Investment advisers want one thing above all others when it comes to tax reform: a streamlined tax code that makes it easier to understand and use.
“The number one thing is simplicity,” said Lisa A.K. Kirchenbauer, president of Omega Wealth Management. “It's getting harder and harder to do taxes.”
The various rules surrounding deductions and phase outs of different benefits create a “labyrinth of moving parts” that complicate tax planning, said Jim McCarthy, managing director of Directional Wealth Management.
“You change one thing and it triggers something else two steps down the road,” he said. “It feeds on itself.”
They share something in common with the head of the IRS.
Earlier this week, IRS Commissioner John Koskinen
told an audience at a National Press Club luncheon that the tax system is “impenetrable,” and that the best thing Congress could do is simplify it.
Republicans and Democrats on Capitol Hill have called tax simplification one of the goals of broad reform. Congress so far has only taken tentative steps toward an overhaul of the tax system. The House is poised to put another marker down in coming weeks, as it
considers legislation to eliminate the estate tax.
A bigger concern than the inheritance levy among advisers and their clients is the alternative minimum tax. Implemented as a parallel tax system that aims to prevent the wealthy from shirking their share of the national tax bill, the complicated AMT formula frustrates advisers and their clients.
“The repeal of the AMT would be a real priority,” said Michael Rosenberg, managing partner of Diversified Investment Insights. “Let's live by one rule book and only one rule book. We need to make the laws and rules easy to understand for everybody.”
The AMT no longer just captures the top earners, advisers said. In high-cost areas such as metropolitan Washington, D.C., the tax can sneak up quickly on clients, Ms. Kirchenbauer said.
“You've done what you think is the right withholding and then all of a sudden you haven't,” Ms. Kirchenbauer said. “No more AMT. What a pain that is.”
The taxation of capital gains and dividends also is a sore point for advisers. Mr. Rosenberg would like to see the dividend tax eliminated because corporations already pay a tax on their profits before issuing dividends to shareholders — so-called double taxation.
Getting rid of the levy also would help older clients who rely on dividends for income.
“It would make it easier for the person living on a fixed income,” he said. “It would be a little bit of a break.”
Adjusting the capital gains rate for inflation might help with portfolio planning, said Tim Steffen, director of financial planning at Robert W. Baird & Co. But he acknowledged that implementation of the idea would be a challenge.
Capital gains levies already complicate the planning process.
“Too often taxes become an impediment for doing what might be best from a financial planning or portfolio-management standpoint,” Mr. Steffen said.
One adviser would like to see Congress amend the tax code to help clients participate in emerging sectors of the economy.
Marc Tannenbaum, principal of Signature Financial Planning, said lawmakers should create tax incentives for investments in alternative energy, technology and life sciences that are similar to deductions allowed for oil and gas investments. The tax benefits would help mitigate the investment risk.
“I'd like my investors to be able to put money in those smaller start-up businesses,” Mr. Tannenbaum said. “If you give them the tax incentives to invest, then you'll see the money go into research and development of these industries.”
Mr. Tannenbaum also would like Congress to help his clients better manage debt by making interest on student loans tax deductible for all income levels.
“Currently, many professionals are making too much money to deduct their student loan interest yet not making enough to make a meaningful dent in the principal of the loan itself,” Mr. Tannenbaum said.
Before adding new wrinkles to the system, some advisers want Congress to make current tax benefits permanent.
For instance, a tax incentive for charitable contributions made directly from individual retirement accounts has
once again expired, putting it in limbo until Congress acts again. That means some of Mr. Steffen's clients may have to wait until the end of the year to know the tax rules for their charitable contributions.
“The uncertainty is what's frustrating people,” Mr. Steffen said.
Tax code permanency is a recurring theme for advisers.
“You have to make it simpler and you've got to stop futzing with it,” Mr. McCarthy said. “My clients don't have a problem paying their fair share. They want to plan accordingly.”
