High-net-worth taxpayers who were shocked by their tax refunds this year can take steps to prevent the same problems with their 2019 taxes.

Loss of some itemized deductions and individuals’ failure to withhold the right amount of pay last year seem the biggest reasons for many nasty surprises this spring. The new cap on the state and local tax also smacked wealthy clients in high-tax states such as California, New York and New Jersey.

“Waste no time in reviewing withholdings and making an adjustment,” said Lynn Ballou, CFP and regional director for EP Wealth Advisors in Lafayette, Calif. “We’re already a third of the way into this tax year.”

Under-withholding is actually not new, added Susan Carlisle, a CPA at Carlisle Dorafshani Wohl and Associates in Los Angeles. Many CPAs spend the last quarter of the year doing a tax projection to ascertain that clients have sufficient taxes paid in to avoid under-payment penalties, she said.

Some tax-savings tools remain constant despite the recent tax reform. “Many of my [wealthy] clients do take advantage of benefits at work such as retirement contributions, flex spending accounts and so on. They tend to think that these fringe benefits will lower what they owe with their tax return, but they already received the benefit during the year,” said Gail Rosen, a CPA in Martinsville, N.J.

For example, if a client earns $500,000 a year and has $25,000 deducted for a 401(k) contribution, the employer uses the IRS tables to withhold taxes during the year based on $475,000.

The IRS has also released updated guidelines to help taxpayers set up withholding, but taxpayer information has to be accurate for the guidelines to work. Another wrinkle: “Apparently the IRS is revising the withholding process and tables again,” Ballou said. “Rather than working off the old premise that was based on the number of dependents and exemptions, the new W-4 is based on the actual numbers we’re likely to enter on our returns when we file.” The IRS hopes to have the new process rolled out by the end of this year.

“Certainly people had sticker shock and unexpected balances due or reduced refunds,” said David Levi, Minneapolis-based CPA and senior managing director at CBIZ MHM. “Much of it in our practice was due to even greater reduction in bonus and stock option withholding. We also had many clients that got stung by the capital gains dividends declared by mutual funds at the end of 2018. Especially for clients that have their capital gain dividends reinvested in more fund shares, there were fund sales that had to take place in 2019 to pay the tax on 2018 gains.”

A now-fuller understanding on such factors as the Section 199A deduction facilitates better planning. “We’ve worked with clients on accounting method changes [such as] accrual to cash method, inventory issues and so on that will have consequences in 2019,” Levi said. “We’re continuing to review the consequences of changing from pass-through entities to C corporations, as well as helping clients assess the correct structure to begin new businesses. We’re also working with many of our very high-net-worth clients on estate planning to take advantage of the current increase in the lifetime transfer amount.”

Wealthy clients can retool portfolios with more into tax-free muni bonds or pre-tax plans such as HSAs. “Before you implement any strategies, I recommend you strip away the tax benefits ... and be sure your plans still make fiscal sense without the tax benefits,” Ballou said. “Perhaps the least-discussed opportunity comes from the much higher thresholds that kick in for alternative minimum taxes."

First « 1 2 » Next