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 signature by year's end.


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.


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.


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."


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