New tax law, new rules: 11 tips for helping clients maximize benefits
April 19, 2018 2:59 PM
When a client asked how non-C corporations are treated under the new law, Dave Stolz, a veteran CPA with 17 years of experience, said he wasn’t entirely sure.
In this instance, it's not exactly clear how the deduction will be enforced since the IRS and Treasury have not yet provided detailed guidance, Stolz says.
Advisors should be gearing up for more questions like these. The majority of affluent Americans are likely to adjust their financial plans as a result of the changes, according to a survey conducted by the American Institute of Certified Public Accountants.
This is just one example of how clients are reacting to the Tax Cuts and Jobs Act. While clients may be excited about receiving larger benefits, they might worry claiming them will be confusing.
To help clients develop a better tax plan in compliance with the changes from the overhaul, many of Financial Planning’s contributors and reporters have compiled useful tips. Click through to check out 11 ways you can help clients navigate tax planning under the new law.
In this instance, it's not exactly clear how the deduction will be enforced since the IRS and Treasury have not yet provided detailed guidance, Stolz says.
Advisors should be gearing up for more questions like these. The majority of affluent Americans are likely to adjust their financial plans as a result of the changes, according to a survey conducted by the American Institute of Certified Public Accountants.
This is just one example of how clients are reacting to the Tax Cuts and Jobs Act. While clients may be excited about receiving larger benefits, they might worry claiming them will be confusing.
To help clients develop a better tax plan in compliance with the changes from the overhaul, many of Financial Planning’s contributors and reporters have compiled useful tips. Click through to check out 11 ways you can help clients navigate tax planning under the new law.
Something to check when working with charitable clients
Under the new tax law, it may be wise for clients to gift appreciated securities or make a qualified charitable distribution from their IRAs. Advisors should conduct an analysis for charitably inclined older clients, according to Susan Green, director of financial planning standards for Wescott Financial Advisory.
"If you gift appreciated securities, you don’t pay tax on the capital gains," she says. "If you make a QCD, you lower your taxable income by that amount, up to $100,000."
Read more:Should advisors offer clients tax planning services?
"If you gift appreciated securities, you don’t pay tax on the capital gains," she says. "If you make a QCD, you lower your taxable income by that amount, up to $100,000."
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Take extra care in helping clients finance vacation homes
Advisors working with clients seeking to finance a second home should consider the new tax law's rules concerning deductibility of home mortgage interest.
"If a client takes out a mortgage on his primary home to finance the construction of a vacation home, it will not be deductible," Green says.
Read more:Should advisors offer clients tax planning services?
"If a client takes out a mortgage on his primary home to finance the construction of a vacation home, it will not be deductible," Green says.
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Fewer clients are about to be impacted by AMT
Good news?
The new tax law will decrease the number of people impacted by the Alternative Minimum Tax, "perhaps the most misunderstood and certainly one of the most disliked concepts of personal income taxation," said Bill Morgan, an advisor for Buckingham Strategic Wealth.
The exemption is larger, thus "increasing the amount of income over which the exemption phases out," he said.
State and local taxes are also no longer deductible for AMT purposes, Morgan noted. "With the new limitation on SALT to $10,000, the difference between AMT and regular taxable income should decrease," he said.
Read more:Should advisors offer clients tax planning services?
The new tax law will decrease the number of people impacted by the Alternative Minimum Tax, "perhaps the most misunderstood and certainly one of the most disliked concepts of personal income taxation," said Bill Morgan, an advisor for Buckingham Strategic Wealth.
The exemption is larger, thus "increasing the amount of income over which the exemption phases out," he said.
State and local taxes are also no longer deductible for AMT purposes, Morgan noted. "With the new limitation on SALT to $10,000, the difference between AMT and regular taxable income should decrease," he said.
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Have clients take a good second look at their wills
Given the tax law's higher exemptions, bequests outlined in some clients' wills might be outdated, according to estate planner and Financial Planning columnist Martin Shenkman. For example, if a client signed a will or revocable trust in 2003 when the estate tax exemption was just $1 million dollars, it could have catastrophic implications in 2018.
"Many clients have never updated their wills as the laws have changed," Shenkman notes. "The huge increase in the exemption makes it critical to evaluate how the dollars flow."
Shenkman warns that routine check-ins will be necessary as Congress has frequently tinkered with the estate tax.
