Financial planning and the TCJA

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The new tax act once again puts tax planning at the epicenter of financial planning. While most high-income taxpayers have always considered tax planning to be a core part of their financial plan and economic well-being, the Tax Cuts and Jobs Act makes a planning conversation between CPAs and their clients even more natural than it already was.

The biggest conversation piece for CPAs with high-end or business-owner clients is the rate reduction for businesses. This discussion starts out with an assessment of whether this provision will apply to your clients. If yes, the second conversation could be about how to best deploy these newfound resources. If no, the conversation may drift to what they can do in order to benefit from the rate drop.

Starting in reverse order, there are lots of theories spinning regarding how to restructure your business to qualify for the lower rate. One way, of course, is for your successful small-business clients to abandon their strategy as Subchapter S corporations. Since 1986, the S corp has been the preferred structure for small business. Converting back to a C corporation may indeed tax the business’ income at a lower rate, but don’t forget that the owner will again be taxed on the dividend, if they take dividends. They will also raise the possibility of double taxation should this business ever get sold.

Other professional tax planners have bantered around the idea of splitting up the business so that certain parts may qualify for the deduction. Segregating their vehicles, payroll or some other part of their business so that this new entity or division may benefit from the favorable tax treatment is a bit more palatable than losing a qualified S election. In the event that this tax law gets changed or goes away as fast as it arrived, at least this plan may be easily unwound.

For your clients with family businesses, perhaps the splitting up of the entities may facilitate a succession conversation. It is possible that a recent unwinding or segregation of the business divisions may help lower the valuation, making it even easier to transition ownership.

If your client does qualify for the lower tax rate on their pass-through entity, look to what that surplus can accomplish. If the company wants to share the wealth with everyone, they can consider beefing up their benefit and retirement plans. If the company has too many employees, and can’t materially improve the benefits package, they can consider some sort of “top-hat plan.” In a top-hat plan, selective benefits are given to key employees and those who are adding the most to the company’s success. If the company should discover that a personal, non-cancellable own-occupation disability income insurance policy is what is needed, they need to be careful. If they pay for that corporately, and do not add this to the employee’s compensation, the benefits may be taxable to the employee upon receipt.

Your client can fix their succession issue. Chances are likely that your client has no succession plan or a plan that is so old that its utilization may be disastrous for either the decedent’s heirs or their partners.

Every business owner has a list of things that they would do if they ever had the time or the money. For our successful small-business owners, this is the time to ask them what is on that list. It may be an upgrade to their manufacturing equipment to create less waste or to scale efficiency. This tax cut could be the nudge that your clients need to make their next hire. Help them decide if the personnel addition is to free up time for the owner to enjoy personally, or whether it is a strategic position within the company to help it grow and prosper. Maybe it is time to upgrade technology or the company’s internet footprint. Whatever it is that your client feels could or should be done, help them make thoughtful decisions focused on outcomes and what they would like to see in return for their new investments. Ironically, the more your client chooses to invest in their business, the further their total tax burden will fall.

The mergers & acquisition world is very excited for the business tax cuts. Most professionals in the M&A world expect 2018 to produce a lot of transactions — both large and small. This could be the time for your client to test either side of that pond. For older owners without a succession plan, this could be the time to entertain a sale. The only factor working against them is higher interest rates — and it doesn’t look like that is going to slow down for the remainder of this year. If selling is not in the cards, perhaps it is your client’s chance to approach some of the competitors or synergistic companies in their marketplace and see who would entertain a sale.

Perhaps the last idea for excess cash from a lower tax bill is simply to save and invest it. This is also a good time to do a financial independence forecast.


Your high-net-worth clients are probably unhappy with the state and local tax deduction limitation. This limitation on your clients’ state income and property taxes is more of an annoyance than anything else. It may propel some to move to a no-income tax state, but there isn’t much else they can do. While preparing your clients’ 2017 taxes, run the 2018 forecast to show them how they are impacted by tax reform. Frankly, for all of your tax clients this is probably a good move.

The limitation on home mortgage interest is another annoyance for some clients. For mortgages taken after Dec. 15, 2017, clients are limited to deducting the interest only up to $750,000 of debt, down from $1 million. For the client with excess cash, this begs the question of paying down some of the debt where they receive no tax benefit for the interest payment. This will raise the issue as to whether your client is better off with the debt and investing excess cash, or paying down the mortgage. There is no definitive answer, but for your clients with a very low tolerance for risk, a pay-down may make sense. For those comfortable with risk, they may decide that having non-deductible debt at a rate of x percent is a great deal because they feel that their investments may outpace that cost of funds.

This could also call for a debt restructuring. For your client with over $750,000 in home mortgage interest, perhaps there is another way. Thoughts that come to mind include taking a loan out against their investments. Of course, this may also not be deductible. But if your client can deduct it against investment income, this strategy may make sense. Another alternative may be to get some debt in the business. While it may be comforting to be debt-free, here we are simply talking about borrowing for their business, which is tax-deductible. Your client can then in turn either raise their income or take a distribution from the company to retire their home mortgage.

With the mortgage and SALT limitations, that leaves charitable activities as another area to look at. With the new standard deduction at $20,000 for married, it is possible that some of your high-net-worth clients won’t have enough deductions to itemize. This raises the issue of bunching of deductions, particularly those that are discretionary, such as charitable contributions. Your client can go from being a regular contributor to being a spotty contributor to maximize the tax benefit. The use of a charitable foundation or a gift trust account can help your client accomplish both benefits. They can get the deduction for making a larger than normal contribution in any given year to the entity of choice. Then that entity must contribute 5 percent of the principal in that account to qualified charities each year, effectively restoring your client’s ability to make small annual gifts that would benefit from a tax deduction.

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Tax reform Trump tax plan Wealth management Financial planning Tax planning Ultrahigh net worth