Reform added so many tax changes in 2018 that it might be hard for your high-net-worth clients to believe more changes could be coming next year. They’d likely be wrong.
“The TCJA has given wealthy taxpayers some interesting changes to their return,” said Scott Kadrlik, CPA/PFS and managing partner at Meuwissen, Flygare, Kadrlik & Associates, Eden Prairie, Minn.
Plusses of reform have included an increased standard deduction and a deduction of 20 percent of the qualified business income for a pass-through entity. Among the negatives: limiting state and local taxes and loss of miscellaneous deductions, which includes tax preparation fees, investment management fees and unreimbursed employee business expenses.
Also on the minus side, “the longer-term negative implications of the new chained CPI method for inflation adjustment, which is also probably going to have a negative effect on COLAs for Social Security benefits,” said Kimberly Foss, CFP, CPWA, president and founder of Empyrion Wealth Management in Roseville, Calif. “We’re also advising clients who are high-earning employees to consult with advisers about their withholding given the rate changes recently announced by the Social Security Administration. These changes are also going to affect pension plans and taxation of SSI, again, especially for high-earning employees.”
Most of your wealthy clients will probably see gentler tax brackets in 2019. Also Washington isn’t done with tax reform, at least for now.
The House of Representatives has proposed a bill that “removes the prohibition that prevents individuals who have reached age 70½ from contributing to traditional IRAs, including non-deductible IRAs,” said James McGrory, CPA and shareholder at Philadelphia-based Drucker & Scaccetti.
“Several of my HNW clients who are employed have enjoyed the ability of making back door Roth conversions,” McGrory said. “Under present law, the ability to do this ceases with their reaching age 70½,” he said. “Should the recent tax proposal become law, I can see many of my HNW clients 70½ and older will want to increase balances in their Roth IRAs by continuing to make back door Roth conversions.”
“One of the most important pieces in the Lame Duck tax bill revolves around retirement accounts, including possible exemptions from the required minimum distributions,” said Ann Etter, a CPA/CFP with Goodney & Associates in Northfield, Minn. “RMDs are currently an issue with tax planning. Taxpayers forced to take retirement income from IRAs or 401(k)s may be giving up preferred income tax rates on their qualified dividends and capital gains, as the RMDs can push them through the tax brackets where the preferred rates apply.”
Foss is pleased with the president’s proposal to delay or decrease the amount of RMDs from retirement plans for those age 70½ and older. “This gives seniors more flexibility in their income planning and, especially for HNW individuals, allows for a more personalized strategy for maintaining the income stream and utilizing tax-efficient strategies,” she said.
Some changes have been and will be more local. “Staying current on state and local tax changes is extremely important, especially for advisors who represent HNW clients who are residents of [high-tax states such as] New York, California, and Connecticut and New Jersey – states with some of the highest income tax rates in the country,” McGrory said.