With much about tax reform remaining up in the air, wealth advisors are urging their clients to proceed cautiously and keep some tried-and-true adages in mind.
“We still have a long road ahead to arrive at tax reform,” said Jamie Byington, tax partner in the South Florida office of Cherry Bekaert, an accounting, advisory and tax firm, via email.
Although the House and the Senate have each passed a version, they contain significant differences. “The two versions will still require conference agreement to create final reform,” she said. “At this point, it is difficult to say what reform will look like in its final version.
“I believe there is a reasonable chance for tax rate reduction (as opposed to total reform) by year-end, particularly for corporate taxpayers. It is also likely that various write-offs, typically claimed by individuals, will be severely limited. There appears to be some momentum for reform and/or tax rate cuts, so I suspect some version of legislation will be signed by the president this year.
“Although significant planning is difficult without knowing the actual provisions to be passed, it is generally safe to say that the adage ‘defer income and accelerate deductions’ can be applied,” she said. “If tax rates drop, as expected, deductions will be more valuable in 2017, especially if some are eliminated by the new tax laws. Likewise, income would be taxed at lower rates in 2018, leaving more cash for my clients.”
Ms. Byington said she urges clients to consider several factors, including selection of tax entity type, methods of accounting, deductions, writing off fixed asset additions, charitable contributions, compensation and benefits (new limits on deductions will increase the cost of many fringe benefits), benefit plans and their design, international business structuring, estate and gift tax planning, and consideration of how states will conform to the federal changes.
“The tax reform legislation is still a moving target,” said Mason Williams, managing director and chief investment officer at Coral Gables Trust, via email. “Odds are the legislation will get passed before end of 2017, but the reconciliation process will ultimately determine the actual law. The House and Senate agree on a lot of items, so the final version probably won’t contain too many surprises from what we have heard thus far.
“The Republican agenda is riding on the success of this tax package and markets are positioned heavily for a market-friendly outcome. Tax treatment of capital gains and dividends will largely remain the same,” he said. “Being tax-efficient by offsetting capital gains with capital losses still will hold true next year and beyond. There could be some potential changes to investment strategy regarding municipal bonds for non-Florida residents. There could be a surge in demand for our clients in states like New York, California and New Jersey if the deductibility of state tax goes away.
“However, the consensus believes tax rates are not going to be low enough to affect that market and municipal bonds have additional benefits beyond tax deductibility. It is wise to not perform any major overhaul to a portfolio until there is more clarity on the outcome. If we get legislation this year, we are also advising to defer any income, if possible, into 2018, especially for individuals in the highest tax bracket.
“Most of my clients are concentrated in the real estate and construction industry,” he said. “There are significant opportunities in the proposed provisions for my clients in developing strategies to operate in a tax-efficient way under the new tax regime.”
Mr. Williams said the general philosophy that guides Coral Gables Trust is “not to leave any tax dollars on the table. My clients know I would never cross the line, but I will walk up to it in order to resolve issues in their favor. I will always be their best and strongest advocate.”
“Tax reform is hot and heavy in the financial press at the moment but taxes is one of several factors when considering a complete investment and financial plan. Our approach is multi-dimensional, designed to make sure our client resources are deployed in the appropriate manner in order to help them reach their goals and objectives,” he said.
“I have been practicing for more 35 years and went through the significant tax overhaul in 1986,” Mr. Williams added. “It took training, time and testing to finally come to grips with the impact of that change. I expect nothing less for this overhaul.”
“At this point and with multiple proposals on the table, it is difficult to know how exactly reform will shake out. However, there does seem to strong push in Congress to have a proposal passed by the end of the year,” said Jay Schechter of Singer Xenos Schechter Sosler Wealth Management, via email.
“Changes to the tax laws will create multiple financial opportunities for our clients. While tax reform will not completely change our investment strategy, it will certainly enhance it. We believe a lower corporate tax rate will have a positive impact on the stock market and we are already advising clients where appropriate to hold more equities.
“However, the stock market’s current strong performance is due much more to strong corporate profits around the globe than to the anticipation of tax reform. Certainly, lower taxes will help both individuals and business increase their wealth,” he said.
“The proposal to immediately raise the threshold for the estate tax, and eliminate it altogether over the next four to five years, will impact retirement planning moving forward as very few individuals and families would then be subject to this tax. Additionally, if passed, the proposal to limit the home mortgage deduction would lower the amount of mortgage we would recommend clients carry.
“Regardless of tax reform, the Fed’s continued desire to increase interest rates causes us to continue to recommend alternative investments in fixed income and greater exposure to emerging market stocks,” Mr. Schechter said.
“Our overall goal is to help our clients accumulate wealth for retirement. When it comes to planning for retirement and building wealth, our philosophy is to embrace a broad and long-term view. Even if tax reform were not passed, the market fundamentals remain strong.
“While there has been discussion about the impact that tax reform will have on the markets, strong earnings across the globe have been the real drivers of the market. Most of this has been driven by economic recovery internationally following the great recession, and those international earnings will not be impacted by US tax reform.”
“Monitor the situation very closely until a reconciliation tax bill has been passed, which should be in the next week or so,” said Kashyap Bakhai, principal of the MBAF accounting firm, via email last week.
“Then, work towards either accelerating the deductions that will be disallowed in the new tax bill to the current year or shifting income (if advisable) to the following year where there could be lower tax.
“Restructuring of business will happen in 2018, once the actual legislation is passed,” he said. “Also, there may be opportunities in the estate planning area under the new tax bill.”
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