How new IRS rules, presidential race will affect wealth management

August 20, 2024 9:00 AM

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Wealth management experts play a vital role when helping individuals and families navigate the financial landscape and plan for the future. But as tax laws and regulations evolve, advisors need to keep abreast of the changes and the potential impact to their clients' financial plans.

Over the last two months, leading officials with the IRS have rolled out new guidance on emergency retirement plan distributions for domestic abuse victims, final rules for reporting cryptocurrency trades, progress on a delinquent tax collection program for millionaires and more.

These changes come during a dynamic political landscape created by President Joe Biden's decision not to seek reelection and instead endorse Vice President Kamala Harris for the Democratic nomination.

This has led experts to look at both Harris' and former U.S. President Donald Trump's political track records with the goal of predicting what each administration's regulatory landscape could look like.

From her time as a state attorney general, California senator and eventually to the White House, Harris has backed numerous efforts largely focused on those who make less than $100,000 per year. Examples include the LIFT (Livable Incomes for Families Today) the Middle Class Act bill she proposed in 2018, the Rent Relief Act, her "Medicare for All" plan and more.

On the Republican side, many have associated the Trump candidacy with the 922-page plan drafted by the Heritage Foundation known as Project 2025, which proposes significant changes to the functionality of the Securities and Exchange Commission, individual income taxes and more.

"The policy vision in Project 2025 is remarkably developed and specific as it relates to capital markets policy," Michael Canning, the founder of public policy consulting firm LXR Group, said in an email to Financial Planning's Tobias Salinger. "The document envisions a root-and-branch retooling of securities laws and remaking of the SEC, in the name of reducing complexity and promoting capital formation. Capital formation would become the overriding policy focus."

Financial Planning surveyed more than 190 advisors at broker-dealers, registered investment advisers (RIAs) and other firms to gauge industry predictions for the year ahead. The economy, chiefly inflation, was the top concern among 63% of respondents, with growing political and socioeconomic instability and regulatory scrutiny/enforcement rounding out the top three.

The data further suggested that clients would most likely delay large purchases, decrease investing behavior and push back retirement plans.

The IRS isn't the only entity that has been busy over the last few months. The U.S. Supreme Court has issued five notable rulings enacting changes ranging from the end of the Chevron Deference to how the SEC handles cases of securities fraud — all of which bring widespread amendments to the power of regulatory agencies.

Below are some of the most noteworthy efforts out of the IRS in recent weeks and their impact on the wealth management industry.

IRS amasses $1B in owed taxes from millionaires

The Internal Revenue Service, as part of an ongoing campaign to collect delinquent funds owed by high-income taxpayers, has successfully managed to bring in roughly $1 billion in past-due taxes.

Dozens of IRS employees have been working since the September 2023 launch of the campaign to contact 1,600 individuals who made more than $1 million in annual income and owed $250,000 in taxes. Increased funding and capital freed up by the Inflation Reduction Act played a key role in empowering the agency to collect what is owed, according to IRS Commissioner Danny Werfel.

"Too often during the past decade, the IRS didn't have the resources to pursue high-income taxpayers to follow up with these people — even though their tax bill wasn't in dispute," Werfel said. "It takes time and effort to follow up, and the IRS was stretched too thin to pursue all these cases."

The agency is also cracking down on roughly 125,000 households with income exceeding $400,000 per year that have not been filing tax returns.

"Inflation Reduction Act funding allowed us to restart our nonfiler program, which had been dormant due to a lack of funding," Werfel said.

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IRS collects $1B from millionaires

Rules on selling, exchanging crypto finalized by IRS

Brokers handling the possession of digital assets for their clients in specific sale or exchange transactions will see changes in reporting requirements under new final regulations from the Treasury and the IRS.

The Form 1099-DA, which the IRS previewed a draft of this year, requires brokers to report on gross proceeds for transactions, adjusted basis on certain transactions, fair market value of assets and other transaction details.

Eligible parties include providers of custodial digital-asset trading platforms and digital-asset kiosks, as well as specified digital-asset hosted wallet providers and processors of digital-asset payments.

"Because of the bipartisan Infrastructure Investment and Jobs Act, investors in digital assets and the IRS will have better access to the documentation they need to easily file and review tax returns," Aviva Aron-Dine, Treasury's acting assistant secretary for tax policy said in a statement. "By implementing the law's reporting requirements, these final regulations will help taxpayers more easily pay taxes owed under current law while reducing tax evasion by wealthy investors."

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IRS finalizes rules on selling and exchanging crypto

IRS provides guidance on emergency retirement plan withdrawals

Victims of domestic abuse or others with emergency personal expenses can now withdraw from eligible retirement plans, per new guidance from the IRS.

Notice 2024-55 provides taxpayers with detailed information about exceptions added under Secure 2.0 that took effect this year, such as properly defining an emergency personal expense distribution, identifying which retirement plans are eligible, outlining limitations on distributions and more.

Distributions can be received within a one-year time frame that begins on the date when a taxpayer suffered an instance of domestic abuse.

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New guidance on emergency distributions from retirement plans

How rising property taxes have entered the advisory conversation

As the share of homeowner budgets occupied by property taxes continues to grow, financial advisors are seeing a similar growth in the importance of addressing proper budgeting with clients.

In the first quarter of this year, data from the National Association of Home Builders reported on by FP sister publication National Mortgage News showed property tax revenue in the U.S. increased by roughly 9% year over year — amounting to a seasonally adjusted $766.7 billion at the end of the three-month period.

There are a litany of factors in the homebuying process beyond the price of the property that play into how affordable a purchase might actually be, including the persistent burden of property taxes, according to Amy Irvine, founder of Corning, New York-based Rooted Planning Group.

"People look at the price of the house and what that cost is, but they dont always look at the underlying property taxes," Irvine said in an interview with Financial Planning's Tobias Salinger. "The house will be paid off at some point in time. The property tax won't."

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With property taxes rising, here's what to tell clients

Could Kamala Harris’ tax policy history tip the electoral scales?

Following President Joe Biden's decision last month not to seek reelection and instead endorse Vice President Kamala Harris as his pick for the Democratic nomination, advisors and wealth management experts have been reviewing Harris' past legislative efforts to better predict what the future administration could look like.

Harris has historically focused on providing tax relief to those in the sub-$100,000 annual income bracket, as seen through the LIFT (Livable Incomes for Families Today) the Middle Class Act bill she proposed in 2018. The legislation would have provided up to $3,000 in tax credits for those filing as individuals and $6,000 to those filing jointly, provided their income was less than $100,000.

Other measures included a proposed bill known as the Rent Relief Act, again for those with income under $100,000 per year, that would establish a refundable tax credit for those paying in excess of 30% of their gross income toward rent and utilities. The legislation drew sharp criticism from those who held that it would benefit landlords more than renters.

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How Kamala Harris may shift the crucial tax debate in this year's election