Top 3 planning moves for advisers under new tax law

The 2017 tax overhaul has led financial advisers and other tax advisers to substantially restructure clients’ financial plans, primarily in three areas: charitable giving, business structure and estate plans, according to a new survey.

A poll of 631 CPA financial planners conducted by the American Institute of Certified Public Accountants found that 50% altered clients’ plans around charitable gifts, 49% made changes around the structure of clients’ businesses and 42% around estate plans.

Charitable Giving

The focus on charitable giving stems from several changes that the tax law, signed by President Donald J. Trump last December, makes to tax deductions.

For one, it doubled the standard deduction, to $12,000 for single individuals and $24,000 for married couples, making it less likely that taxpayers would get a tax benefit for itemizing deductions. It also eliminated or curtailed other popular deductions. For example, the law caps the deduction for state and local taxes at $10,000.

“We’re in charitable planning heavy-duty,” said Leon LaBrecque, managing partner at LJPR Financial Advisors. “That’s clearly one of our biggest pieces.”

Bunching charitable gifts into one tax year has become a significant strategy, according to tax experts. Lumping several years’ worth of charitable gifts into a single year helps clients breach the standard-deduction threshold and receive a tax benefit for charitable giving.

Donor-advised funds and community foundations are vehicles that allow clients to bunch their gifts and allocate the money over several years.

“We’ve opened more donor-advised funds this year than we normally do, by far,” Mr. LaBrecque said.

Business Structure

The tax law also changed the calculus around the selection of business entities. There are two considerations, according to experts: whether a business should be a C corporation or a pass-through entity, such as a limited liability company or partnership; and whether to elect to be taxed as an S corporation.

The new law significantly reduced the tax rate on corporate income, to 21% from 35%. But it also provides a 20% tax deduction on the business income of pass-through entities, the income of which is taxed at their owners’ tax rates. There are several considerations here — for one, some pass-through businesses may not be eligible for the 20% deduction or may have theirs reduced.

Separately, clients may be less likely to elect that their businesses be taxed as an S-corp.

“Before tax reform, S corporations were very popular as a way to try to reduce your taxes,” said David Oransky, a CPA financial planner with Laminar Wealth. “Not making the election might make more sense than it used to.”

S corporations can save on employment taxes, such as Social Security and Medicare taxes, said Mr. Oransky, who’s a member of the AICPA’s personal financial planning executive committee.

That’s because owners of such businesses, such as an LLC that’s taxed as an S-corp, have to pay themselves a reasonable salary. Employment taxes are only assessed on that salary. For example, a business with $150,000 of income that pays its owner a $70,000 salary won’t pay employment tax on $80,000 of income.

However, electing to be an LLC taxed as partnership, for example, could yield more savings under the new law. That’s because the same business cited above could potentially get the 20% pass-through deduction on $150,000 of income; if it were taxed as an S-corp, the deduction would only apply to $80,000 of income.

“We have seen many cases where being an LLC taxed as partnership seems to be better,” Mr. LaBrecque said.

“There’s more in the picture than there was before,” he said of the considerations.

Estate Plans

The law doubled the exemption threshold for gift and estate taxes: In 2018, a couple will only have to pay federal tax on estates valued at more than $22.4 million, up from around $11 million previously.

The planning change here, Mr. Oransky said, is more about strategizing than executing any definitive moves. For example, clients on the cusp of the exemption would typically use a vehicle like a grantor-retained annuity trust, or GRAT, to keep an estate’s value below the threshold to avoid tax.

Now, clients formerly on the cusp have about $11 million of wiggle room — leading many to wait and see what happens with the law, so as not to preemptively lose a measure of control over their assets, Mr. Oransky said. (Many provisions of the law are scheduled to revert after 2025, including the estate tax exemption.)