The New Year is in full swing, and with it comes a tax filing season that encompasses one of the largest changes to the tax code many of us have seen in years. The Tax Cuts and Jobs Act (TCJA) presents both challenges and opportunities for all clients, including those with a high net worth.
Like other taxpayers, high net worth (HNW) individuals are waiting to see how these changes are going to affect them. Some have worked tirelessly over the last year to plan, evaluate and update their financial situations in order to be prepared for the upcoming tax season, while others are taking the wait-and-see approach.
Either way, when you speak with them, here are some points I recommend covering.
There are some changes in the TCJA that will improve the financial standing of HNW individuals and their families. For instance, the federal estate tax exclusion will rise to $11.2 million for individuals and $22.4 million for couples. This will remain in effect until the end of 2025.
As an accounting professional, you can work with clients this applies to and help them reevaluate their plan and make sure it works with these much higher limits. Ideally, you want to make sure that your plan for the federal level also works on the state one, too. Remember: Many states have their own estate tax exclusion.
The introduction of the 20 percent deduction on business income for pass-through entities is also a game changer. HNW clients who have ownership interest in entities like sole proprietorships, LLCs, partnerships and S-corporations may receive tax benefits, so this is a good time to explore which business entity is best. Simply making a change to your client’s entity may bring them some significant advantages.
Furthermore, tax-free bonds or municipals may see a change in demand. Now that the top tax rate has been reduced, it will be key to review a client’s portfolio and see if they are still benefiting from their investments. In certain states, such as New York and California, higher bracketed investors may still find tremendous value in muni bonds. Those who can reduce their marginal tax rate enough and live in a state with low or no income tax may want to reevaluate how their fixed-income assets are positioned.
Note: Munis only make sense if you are going to have more in your pocket by investing in the tax-free alternative. In other cases, it may be better to invest in taxable equivalents and pay the taxes.
Charitable deductions are also impacted by the taxes. The substantial increase in the standard deduction has cramped the financial incentive for taxpayers who do not itemize to make donations as they have in the past. However, those who continue to itemize will benefit. The deduction limit has increased from 50 percent of AGI to 60, and the Pease limitations have been repealed, which capped the amount of charitable deductions for the HNW.
In addition, there are potential planning opportunities you should mention, including opening a charitable lead annuity trust, using an IRA to make charitable donations up to $100,000 (if your client is are over the age of 70½) and using donor-advised funds that may yield an up-front tax deduction.
As you can see, there is a window of opportunity here for your HNW clients. For most, it will end on December 31, 2025. Now is the time to set up meetings and show these individuals the value you bring to the relationship. Ideally, these changes will present an opportunity for you to coordinate with other professionals who are involved in handling your clients’ portfolios, like attorneys and wealth advisors. You will be seen as the quarterback who has brought the team together with the goal of providing the client with solutions that will enhance their financial situation and their future.
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.
Lawrence Sprung CFP® is the President and Founder of Mitlin Financial, Inc. He entered the financial industry in 1996 and continues to be inspired and energized by the challenge of helping his clients achieve and even surpass their financial goals.
Mitlin Financial, Inc. is an SEC Registered Investment Advisor (RIA) that prides itself on...