Strege said finding tax reduction strategies for wealthy investors is nothing new but some other opportunities outside of tax harvesting have become less attractive. He said oil and gas drilling limited partnerships used to be a good write off because 89-93% of the investments could be deducted off federal taxes, but investment returns have been tempered by the decline in oil and natural gas prices.
Financial advisor Adriel Tam, CEO and founding shareholder of Viridian Advisors in Seattle, said his California clients are increasingly having discussions about their increasing tax burden, partially fueled by the new state tax deductibility rules.
“California is a wonderful state, but the taxes are really challenging,” said Tam. Tax harvesting strategies are one option, he said, but other may include assessing the investor’s need to maintain his or her primary residence in California.
Tam said 2019 will be a test year of sorts, because it would the first year that clients see the tax effects in states with high income taxes see the effects of the drying up of most of the state income-tax deduction.
Bernie Kent, chairman and senior advisor at Schechter Investments Advisors in Birmingham, Michigan, said he employs tax harvest strategies for all his clients at his firm, which has an AUM of $900 million.
Kent said he even in states without income taxes, tax harvesting still makes sense because of the capital gains reduction.
“I'm going to say everyone should be looking at it because whether you're paying a 37 percent marginal tax rate in California or just a 15 percent rate in Florida, why should you pay that tax when you can defer it,” he said.
Kent said more advisors will adopt the tax harvesting strategies in 2019 not only because of the state income tax deduction changes but because of the recent market downturn that is causing losses for investors.
President Trump’s tax plan got much media scrutiny along with questions about whether The President was targeting states that had voted against him. Overway rejects that criticism in his white paper.
“The media portrayed this as an issue primarily for blue states with high tax rates,” he said. “The facts don’t fit quite as neatly into that narrative, however. California and New York with their high state tax rates and Texas with no state taxes certainly support that assertion, but there are a good number of more conservative states with relatively high tax rates of 6%+ (e.g. Georgia, South Carolina, Nebraska, Arkansas, and others) while left-leaning Washington state has no tax.”