Home Consumer Planning for Tax Reform: To be or not to be?

Planning for Tax Reform: To be or not to be?

tax reform

If the proposed tax reform is causing you stress, you aren’t alone. CEO Marianela Collado says that’s the biggest concern at Tobias Financial Advisors right now, as they work through year-end tax planning and take calls from clients wondering how they will be affected and what they should do next. With the joint unified tax proposal just being released on Friday, there are some big surprises!

“It brings a level of uncertainty for us and anxiety for the client because it’s not as black and white as far as what they should do,” she explains. Even as we all await to see what Congress puts together and whether or not the reform bill passes, we are all left wondering how our taxes will be impacted.

“We tell clients, ‘If reform goes through, do this. If it doesn’t, do this. Your safest bet, since we don’t know, do this,’” Marianela says. For now, all we can do is look at how various provisions may affect us and make the best decisions moving forward. Here’s a look at a few of the standout provisions you may want to know about:

  • Property Taxes

There is a provision to cap the property tax deduction at $10,000. For Florida residents with a property tax over $5,000, it may make the most sense to pay it immediately and get the discount. For others, or those with a property tax under $5,000, it may make more sense to wait until January. These are things to discuss with your advisor soon. 

  • Qualified Business Income of Pass-Through Entities

This provision allows for a deduction equal to 20% of the pass-through income for qualified businesses, which in effects lowers the effective tax rate on this income. So much for simplicity, this one gets a bit more complicated as certain tests have to be met and the applicable tests are driven by the owner’s overall income and wages paid by the business.  This provision may provide an immediate benefit for some businesses, but not all. It excludes certain industries such as lawyers, accountants, investment advisors or consultants doing business as an S-Corporation or partnership, Marianela says.

  • State Income Tax

Currently state income tax is a deductible expense, which is especially useful in high income tax states such as New York and California. The proposed bill is placing a cap on the deductible state income taxes, which is $10,000, but combined with property taxes.  In other words, very few taxpayers in high income tax states who also own their homes in high property tax cities will be getting a benefit for state income taxes paid.

  • Tax Preparation, Investment Advisory and Unreimbursed Business Expenses

Although currently deductible, these are all slated to be gone. This is a big surprise compared to the bill proposed by the House.

  • The Alternative Minimum Tax

While the whole theme of the initial proposed tax bill was simplicity and the elimination of the alternative minimum tax, the joint proposed bill keeps the AMT as is but with some higher exemption levels. 

  • Estate Tax Exemption

The current estate tax exemption is proposed to be doubled from approxImately $5.5M to $11M per person (That’s $22M per couple).  While the House bill was proposing to completely repeal the estate tax in 2023, the joint bill eliminates the repeal, but the entire proposed bill is subject to sunset in 2026.

Marianela said that the best thing you can do is sit down with your advisor and run your numbers. What will your taxes look like if the proposed changes go through? What will they look like if they don’t? That will clear your mind and give you a picture of the future – or proposed future.

But in the end, remember that this is a long game. These proposed tax changes may call for some tweaks or pivots, but your long-term goals are the focus. Planning is crucial. Look ahead at what’s coming and be aware to plan around them, but never losing focus on the long term goals and objective.

About the Auther: Marianela Collado, CPA/PFS, CFP®, is the CEO and a Senior Financial Advisor at Tobias Financial. She has over 15 years of experience in the tax and financial planning arena. Marianela has worked with many ultra-high net worth families and assisted with the implementation and reporting of complex income and wealth transfer strategies.