President Trump's tax reform may have fattened paychecks, but many taxpayers may be shocked by inadequate withholdings at filing time—particularly those in high-income brackets.
“Many of our high-net-worth clients are nervous," said Gail Rosen, a CPA and shareholder in charge at the Somerset County, N.J., office of WilkinGuttenplan. "They hear the talk from others and from the media that more people than usual are owing.”
“There could be a surprise in store for [wealthy] individuals, especially for those that have itemized for years and won’t be able to do so for 2018,” said Karen McIntyre, an investment advisor at Unified Trust Company in Lexington, Ky. “The changes increased the standard deduction allowable, but for some high-net-worth individuals the loss of the individual line item deductions, such as the charitable deduction or the cap on deductions of state and local taxes [SALT], could result in a big difference."
Most clients are aware of such high-profile changes as the SALT cap. “Changes involving miscellaneous itemized deductions that are no longer deductible are less widely known. ... Investment management fees and unreimbursed employee business expenses are popular items no longer deductible,” said Nathan Smith, director in the CBIZ MHM national tax office in Clearwater, Fla.
"Perhaps the biggest surprise in some cases is the additional conversation and time being spent on the QBI (qualified business income) deduction,” said Jim Oliver, a CPA and partner at Calvetti Ferguson in San Antonio, Texas.
Oliver actually has seen few wealthy clients hit with surprise bills. “In a few cases there’s been a negative impact, but often for more unusual circumstances,” he said. “The lack of a state income tax in Texas seems to have minimized the impact of the new SALT limitation.”
Some clients who are hit with a tax bill increase may want to charge the taxes on a credit card and earn card rewards, advisors said. But clients need to be wary of this approach, they said.
“Using a card comes at a price,” said Dean Mioli, director of investment planning for Independent Advisor Solutions at SEI in Oaks, Pa. “You may also enjoy a float on your tax payment until your credit card bill is due. If you go this route, pay off the credit card bill when due.”
“Many a wealthy or even not-so-wealthy taxpayer often mistakenly thinks use of a credit card to pay IRS or state taxing authorities a good idea. I don’t agree,” said Martin Abo, CPA with Abo Cipolla Financial Forensics in Mount Laurel, N.J. “The processing fee is typically a flat 2 percent on the amount paid.”
There are three installment agreements that taxpayers can generally establish with the IRS, Smith said. “The first is for unpaid tax liabilities of $10,000 or less. The IRS is required to accept this type of request as long as the taxpayer (and his or her spouse) have timely filed and paid all tax returns and liabilities during the past five tax years, haven’t entered into another installment agreement for income tax and agree to pay the full amount within three years,” Smith said.