A recent interview style Q and A session appeared in Accounting Today featuring the expertise of author Iralma Pozo. In this series of questions, Pozo tackles some important aspects of the most significant change to the U.S. tax code since 1986. With such historic changes underway, it’s critical that you understand how the Tax Cuts and Job Act will affect cash flow issues for clients.
What’s particularly insightful is Pozo’s advice regarding parents and what they need to know about 529 plans. Her observations about developing a new strategy for charitable deductions and nonprofit organizations are also highlights:
With so many changes and factors, where do advisors start?
Legal and accounting firms, bar and state accounting associations, continuing education providers and publishers have been busy providing articles, webinars and training. In any planning, cash management and cash flow must be taken into account, to ensure there is enough money to cover ongoing expenses and operations and to fund any additional expenses taxpayers chose to incur in order to take advantage of tax changes. Looking at the bottom line is not enough in times of change; one must also make sure on a monthly basis that basic necessities are met and the lights stay on. Additionally, advisors will have to take into account which changes are permanent, temporary and due to increase or decrease between now and 2025.
How will the states react to tax reform?
In the past, many states piggybacked on the federal tax regulations. Some states such as New York have already announced plans for changes in the state tax laws. Any additional differences will have to be taken into consideration when preparing estimated tax payment calculations and projections. With some states increasing the minimum wage and providing paid family leave, there will be a lot of changes.
How will the alternative minimum tax enter the equation?
The AMT has to be taken into account in planning for individuals and corporations. The individual phase-out threshold has increased to $1 million. For individuals who prepaid real estate taxes for 2018 that were already assessed in 2017, the AMT exemptions from 2017 may yield less or no tax savings.
What are some things that advisors should discuss with parents?
Parents will benefit from the $400 increase in the refundable child tax credit. The standard deduction was increased and personal exemptions were eliminated. This change may be confusing to some parents. Parents will be able to use 529 plans to send children to elementary school.
Advisors can help families leverage caps on real estate and tax deductions with education expenses. Some parents purchase homes in counties they can barely afford in order to send their children to schools in better school districts. Some of these parents will no longer benefit from the tax savings they were accustomed to when they were able to deduct their real estate and state taxes. Advisors can help parents determine how contributions to educational savings accounts can lower their taxable income and save them money on taxes.
How can advisors help clients with retirement-related issues?
Advisors will have to help clients access their current and future earnings and tax expectations, to ensure a Roth IRA conversion is best for them. Roth IRA conversions will no longer be reversible.
How can advisors help clients with real estate investment issues?
With the caps on deduction of property and real estate taxes, mortgage interest, business interest expenses, advisors can help clients figure out what the best structure is for real estate investments. Some clients who have previously shied away from partnerships may find such entity structures more favorable or feasible.
How will entrepreneurial business owners make out with tax reform?
Business owners should be open with their advisors on what their strategic plan for the year is, how much they plan to grow and what their operating budget includes. Discussions should include which entity type is most beneficial, how the business owner can receive compensation and benefits to save taxes, and how much money the business owner needs to cover basic operations and living expenses on a monthly basis.
How can advisors help pass-through entities that are service providers?
Advisors can assist high-earning service-providing businesses set up compensation and benefits that can reduce income and increase tax savings, yet provide future benefits to business owners.
How will tax reform affect nonprofit organizations?
With the increased standard deduction, some people will no longer be able to itemize, and will no longer see a tax savings from making charitable donations.
Executive compensation changes will particularly be something nonprofits will have to address. With potentially decreasing donations, stakeholders would prefer to see more money going to causes and programs as opposed to executive pay. Endowments will be affected by tax reform as well, with a new excise tax of 1.4 percent on the net investment income of applicable educational institutions. Investment and other advisors will have to work with educational institutions that have large endowments to ensure the organizations strategize about what to spend and what to save for the future.
It’s clear that the TCJA will have far-reaching effects for years to come. For this reason, we recommend that you plan on extensive meetings with your advisors (legal and accounting) to obtain help with navigating through “the jungle” of new tax rules that reform has left us.
You will likely need to spend plenty of extra time with your legal and accounting/taxation advisors this year.