Financial advisors in high-tax states are figuring out how to help clients hit hard by added tax burdens and retain those who are pulling up stakes and moving to lower-tax states.
Many of their clients are impacted by the current federal tax law’s $10,000 cap on state and local tax (SALT) deductions. In a number of municipalities in the New York tri-state area, $10,000 barely makes a dent in property tax bills alone. On Tuesday, New York, New Jersey, Maryland and Connecticut filed a joint lawsuit to strike down the cap, claiming it’s unconstitutional and designed to hurt “blue” states that lean toward Democrats.
Advisors in high-tax states (where residential real estate values are often very pricey) are also helping clients understand the new cap on home mortgage interest deductions. Homeowners can now deduct interest paid on new loans of up to $750,000 of debt (old loans are grandfathered at $1 million). In Westchester County, N.Y., where 73 percent of homes have property taxes above $10,000, 19 percent of home purchase loans exceeded $750,000 last year, according to ATTOM Data Solutions, and home sales there have plunged.
Steven Kaye, president and founder of AEPG Wealth Strategies, an RIA firm in Warren, N.J., has been sharing tax-saving strategies when he meets and corresponds with clients. Although some people are angry about the tax law changes, he said, “It hasn’t really hit anyone in the pocketbook yet.” He expects clients’ interest in SALT strategies to “ramp up” once they see their year-end tax bills.
One strategy he suggests is for homeowners to fractionalize ownership of a residence with tax-paying children or with parents, either directly or through a non-grantor trust arrangement, he said. He has also talked to clients about changing a second residence to a rental property. However, homeowners who do this must be very aware of the rules regarding the number of days a home may be considered for rental or personal use, he said, and they should make sure they have enough liability coverage.
Another potential tax-saving strategy is to buy a condo, instead of a second single-family residence, and put it in a rental pool. Kaye said he purchased a “hotel condo” at a resort, for zero down, and is enjoying its services, amenities and positive cash flow.
Barnum Financial Group, a financial planning and advisory firm headquartered in Connecticut and with offices in five states, has seen more significant client interest in the recent tax changes than it did for past tax changes, said Adam Belardino, a financial planner in Barnum’s Elmsford, N.Y., office.
“Our clients in California and New York were the most proactive in discussing their respective income-tax liabilities due to the tax code change,” he said.
With help from their accountants and their Barnum teams, many clients prepaid a significant amount of their 2018 taxes in 2017 in order to be grandfathered into the 2017 tax exemptions, said Belardino. Another strategy the firm has always used, but which has grown in significance due to the tax code changes, he said, is converting clients’ current IRAs to Roth IRAs. Many people have benefited from a decrease in their federal tax rate, he said, so it was “quite advantageous” to review these conversions.
Another tactic Barnum has used, also with assistance from clients’ accountants, is maximizing clients’ charitable organization donations through family foundations and donor-advised funds.