply “didn’t have time” for planning. We were too busy with our tax returns, financial statements and audits. That experience, however, created in me a passion to change. In fact, the conviction to focus on the future is one of the reasons why MCM exists today.
So, we are changing what our clients think about their CPA’s role. And when a seasoned, successful client tells you that “this is the most valuable meeting I have had in years” (true story!) you begin to think that you’re on to something.
At MCM, we look forward to your future.
One would think that the “S” in S corporation stood for stylish with the tremendous interest in this particular entity type. As an attorney friend of mine put it, everyone wants one but they don’t know why.
This demand is, at least in part, a result of the word on the street that says you can pay lower taxes when structured as an S corporation as compared to other entity types such as partnerships or limited liability companies (LLCs).
S corporation shareholders are taxed on a) compensation paid and b) business income. Compensation is subject to payroll taxes while business income is not. Shareholders often take business income in the form of dividend distributions which, generally, are not taxed (because they are being taxed on income that, at least in theory, should exceed distributions to maintain positive cash flows). Partnership and LLC income, in comparison, is fully subject to payroll taxes (up to the Social Security limits).
The too often attempted strategy, then, is to set compensation low in order to minimize payroll taxes. However, governing authority requires S corporation shareholders to be paid a reasonable compensation. Factors that play into reasonable compensation include: nature of the S corporation’s business; employee qualifications, responsibilities, time and effort; compensation compared to nonshareholder employees; comparable business pay for similar services; compensation as a percentage of corporate profits; and compensation compared with distributions.
This strategy has been much abused. In 2009, a Government Accountability Office (GAO) report to the Senate Committee on Finance revealed that in 2003 and 2004 combined, S corporations had underreported their shareholder compensation by $24.6 billion.
Clearly, a hot issue – the IRS has heightened audit frequency on S corporations, the GAO has posed several alternatives for S corporation reform and Congress has attempted to pass legislation that would subject all undistributed income of professional service S corporations to self-employment tax.
As the governing authorities continue to study and approach a resolve with S corporation shareholder compensation, the word on the street is bound to change.
If you’ve been by our office or driven down Main Street in Franklin, you may have seen our latest sign titled “Wealth Reform”. What’s that?
Reform simply means to improve or make better. While the health reform could cause you to question this definition, we will lean on Webster rather than Washington for meaning in this case. Wealth reform, then, means to improve or make better one’s wealth. How’s that?
Is more better? Not always. Wealth reform does not necessarily mean “to increase”. We have found through our extensive, ongoing research that many high and ultra-high-net-worth clients are not as concerned about building wealth as they are about preserving it and minimizing taxes on it. That makes sense – the wealthy know how to make and save money. That’s how they became wealthy in the first place. Expertise in preservation and taxation, however, is not always in their toolbox. Not to worry, it’s in ours. Now, if you need to build wealth, we have those tools as well.
Listen carefully. Not you, us. We listen very carefully to you. This is the only way we can identify your values, needs and goals.
Relax. Our office is cozy, not stuffy. We’re relational, not reserved. That’s just who we are.
Sold out? Do you often feel like you are being sold to? We do and we do not particularly enjoy it. Purveying product is not our first priority here. Our clients are.
“Trust me”. Have you heard that before? Has it burned you? You’re not alone. While we would never tell anyone to “trust us”, the CPA is the most trusted of advisors. More importantly, our actions, not promises, will lead you there over time.
Maybe you could simply say it this way – our clients are not transactions, they are friends. In today’s climate, that’s reform.
We are often asked what is wealth management and how does it work. Wealth management is a holistic investment process that integrates the long-term goals of an individual with financial solutions, using a planning-based, consultative approach.
While not all wealth managers are created equally and, with that, our processes differ, McKinney Capital Management’s process is as follows:
- Discovery Meeting: This is an initial “fact finding” meeting involving an extensive interview in order that we may determine the prospective client’s financial needs and goals, values, risk tolerance, and past investment experience.
