New tax strategies for mortgage interest deductions, charitable contributions and others

7 potential tax windfalls for clients

November 1, 2019 4:14 PM

It wasn’t easy, it wasn’t pretty and it was certainly, at times, stressful. But financial advisors and clients alike made it through April 15, 2019 — the day the most sweeping overhaul of the tax code in 30 years went into effect.

The Republican tax bill ran 1,097-pages, including 503 pages of legislative text.

The good news for planners in this year’s run-up to tax season: They now have solid precedent to draw upon as they begin to field calls from jittery clients. Here are some specifics, along with strategies arising from those changes, to pass along to clients.

Limitation on state and local income tax deductions

Code change: The tax law created a new cap for itemized deductions of $10,000 for state and local income tax and property taxes.

Takeaway: For those with multiple properties, the loss of this property tax deduction can be avoided by transforming properties into investment/rentals. Property tax deduction for rental properties has not been impacted by the tax changes. While taxpayers in California and New York were hit the hardest, some taxpayers in the Midwest also hit the cap. For those who fall into higher-income tax brackets, high property tax and second homes were impacted the most by this cap.

Charitable giving impacted by the new code.

Code change: Charitable contributions may not have as much of an impact on your client’s tax return as a result of the increase in the standard deduction — but that doesn’t mean anyone should stop donating! (And, by the way, clients may not have received as much of a benefit from contributions in the past as some of them thought.)

Takeaway: Investors over 70-1/2 years old have the ability to claim a benefit from gifting from the IRA directly to their qualified charity. The change in gifting from a checking account to this IRA account is now the most preferred avenue from a tax perspective for those that are age eligible. What makes this route so valuable is the qualified charitable distribution even offsets RMD requirement allowing some investors a lower taxable income that may impact social secmorturity taxability or Medicare premiums.

Entertainment expense is no longer deductible

Code change: Business-related entertainment expenses are no longer deductible. Certain business meals remain 50% deductible and the substantiation requirements have changed under the new law. But — sorry sports fans — those business-related rounds of golf and sporting event tickets are no longer tax deductible.

Takeaway: Business meals can still claim the 50% deduction. According to the IRS, the business meal deduction applies as long as “food or beverages are not lavish or extravagant.” Essentially, a client can still take their client out to a favorite sporting event and dinner, but now only the dinner portion counts as a qualified expense.

The loss of miscellaneous deductions may hurt

Code change: In the past, clients may have been able to deduct a portion of investment fees and expenses, tax preparation fees — as well as casualty and theft losses. These miscellaneous deductions, along with a list of others,,were eliminated. The actual impact on individual taxpayers will vary.

Takeaway: It may be more beneficial for investment advisory fees to come from tax- deferred accounts, where in the past, some investors may have had these fees come from taxable investment accounts due to the investment advisory fees’ inclusion into miscellaneous itemized deductions. The ability to pay investment advisory fees on pre-tax basis is still valuable even with this lost deduction.

Qualified business income: Beneficial for most small business owners

Code change: The new QBI deduction is 20% of qualified business income, subject to limitations. Depending on the type of business entity (i.e., S corporation, partnership, sole proprietor), the industry your client participates in and their income level, the qualification and level of this deduction will vary. In addition, the complex formula may be impacted by retirement contributions and other moving pieces. The QBI deduction is not a permanent change and will revert to previous laws in 2026. QBI may have unintended side effects for those who don’t focus on the underlying details of this calculation. Historically, the retirement contribution for small business owners could easily be translated into savings at the marginal tax rate. For business owners, contributions into SEP IRA, SIMPLE IRA, defined benefit contributions and solo 401(k) will lower qualified business income, thus lowering the deduction.

Takeaway: The workaround is to consider tax-deferred accounts that do not impact the QBI deduction. For example, a small business owner may want to utilize avenues such as an HSA account, individual IRA account, spousal IRA account or a spouse’s 401(k)/403(b)/457 plan to receive the full tax savings at the marginal tax rate. These alternative avenues allow qualified business income to remain unchanged, thus maintaining the full, qualified business deduction. If eligible, the Roth IRA avenue may be an alternative to consider due to the lower tax rates and no impact on QBI deduction.

Tax return preparation is more complicated

Code change: The largest tax overhaul in 30 years means CPAs must relearn the rules. As a result, it will take time to digest and create new tax and investment strategies.

Takeaway: Clients may need their planners to coordinate with tax advisors to make best use of the changes. Some clients may even reconsider their relationships with their current accountants and come to you asking for recommendations. To capitalize on these changes going forward, all accountants and advisors should review past strategies.

Turn fear into opportunity

Code change: It’s extremely difficult to predict future tax rates. However, the individual income tax rates were not a permanent provision in the tax law. Thus, as drafted now, individual tax rates will revert back to previous rates in 2026.

Takeaway: One way to view this tax change is as an opportunity for some clients to lock-in the current tax rates via Roth conversion, especially for those with very large pre-tax retirement accounts. Indeed, the widening of tax brackets does create an opportunity for some. For clients who are retired or near retirement, the changes allow some the opportunity of utilizing Roth conversion to accelerate taxable income with the lower individual tax rates.