"Addressing the many what-ifs will make a client's documents more complicated and costly, but anything less is risky."
Read more:Avoid 'dangerous' planning generalizations after new tax law
"Many clients have never updated their wills as the laws have changed," Shenkman notes. "The huge increase in the exemption makes it critical to evaluate how the dollars flow."
Shenkman warns that routine check-ins will be necessary as Congress has frequently tinkered with the estate tax.
"Addressing the many what-ifs will make a client's documents more complicated and costly, but anything less is risky."
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Does using an older life insurance trust still make sense?
Older life insurance trusts were originally intended to pay estate tax when the exemption was $1 million. Advisors should evaluate whether these plans still make sense — can it be modified or should the trust serve a new purpose?
If an insurance policy is a good one and can provide a good asset protection tool, it might work for other purposes even if the estate tax is no longer relevant. Clients might need some help remembering what old trusts can provide, Shenkman says.
"More than 20 states have laws that permit merging and old trust into a new trust," he says. This process, called decanting, "can facilitate updating administrative and distribution provisions to help repurpose the old trust."
Read more:Avoid 'dangerous' planning generalizations after new tax law
If an insurance policy is a good one and can provide a good asset protection tool, it might work for other purposes even if the estate tax is no longer relevant. Clients might need some help remembering what old trusts can provide, Shenkman says.
"More than 20 states have laws that permit merging and old trust into a new trust," he says. This process, called decanting, "can facilitate updating administrative and distribution provisions to help repurpose the old trust."
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Review durable powers of attorney
Planners should review clients' durable powers of attorney to make sure any provisions giving agents the right to make gifts are still relevant under the current law.
If unattended, these can turn into "dangerous spigots" for elder financial abuse, Shenkmen says. "Many wealthy clients who should take advantage of the new high exemptions before they sunset or are legistlatively changed will be uncomfortable doing so."
Advisors working with these clients may want to recommend for an estate-planning attorney update the powers to include a broad gift provision. This would allow an agent to use some of the new exemptions before they disappear should the client become incapacitated before the law changes again.
Read more:Avoid 'dangerous' planning generalizations after new tax law
If unattended, these can turn into "dangerous spigots" for elder financial abuse, Shenkmen says. "Many wealthy clients who should take advantage of the new high exemptions before they sunset or are legistlatively changed will be uncomfortable doing so."
Advisors working with these clients may want to recommend for an estate-planning attorney update the powers to include a broad gift provision. This would allow an agent to use some of the new exemptions before they disappear should the client become incapacitated before the law changes again.
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No more take-backs on Roth conversions
That means talking to clients about Roth conversions is going to look a little different moving forward. For example, Roth conversions may look more attractive to clients now that income tax rates are lower, and advisors may see many more clients opt to take the standard deduction now that it has been doubled.
Overall, advisors can expect to do more handholding. "Clients will require more advice, and their advisors will need to conduct more careful analysis before making any recommendations," says CPA and Financial Planning columnist Ed Slott.
Read more:How the new tax law changes Roth IRA conversions
Overall, advisors can expect to do more handholding. "Clients will require more advice, and their advisors will need to conduct more careful analysis before making any recommendations," says CPA and Financial Planning columnist Ed Slott.
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How the tax law may affect real estate owners
There are pros and cons to how the tax law will affect real estate owners, according to Heidi Henderson, specialty tax consultant and executive vice president with Engineered Tax Services,
Note this potential boon: Under the new tax law, there's 100% bonus depreciation for property placed in service after Sept. 27,2017 and before 2023. The previous law stipulated for 50% bonus depreciation for property placed in service in 2017, 40% for 2018 and 30% for 2019.
However, real estate owners may experience losses of credit when it comes to changes to the interest deduction limitation, state and local tax and property tax deductions, and the net operation loss limitation.
"All things considered, the Tax Cuts and Jobs Act will provide significant tax savings for the majority of businesses given an overall reduction of tax rates and increased bonus and Section 179 deductions," Henderson said. "Real estate owners should seriously consider projected revenue, tax liability and the application of accelerated depreciation to take advantage of these increased expenses on all acquisitions."
Read more:Pros and cons of the new tax law for real estate owners
Note this potential boon: Under the new tax law, there's 100% bonus depreciation for property placed in service after Sept. 27,2017 and before 2023. The previous law stipulated for 50% bonus depreciation for property placed in service in 2017, 40% for 2018 and 30% for 2019.