- Plan Development: We take the information gathered in the discovery meeting and develop a plan that is designed to achieve the prospective client’s financial needs and goals.
- Plan Review: In this second meeting, we review the plan with the prospective client and their significant other, if any. This meeting provides an overview of the plan, including how (if followed) it should reach the desired outcome.
- Plan Implementation: It is at this point that a client relationship is established and plan implementation begins.
- Ongoing Review: We continually monitor the portfolio and plan, communicating with our clients regularly and making changes as needed.
While wealth management is not for everyone, it is for those who are very serious about what they have worked so hard for. If that describes you, we invite you to contact us. Our discovery meetings cost you nothing more than your time which is one of your most important assets of all.
What is PFS?
PFS, or Personal Financial Specialist, is the financial planning specialty credential issued by the American Institute of Certified Public Accountants (AICPA) exclusively to qualified CPAs like myself with proven expertise and experience in comprehensive personal financial planning. The AICPA is the premier professional association for CPAs in the U.S. and has more than 350,000 members. You must be a CPA member in good standing of the AICPA before you can obtain the PFS Credential.
Why is PFS a preferred choice among financial planning credentials?
PFS is granted exclusively to CPAs like me who are members in good standing of the AICPA. As a PFS Credential holder, I demonstrate a comprehensive knowledge of the core areas of financial planning. Also, to obtain the credential, I met stringent requirements with professional work experience, education and training and passed an examination that tests my financial planning knowledge. As an added benefit, when you choose me as a CPA/PFS for your financial planning needs, you also gain an advantage thanks to my knowledge and expertise in related areas such as tax, accounting and business management. This ensures that your needs are more fully met through an integrated, holistic approach.
What are other reasons I should hire a CPA who holds a PFS Credential?
Studies by independent groups have repeatedly shown that CPAs are among the most trusted advisers to the public. As such, CPAs have built a reputation over the last 100 years as a profession that provides competent, ethical and trustworthy advice. As a client, you can count on objective financial planning advice from me that will always meet your best interests.
Personal financial planning is a core competency for CPAs, and PFS is the only personal financial planning credential that is specifically designed for CPAs and the unique perspective we bring to the practice.
How do CPAs qualify for the PFS Credential?
To obtain a PFS, CPAs must prove their broad-based knowledge and business experience in core areas: estate planning, investment planning, the personal financial planning process, personal income tax planning, retirement planning and risk management planning. They must also pass an intensive qualifying examination and commit to lifelong learning requirements.
How can I be assured that you are serving my best interests?
CPAs adhere to the AICPA’s strict code of professional conduct and ethics. In addition, PFS Credential holders follow the AICPA’s Statements on Responsibilities (SORs) in Personal Financial Planning. These SORs describe specific planning procedures as well as guidelines for developing plans and communicating advice to clients. As a PFS Credential holder, I follow these guidelines when working with my clients and other advisers such as bankers and attorneys.
We recently had the privilege of coaching about 30 New York Life Insurance Agents at their Cool Springs office. Topics included estate taxation and business structure. We had a great time and they all managed to stay awake. Thank you for the opportunity New York Life!
At MCM, we are about educating – educating ourselves, our clients, our community and other professionals. Why? With education, we make better decisions. It’s that simple.
Nashville has done it again! In a report by Accounting Principals, an accounting and finance staffing provider, using data from the Bureau of Labor Statistics, Nashville ranked 6th in top cities to find a job in the financial services industry. Topping the list of seven were: San Francisco, Denver, Paramus (N.J.), Chicago, Portland, Nashville and Miami.
MCM launched its charitable giving program today, with the initial donation being made to Mercy Children’s Clinic. A portion of the fees earned from the preparation of every new client tax return was contributed to Mercy.
Giving back to Williamson County is fundamental to MCM’s mission and Mercy Children’s Clinic was the natural choice this year. “Children should not have anything less than exceptional healthcare, regardless of their socioeconomic background and their family’s ability to pay,” McKinney stated.