The tax reform bill passed by the Senate late last week promises changes for taxpayers of all age groups and incomes. It also means you have to help your clients separate headlines from actionable tax planning.
Reports abound about reform’s possible effects. The nonpartisan Institute on Taxation and Economic Policy, for instance, said earlier this month that the tax bill raise taxes on at least 29 percent of Americans and causes people in 19 states to pay more in federal taxes in 2027. The lowest-earning three-fifths of Americans would pay more on average in federal taxes, while the top 40 percent on average would receive a tax cut, according to the Institute’s analysis.
The report added that in 2027 the richest 1 percent of Americans would receive an average tax cut of more than $9,000. In some states, low- and middle-income earners would reportedly have larger average tax increases.
While the passed bill now heads to reconciliation, your clients’ key question is how far ahead to plan. “Very few individuals, even HNW clients, prepare an actual tax plan that stretches 10 years. They may discuss the generalities of how money will be moving out of or into taxable accounts, but they don’t actually project any more than one or two years out,” said Aaron Blau, a CPA and enrolled agent in Tempe, Ariz.
“Regardless of the tax plan, being able to defer income to future years, prepay tax deductions and maximize retirement plans when available is a sound strategy,” said Brian Stoner, CPA in Burbank, Calif., adding that revising annually based on shorter-term changes makes the most sense. For example, HNW clients should check income for this year and next to see if they will be in a lower bracket in either year. “Use that as a basis for your plan,” Stoner said.
Long-term planning is especially tricky now given the possible seesaw of many laws as administrations change in Washington, according to Michael Eisenberg, CPA and financial services principal with Squar Milner Financial Services in Encino, Calif.
“A number of years ago, when a tax law was written you could advise on it because it was safe the lawmakers wouldn’t make major changes to it for a number of years,” he said. Eisenberg did predict what aspects of reform you might be able to use reliably for clients’ tax planning over the next few years:
• Some variety of adjustment to the alternative minimum tax, a long-established tool once used to ensure that the wealthy paid taxes but, lacking an inflation-adjustment factor, one that has only socked more of the upper-middle class in recent years.
• The first-in-first (FIFO) rule for stock sales.
• Reduction in such benefits as Social Security and Medicare. The calculation of Social Security benefits is also likely to change, such as increasing the percentage withheld or the total amount subject to withholding or raising the eligibility age.