While Congress continues to debate the most massive overhaul of taxes since the 1980s, financial advisors are doing the same.
Advisors disagree on how to handle the waiting on whether state and local tax deductions will be lost, but all say clients and advisors have to be aware of the possibilities and poised to act.
“It seems to be a done deal that taxpayers will no longer be able to deduct state and local taxes from federal income tax,” said Bernard Kiely, founder of Kiely Capital Management Inc. in Morristown, N.J. “But I’m afraid, other than moving, there may not be much a person can do” to combat the increase in taxes that many will be subject to in high tax states like New Jersey.
“The increase in the standard deduction will not make up for the loss of the itemized deductions here,” he said.
“There will have to be a reconciliation between the House and Senate versions of the bill and it is still very fluid and happening quickly,” agreed Harry Scheyer, senior vice president with RTD Financial Services based in Philadelphia. “I would never tell someone to pay taxes ahead of time. But it is going to be tough to wait and see what happens.”
Robert Klein, founder of Retirement Income Center based in Newport Beach, Calif., agrees it may be too early to act. “I educate clients that proposals are just proposals, even though there is a good chance this one will become law.”
“We can’t do any actual tax projections yet,” he added. “To the extent that state income tax payments might be able to be accelerated to this year, clients might want to consider that option, unless it forces them to pay the AMT [alternative minimum tax]. We are always looking at the best time to pay state taxes.
“In places like New Jersey it is easy to hit $10,000 in property taxes [the proposed limit for deducting property taxes], so people may want to accelerate some of that payment to this year,” Klein said.
Many states outside of New York, New Jersey and California have high marginal tax rates for high-income earners. In South Carolina, the top rate is 7 percent. Joe Taylor, principle at Myrtle Beach, S.C.-based Oak Street Advisors, said that the uncertainty regarding passage and final format of the tax bill makes it challenging to plan ahead, but agreed with Klein’s move to take deductions in the 2017 tax year.
“The final content of any tax rewrite is uncertain, but… we think it would be prudent to accelerate the deduction where possible,” said Taylor. For advisors, that would mean recommending that clients withhold more state and local taxes in the 2017 calendar year, and arranging for retirees and self-employed clients to make any estimated tax payments for January 2018 in December 2017 instead.