The potential sunset three years from now of some provisions of the Tax Cuts and Jobs Act loom large in midyear planning for some wealthy clients, as do recent market gyrations.
“Many of our high-net-worth clients are asking questions such as when is the optimal time to pass down their wealth, which of their assets to gift and what’s the most tax efficient way to do so,” said Cindy Ostrager, CPA and partner at CohnReznick in New York.
“If the limits do go back down to [about] $5 million, without proper planning you could lose out on avoiding tax on about $8 million,” said Barbara Taibi, partner in the Private Client Services Group at Eisner Advisory Services LLC in Iselin, N.J.
“If your assets are exceeding the current exemption limits, you want to start planning now,” she said. “The creation of trusts or foundations or even succession planning for businesses can’t be done quickly: You don’t want to try finding attorneys or valuation experts when you’re up against the deadline. At least have the plan in place.”
“Most wealthy clients are focusing on the increase in interest rates and the volatility in the markets. For those in a position to generate income from their investments, stable fixed income accounts are now generating attractive rates without the worry of changes in the markets,” she said
The increase in interest rates has caused many wealthy clients re-think multiple homes with mortgages and put off planned moves, Taibi said.
“Regarding investing in fixed income or markets, everyone needs to think about their risk tolerance,” she added. “At least for the first time in many years, there are safer investments that generate a good interest rate if that matches the risk you want to take and also if you’ll be needing the money in a shorter timeframe and want to avoid market volatility.”
A rocky stock market also creates midyear tax opportunities.
“If in 2022 you incurred significant capital losses, remember that for federal purposes these losses were carried forward for future years to offset capital gains,” Taibi said. “If you were intending to sell your home, business or other securities, remember you may have these losses to offset the 2023 gains and provide you with tax-free gains as you use up the losses [though] rules differ for many states.”
Jeff Mattonelli, financial advisor at Van Leeuwen & Company in Princeton, N.J., said, “In 2022, we were actively tax loss harvesting throughout the year in our clients’ taxable investment accounts as volatility was paramount in the market. ... For many of our clients, this means we have carried forward many of the losses into this year. As the market has experienced some significant growth in the first half of the year, it may make sense to look at trimming positions that have outperformed.”
“As the market is currently up, clients can fulfill charity pledges using capital property or utilize funds in their IRA if [they’re] at least 70½ years old,” added Jennifer Leelaviwatana, managing director at CBIZ Marks Paneth in New York. “Currently, a qualified charitable distribution from an IRA is limited to $100,000 per year.”
Another midyear move: Sett up an appropriate 529 plan for deductions on specific state returns, Leelaviwatana said.
“Review 2022 income tax returns for any missed opportunities that can be implemented now,” Ostrager said. “It’s also a time for high-net-worth individuals to review estimated tax payments or withholding and check whether they’re on track to either cover 90% of the current year tax or 110% of the prior year tax to avoid penalties.”
Mattonelli added that this month, for some corporate executives, may represent their enrollment period for non-qualified deferred compensation plans.
“These clients should review their current elections in concert with their compensation expectations and make necessary changes to their deferral percentages going into 2024,” he said.