Investment advisers say their clients were surprised by higher tax bills and lower refunds this year, a shock increased by their expectations of less pain due to tax reform.
Under the
2017 tax reform law, marginal tax rates were cut and the personal exemption was repealed, while the standard deduction for married couples increased to $24,000 from $13,000. In addition, the deduction for state income, sales and property taxes was capped at $10,000.
"The new tax code was uncharted waters for all of our clients," said Jirayr Kembikian, co-founder of Citrine Capital in San Francisco. "They were surprised by the larger tax bills they received recently. We learned there were many advantages of the new tax code, such as higher standard deductions, but also many disadvantages, such as limitations on homeownership deductions."
As clients slipped into lower tax brackets, their withholding was not adjusted. They ended up with larger paychecks through the year but lower refunds in tax season.
"They didn't connect the two," said Laura Nickolay, financial adviser at White Oaks Wealth Advisors in Minneapolis.
Tax reform simplified paying taxes but the price was losing many deductions.
"The process is more streamlined, but people owed more money," said Dennis Nolte, vice president of Seacoast Investment Services in Winter Park, Fla. "They didn't get the refund they were expecting."
One of the most painful aspects of tax reform for people who live in states with high income and property taxes was the $10,000 limitation on deductions for those levies. The cap resulted in higher tax bills in states like California.
"Everybody expected an increase, but they didn't understand how much," said Stephanie Bucko, chief investment officer at Mana Financial Life Design in Marina Del Rey, Calif.
The limitation on the
so-called SALT — state and local taxes — deduction has some clients rethinking where they live. Ms. Nickolay has clients who have been attracted by lower income tax rates — or no income taxes — in neighboring Wisconsin, North Dakota and South Dakota.
"People have strongly considered moving to other states," she said.
The repeal of miscellaneous itemized deductions was also a shock to some clients, who could no longer write off expenses such as business meals.
"They were mugged," said David Haraway, principal at Substantial Financial Inc. in Colorado Springs. "They were really surprised."
Advisers said one of the lessons they learned from the impact of the 2017 tax reform is the importance of adjusting how much their clients have withheld from their paychecks — or of having them pay estimated taxes.
"Financial advisers more than ever should find CPAs to partner with," Ms. Bucko said.
The Trump administration and Republicans in Congress have been working during the tax season to promote the benefits of the 2017 reform. Larry Kudlow, director of the National Economic Council, has asserted that the changes saved the average American $2,300 in taxes.
In an appearance at the National Press Club on Tuesday, Mr. Kudlow said tax cuts are part of an "incentive model of economic growth" the Trump administration has pursued.
"President Trump is rebuilding this economy," he said. "Incentives matter. Taxes matter."
Tax reform was "better for the middle class than the real well-to-do who live in high-tax states and have high mortgage balances," Mr. Haraway said.
