Last tax season brought some nasty surprises for taxpayers who saw how reform hit their individual returns. Now’s the time of year for advisors to make next April less painful for their wealthy clients.
“Most taxpayers didn’t take the time to study the personal impact of the tax law changes,” said Dean Mioli, a CPA/CFP and director of investment planning at Independent Advisor Solutions by SEI in in Oaks, Pa. “For example, more taxpayers than ever are taking the standard deduction due to the changes to Schedule A itemized deductions. To itemize, one needs to plan their deductions.”
“For some, income tax withholding was inadequate,” said Kathy Buchs, a CPA and director in MAI Capital Management’s client tax group in Cleveland. “Run a projection with a CPA to make sure they’re on track. This also gives them the ability, with plenty of lead time, to consider charitable contributions and other tax-saving moves.”
The high-net-worth client should first take stock of where they are relative to last year. “Is income about the same, more or less? Is the client expecting any big income items before the end of the year, such as a stock option exercise?” Mioli said. “The client needs to consider what tax bracket they’re in and how much room they have before reaching the next bracket.”
Filing status is worth a look ahead, according to Martin Abo, a CPA with Abo Cipolla Financial Forensics in Mount Laurel, N.J. If one spouse has substantial unreimbursed medical expenses, he or she may pay less tax by choosing the "married filing separately" status, assuming deductions are itemized by both spouses on their respective returns.
Another big change post reform: deferring capital gains through investments in qualified opportunity zones. “There is a time limit, generally 180 days from the recognition of the gain, so it’s imperative to start looking at options once the gain occurs,” Buchs said. “Another item to consider is the increased estate tax exemption—$11.4 million per individual for 2019. Unless new laws are passed, this exemption is scheduled to decrease after 2025, so high-net-worth taxpayers should consider ways to utilize this while it lasts.”
After the equity markets’ strong first half of the year, charitably inclined individuals looking to maximize itemized deductions should now donate appreciated securities. “The taxpayer will receive a deduction and avoid paying tax on the gain on the sale,” Mioli said. “If we do see a sizable pullback in the market later this year, a high-net-worth client should be looking to do tax-loss harvesting. If we see 2018-sized mutual fund capital gain distributions in 2019, sheltering the gains will be imperative.”
Stock also figures in a well-publicized new deduction for qualified business income. “Small-business owners should check to see if they are taking maximum advantage of the Section 199A deduction,” said Jack Oujo, a CPA/CFP in Wall, N.J. For tax savings, “we also continue to like high-yield municipal bond funds. Municipal bond funds yielding more than 4% tend to be quite attractive to high-income earners.”
One of the best tax advantages for the second half of a year is maxing out pre-tax retirement contributions, Oujo added. “Wealthy seniors can make contributions of their RMDs to a 501(c)(3) charity,” he said, adding clients should “consider Roth IRA conversions during a bear market.”
“What we have this year is more answers with regard to how the tax law is to be interpreted,” said Cory Gallivan, a CPA and principal in the Alton, Ill., office of Scheffel Boyle. “Section 199A, business structuring and wages are some examples.