Year-end tax-planning discussions change after new tax law

The traditional year-end tax-planning discussion that CPAs have with their clients has been upended thanks to the Tax Cuts and Jobs Act.

“The whole discussion agenda is different now because of the new law,” said Tim Speiss, partner-in-charge of the Personal Wealth Advisors Group at EisnerAmper in New York. “As someone that’s been a CPA for 35 years, it’s kind of odd. State income tax deductions were something that have always been a huge thing you would talk to clients about before the end of the year. You’d say, ‘Make sure you pay this before December 31 even though it’s not due until January 15.’ That’s off the table now. Yet, actually, I think the discussions now are more sophisticated. You’re talking about charity, you’re talking about estate planning, you’re talking about other things, which I think is helpful.”

According to EisnerAmper models, anyone earning more than $300,000 in annual gross income won’t have a much different net tax cost compared to before the legislation. One of the subjects Speiss has been discussing with wealthy clients is the use of non-grantor trusts. The law allows individuals using non-grantor trusts to itemize deductions that are no longer available to individuals. EisnerAmper has done studies and engagements to help family office clients restructure their family office trusts so they’re not subject to the 2 percent itemized deduction limitations on tax preparation fees, investment management fees and unreimbursed employee expenses.

A printout of Congress's tax reform bill, "The Tax Cuts and Jobs Act," alongside a stack of income tax regulations

“The context is rather simple,” Speiss explained. “Because non-grantor trusts, compared to grantor trusts, don’t flow though S corporations or partnerships, they don’t flow through income and deductions to individuals, and because of that, non-grantor trusts are unburdened by many of the itemized deduction limitations, 2 percent specifically, that individuals are subject to. We’ve done a number of studies for clients where we believe there are opportunities to be able to take deductions within non-grantor trusts. A closed entity like a C corporation is able to take deductions in non-grantor trusts that aren’t subject to the new limitations of the 2017 tax act that apply to individuals. That would include the types of trust expenses that are paid in connection with certain asset management functions, investment functions and investment business management functions. They could be deducted by a non-grantor trust and under the new act could not be deducted by individuals. We believe that non-grantor trusts for income tax purposes could be a very appealing structure compared to grantor trusts to improve, enhance and optimize the income tax deductions for trusts.”

While the tax overhaul does raise the cost of home ownership via the $10,000 cap on state and local tax deductions, Speiss isn’t seeing any change in his clients’ behavior when it comes to moving or buying additional homes.

“This is New York, and we have always seen and will continue to see clients that work in New York, but for domiciled residency establishment want to live in a lower tax rate state,” he said. “That will continue to be a very much investigated and desirous scenario, living in a lower tax rate state or trying to work in a lower tax rate state.”

Even though the Tax Cuts and Jobs Act was supposed to make the U.S. tax rate more competitive than other countries, at least for corporate taxes, some wealthy individual taxpayers are still looking to move abroad to lower their taxes. “They aren’t just looking at states. They’re looking at countries,” said Speiss. “They’re looking to establish residency in different countries. At our firm, our clients are looking at residences in a global context. If you’re a U.S. citizen you still have to pay U.S. tax wherever you live, but we represent a lot of non-U.S. citizens, so we work with them on where is the best place to establish residency to minimize their taxes.”

The new tax law has also changed estate planning discussions thanks to the higher estate tax exemptions.

“The increased estate tax exemption of $11.2 million per person is a lot of money,” said Speiss. “The continued use of traditional estate planning vehicles like family limited partnerships and charitable remainder trusts is now even more powerful with a married couple being able to save $22.4 million of assets from estate taxation. Taking advantage of well-established basic estate planning principles like discounts on limited interests, gifting strategies and valuation discounts, on top of now an $11.2 million estate tax exemption, is a huge opportunity for clients.”

With the higher exemption amounts, few clients will need to worry about estate taxes now, but the estate planning discussion can be broader than taxes.

“Estate planning remains very important, but estate planning also includes things like selecting guardians for children, selecting executors, very fundamental things which in my experience many CPAs don’t really delve into,” said Speiss. “They focus on taxation. At $22.4 million, most clients are not going to have to worry about estate tax, but what they really need to worry about is how to get assets to beneficiaries, who are the ones that should be selected as executors or fiduciaries, in other words, very rather fundamental matters. What existing techniques can we use to create valuation discounts using trusts? Clients can now gift more without a gift tax. These are things we’ve been talking to clients about since mid-2017 when we saw the legislation evolve.”

Besides estate taxes, many clients don’t need to talk with their CPAs about itemized tax deductions so much since the new tax law doubles the standard deduction and caps state and local tax deductions at $10,000. “I would say the elephant in the room is state income tax deductions,” said Speiss. “It’s caused a lot of additional study. It’s also caused a lot of people to say, ‘You know what? I don’t care about it anymore. If it’s not deductible, I don’t care about it because I’ve got something else more important.’”

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