The Tax Cuts and Jobs Act did indeed bring about changes that affect wealthy taxpayers. What mistakes are your high-net-worth clients making this year?
“Not understanding the TCJA changes and a general lack of planning left some not knowing what, if anything, they should be doing in 2019,” said Craig Richards, managing director and director of tax services for Fiduciary Trust Company International in New York.
This year’s goofs include—especially for those who may be able to itemize advantageously—not lumping two or more years of charitable contributions into this year. “Being able to itemize at least one year out of three is better than not itemizing all three years,” said Richard Kollauf, vice president and director, business advisory and estate planning with BMO Wealth Management, U.S.
Charitable giving remains one of the few planning tools left for taxpayers after the TCJA. Consider using appreciated property instead of cash, Richards said. “If you’re over age 70½ and have an IRA, also consider using up to a $100,000 of your RMD directly to a charity using a qualified charitable distribution,” he said. “If giving property, get an appraisal.”
“We often see mistakes around the wealthy’s charitable giving,” said Dean Mioli, CPA, CFP and director of investment planning at Independent Advisor Solutions by SEI in Oaks, Pa., who added that cash is the predominant charitable gift. “But in many cases, the most tax-advantageous strategy is to gift appreciated securities. You’re essentially giving away the tax gain—and the tax bill.”
“Taxpayers need to plan their itemized deductions better,” Mioli said. For example, the 2019 standard deduction for married filing jointly is $24,400. “Now more than ever, taxpayers should think about accelerating their tax deductions to overcome the standard deduction. Accelerating medical expenses, taxes paid and charitable contributions into 2019 can be a smart way to maximize deductions.”
Wealthy clients often fail to use a qualified tax pro and keep good records. “You may miss that home office deduction for your freelance work or other deductible expenses altogether,” Kollauf said. “For business owners, many small-business tax breaks are left on the table, again either because they’re not using a true tax professional or because they haven’t provided the proper records.”
In addition, the qualified business income deduction is not only new but complex, “and I see many mistakes surrounding its elections, calculations and limitations,” he added.
Richards advises those working with a tax pro to do the following:
• Review income sources and the timing of recognition. “Will there be any extraordinary taxable events this year? Selling a business or taking capital gains in a portfolio are examples,” he said.
• Discuss changes such as a marriage, divorce or the birth of children.
• Recalculate withholding and estimated taxes. “Taxpayers who had income greater than $150,000 in 2018 must in 2019 pay 110% of their 2018 tax liability or 90% of their 2019 tax liability,” Richards said.