New Year, New Challenges

As of this writing, the Senate and House of Representatives have reached a tentative agreement on the first major overhaul of tax legislation in more than 30 years. Assuming the bill is enacted into law, next year is likely to present financial advisors with more planning challenges and opportunities than they have experienced in a long time. The law cuts the corporate tax rate to 21%, making the U.S. competitive with other nations for the first time in decades.

Could the entire bill fall apart by the time you read this? Anything is possible, but whatever happens, the questions about taxes are likely to be on top of your clients’ agenda when you meet early this year.

There was widespread agreement across ideological and partisan lines that this was an issue that needed to be addressed as other nations used low corporate tax rates to lure multinational companies to their shores. But this is where the agreement ends.

Whatever your beliefs, the law is likely to be amended and changed over the next years. Recall that the 1986 tax act eliminated numerous loopholes that Congress gradually legislated back into the tax code, forcing President George H. W. Bush to break his promise and raise taxes back in 1990.

But as sure as the sun will come up tomorrow, one counts on smart advisors and accountants to create new planning strategies for different groups of clients. Tax reform has created many groups of winners and losers, but it will take time to analyze who actually gets a net benefit from the new rules. For some clients, it may not pay to itemize any longer.

One group of clients facing major changes are small business owners and other investors in pass-through entities. Precise details on how their income will be taxed had not been determined, but these clients are likely to get tax breaks, even if some Republican senators complained they didn’t receive the advantageous rates that giant public corporations did.

There is also the issue of state income taxes and their limited deductibility. Most clients are unlikely to move. But if an Oregonian client lives on the Washington border or a western New Jersey client lives near Pennsylvania, moving 20 miles could pay off big time.        

Evan Simonoff