However, real estate owners may experience losses of credit when it comes to changes to the interest deduction limitation, state and local tax and property tax deductions, and the net operation loss limitation.
"All things considered, the Tax Cuts and Jobs Act will provide significant tax savings for the majority of businesses given an overall reduction of tax rates and increased bonus and Section 179 deductions," Henderson said. "Real estate owners should seriously consider projected revenue, tax liability and the application of accelerated depreciation to take advantage of these increased expenses on all acquisitions."
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Expats looking for a simpler tax process may be out of luck
Expats won't find much relief when it comes to simplifying their taxes, according to David McKeegan, co-founder of Greenback Expat Tax Services. Individual reporting requirements are the same for the most part, but American expats owning small businesses abroad are likely to find themselves in a more complex situation than they did under the old system.
"Most folks will not find their taxes streamlined by the provisions of the Tax Cuts and Jobs Act," says McKeegan.
Read more:5 things expat clients need to know about new tax law
"Most folks will not find their taxes streamlined by the provisions of the Tax Cuts and Jobs Act," says McKeegan.
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For tax purposes, cryptocurrencies are property — not currency
Under the new tax law, cryptocurrency isn't a currency, but property. That's an important distinction for advisors to make sure clients investing in virtual currency are aware of — as it will for sure complicate tax planning.
“When you exchange currency for currency, it’s not a taxable transaction,” says Ryan Losi, a CPA and executive vice president of accounting firm Piascik. “But when you exchange property for property, it is a taxable transaction. You have to identify every piece you have, how it was acquired, was the way you acquired it a taxable transaction, and was it a taxable transaction when you disposed of it. You need to compute the gain or loss, and the character of the gain or loss. When you acquire cryptocurrency on a daily basis, this can become a nightmare.”
Individuals using bitcoin to purchase other property will have to take meticulous records. "It's as if you sold the bitcoin and used the proceeds to buy the house," Losi says. "You're liable for tax on the gain between when you acquired it and when you bought the house."
Read more:The ‘nightmare’ of bitcoin tax planning
“When you exchange currency for currency, it’s not a taxable transaction,” says Ryan Losi, a CPA and executive vice president of accounting firm Piascik. “But when you exchange property for property, it is a taxable transaction. You have to identify every piece you have, how it was acquired, was the way you acquired it a taxable transaction, and was it a taxable transaction when you disposed of it. You need to compute the gain or loss, and the character of the gain or loss. When you acquire cryptocurrency on a daily basis, this can become a nightmare.”
Individuals using bitcoin to purchase other property will have to take meticulous records. "It's as if you sold the bitcoin and used the proceeds to buy the house," Losi says. "You're liable for tax on the gain between when you acquired it and when you bought the house."
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How DAPTs can play an important role in planning for income and estate taxes
There is a helpful tax planning tool few advisors may know about.
DAPTs, or self-settled domestic asset protection trusts, are more flexible than third-party trusts. With a DAPT, a mom can set up a trust for her kids but also be a beneficiary herself. "That flexibility offers potentially dramatic planning opportunities for clients," according to Shenkman.
The catch is DAPTs can't be created everywhere — only the laws of about 17 states permit them.
"Whether they’re used for estate tax planning or asset protection, DAPTs are an important tool for planners as they present a means for a client to secure assets from claimants and future estate taxes, while still offering the ability to access those assets," Shenkman says.
Plus, clients can use alternative structures and take additional precaution to plan using a DAPT outside of the states where they are permitted, he says.
Read more:The vital tax planning tool few advisors know
DAPTs, or self-settled domestic asset protection trusts, are more flexible than third-party trusts. With a DAPT, a mom can set up a trust for her kids but also be a beneficiary herself. "That flexibility offers potentially dramatic planning opportunities for clients," according to Shenkman.
The catch is DAPTs can't be created everywhere — only the laws of about 17 states permit them.
"Whether they’re used for estate tax planning or asset protection, DAPTs are an important tool for planners as they present a means for a client to secure assets from claimants and future estate taxes, while still offering the ability to access those assets," Shenkman says.
Plus, clients can use alternative structures and take additional precaution to plan using a DAPT outside of the states where they are permitted, he says.
Read more:
