Why the House tax bill could be a 'bonanza' for advisers

Clients may need to navigate shifting tax brackets, re-characterizations of Roth IRA conversions, reconsidering the value of charitable contributions, and restrictions on the mortgage interest deduction

Nov 2, 2017 @ 5:00 pm

By Greg Iacurci

The tax bill unveiled Thursday morning has far-reaching implications for financial advisers and their clients, from an overhaul of individual tax rates to the elimination of useful tax strategies and deductions.

"I think there's going to be a lot of impact," said Leon LaBrecque, managing partner at LJPR Financial Advisors, based in Troy, Mich.

"Usually when you get one change it's a great opportunity for planning," added Mr. LaBrecque, also head of the Michigan Association of CPAs' Special Task Force on Tax Changes. "[Here], it's a bonanza and a daunting task to get it to our clients and help them."

(More: What advisers need to know about the House bill)

The House of Representatives' tax-writing committee, Ways and Means, released its Tax Cuts and Jobs Act Nov. 2, representing the first step of a congressional effort to present President Donald J. Trump with a tax bill for by year's end.

FEWER TAX BRACKETS

The legislation would reduce the number of marginal income tax brackets to four — 12%, 25%, 35% and 39.6% — from the current seven, keeping the top rate intact.

But it shifts around the income thresholds, and some middle-income taxpayers currently in the 28% and 33% brackets will jump to the 35% rate, said Jeffrey Levine, CEO and director of financial planning at BluePrint Wealth Alliance.

The bill would also eliminate tax deductions for state and local income taxes, and would cap the itemized deduction for property taxes at $10,000. Coupled with the changes to marginal rates, these alterations could strap upper-middle-class taxpayers, especially those in high-tax states.

"Your $300,000-per-year-of-income married couple living in New York, California and New Jersey, they're going to have potentially higher tax rates on a good portion of their income, and at the same time have more of that income being taxed because of the elimination of some of their more important deductions," Mr. Levine said.

ROTH CONVERSIONS

The bill also does away with popular tax strategies such as re-characterizations of Roth IRA conversions. Taxpayers are able to convert traditional, or pre-tax, IRA money into Roth IRA money by electing to pay tax now rather than upon withdrawal. It's a useful strategy in down markets, for example, because a client can pay less in upfront taxes when an IRA dips in value.

Currently, taxpayers can re-characterize those conversions, which undoes the conversion and shifts the money back to pre-tax treatment. The House bill completely repeals this re-characterization strategy.

"That's huge," Mr. Levine said. "It's something we definitely use with a ton of clients on a very regular basis. It'd be a bread-and-butter strategy that'd be eliminated for us."

Mr. LaBrecque believes there's going to be a "giant surge of planning" before the end of the year if the bill passes; however there would still be significant opportunities for planning even if it doesn't pass within that time frame, he said.

A lot of the planning would be around the deductions telegraphed for repeal or alteration.

"The monster planning moves will be in charity," he said.

CHARITABLE CONTRIBUTIONS

Because the standard deduction would be double what it is currently — $24,000 for joint filers — the value of a charitable contribution could be diluted in the future, especially if under this threshold. But, front-loading a few years' worth of contributions into a donor-advised fund could allow for a more valuable tax break this year, because it provides the full tax benefit in 2017 but allows taxpayers to spread their desired level of charitable giving over several years, Mr. LaBrecque said.

And, if the tax bill doesn't become law by the end of the year, this strategy would still be useful because it's a charitable contribution the client will have wanted to make anyway.

Also, under the new plan, the mortgage interest deduction would only apply to a principal residence and no longer to a second home.

"A lot of my clients have second homes, so we'll be refinancing the principal residence to pay off the loan on the second one to keep the deduction," he said.

Ultimately, he believes the plan is a simplification of the tax code, but "comes with some complexity," said Mr. LaBrecque, who works primarily with mass-affluent clients.

"I like [the tax plan]," he said. "You have to break some eggs to make cake, so some eggs got broken along the way. Most of my clients will benefit, and my small business clients will benefit a little bit more."

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join Mopedia at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

With a surge in SRI mutual funds and ETFs, Steve Schueth of First Affirmative Financial says that after 28 years of being on the "bleeding edge," socially responsible investing is ready to make the leap to the mainstream.

Video Spotlight

Sponsored by Prudential

Recommended Video

Channels

Latest news & opinion

Merrill Lynch releases new compensation plan

Advisers bringing in enough accounts will be rewarded, those falling short will see compensation cut.

Brian Block sentenced to 18 months in prison

The government had sought a sentence of at least seven years against the former Nick Schorsch colleague.

Clayton: SEC targets 'complex, hidden fees'

Putting clients in expensive share classes instead of lower-cost ones hurts investors, chairman says.

LPL says it's on track to recruit 70% of National Planning Holdings revenue

Rivals have picked off some big NPH teams, but LPL said it is getting the lion's share of revenue from the acquisition.

Philip Palaveev on how firms should be recruiting young talent

Next generation needs and deserves more attention and training.

X

Subscribe and Save 60%

Last News

estimate ssdi benefits what is imputed interest rate nevada 529 plans jp morgan retirement app oneira hecm guidelines irs imputed interest rates retirement jokes for doctors how much will h&r block charge for taxes military 401k plan financial planner starting salary strs california retirement calculator divorced spouse social security life insurance investment bond define roth ira t206 cards cfp exam 529 college savings plan nj friends life managed fund mutual central alarm how to be a cfp certified financial planner fidelity advisor short fixed income fund ira cost basis usaa cornerstone fund franklin templeton growth fund admiral metals rochester ny lord abbett short duration income i nys 529 college savings plan social security w2 replacement irs 1099 r lord abbett bond debenture a required 401k withdrawals pension versus lump sum