There was an overwhelming amount of technical content at the AICPA Engage conference. These are the most useable highlights.
If you’re looking for technical content about tax, estate and nitty-gritty “advisor alpha” issues related to investment management, there is absolutely no better conference in our space than the annual AICPA Engage meeting. It brings together roughly 3,000 CPA financial planners, tax planners and estate planning experts to compare notes on complex strategies and issues—much of it, this year, related to the new Tax Cut and Jobs Act.
And of all the Engage sessions, one of the audience favorites is the annual “Best Ideas” Panel, whose purpose is to bring together four highly-respected subject matter experts who provide the most immediately actionable advice that they’re currently giving to their clients in their areas of expertise.
I recently attended Engage, and came back with the highlights from the “Best Ideas” panel—including a surprising number of ways where you can add immediate value with your technical advice to clients. I’ve also included some of the best ideas from two other sessions, one presented by IRA expert Ed Slott (author of five books, including the recent Retirement Decisions Guide and The Retirement Savings Time Bomb and How to Defuse It); the other presented by Steve Siegel, author of The Grantor Trust Answer Book; The CPA’s Guide to Financial and Estate Planning; Federal Fiduciary Income Taxation; and Federal Estate and Gift Tax.
Siegel also happened to be the tax and estate expert on the Best Ideas panel, alongside Lyle Benson, founder of L.K. Benson & Co. in Towson, Maryland; current chair of the Division’s Media Task Force and himself a longtime moderator of the “Best Ideas” panel. The others: Julie Welch a partner and director of the tax department at Meara Welch Brown, P.C. in Leawood, Kansas, and co-author of 101 Tax Saving Ideas—and a wide range of of articles in the CPA world’s professional press; and Michael Kitces, publisher and writer of The Kitces Report and Nerd’s Eye View, and also partner and director of wealth management at Pinnacle Advisory Group in Columbia, Maryland.
Here’s are the best ideas from the two other sessions and the “Best Ideas” panel:
Idea: Check your clients’ withholding amounts in light of the new tax brackets.
Welch held up for (distant) inspection the IRS’s first draft of its new Form W-4, which was almost certainly the audience’s first look at it, since it came out the day prior to the panel. She noted that, in the past, the form basically gave employees a worksheet that helped them calculate their number of exemptions, multiplied by $3,600. Easy, right? She read some of the new form’s language, which sounded more like lines from the 1040 instructions than a simple withholding form:
-Enter the amount of any of your itemized deductions and other deductions.
-Enter the amount, if any, of other non-wage income subject to withholding.
-Enter the amount that you and your spouse have in other wage income from other jobs.
-Enter the additional amount, if any, you want withheld from every paycheck.
“Many of our clients are going to have a tax decrease, but their withholding also went down,” said Welch. “When they suddenly realize that they owe money next year, they’re going to be asking you: what happened?”
Her solution: fill out clients’ W-4 forms, using the IRS calculator (https://www.irs.gov/individuals/irs-withholding-calculator), do a quick one-year tax projection that will help avoid any surprises.
Idea: Create a long-term tax projection for your clients, so you know where to fill in brackets and do Roth conversions.
“With this new tax law, we’re doing multi-year tax projections for our clients, to get a sense of how we can manage their tax brackets,” said Benson. “Especially the period between retirement and age 70 1/2 when the RMDs start, it presents a unique window where we might be able to push income into lower brackets, which will help lower the tax rates when the client has to take those required distributions from their IRAs.”
Benson is not only looking out across multiple years, but also from a multi-generational perspective, identifying where income can be shifted down to the next generation, or even up to parents who might be in a zero capital gains bracket. His primary tool for future tax reduction is opportunistic Roth conversions to fill up space where a client might be at the lower end of a relatively low tax bracket. “Even though we can no longer recharacterize those conversions, we still think it is a good strategy for filling up those tax brackets,” Benson told the group.
Idea: Consider recharacterizing your most recent Roth conversions to take advantage of the lower tax rates.
In the “Best Ideas” panel, Benson gave a quick eulogy over an idea that had long been advocated at CPA conferences. In their Roth conversions, some advisors had been splitting the IRA’s asset classes among a variety of different accounts—say, putting growth stocks in one Roth account, international stocks in another, REITs in a third and bonds in a fourth. Then, by October 15 of the following year (assuming you filed an amended return), they would recharacterize the ones that had fallen in value and later re-do the conversion at a lower value. “That strategy is no longer on the table,” Benson told the group—because Roth conversions made after January 1 of this year cannot be recharacterized.
But in his session, Slott noted that some clients might have made conversions in 2017, and have until October 15 of this year to make a decision as to whether to recharacterize or not. “Some of them,” he said, “may want to undo last year’s conversion that was made at the higher rates and redo it this year, at the lower rates.”
Of course, every client situation is going to be different. “You have to look at the the whole picture,” said Slott. “If the assets in the account made a ton of money, you aren’t going to reverse that; it’s all tax-free gains. And you have to look at the tax situation each year. Maybe they had losses in 2017 and the conversion offset them, in which case it doesn’t make sense to recharacterize.”
Welch noted that in the past, recommending Roth conversions was kind of a no-brainer. “If they questioned your advice, it was easy to say: go do it. It doesn’t hurt anything. You can always unconvert,” she said. “Now you have to really do the math on the front end.”
But Slott suggested that even if the tax rates come out roughly equal, the tie should still go to the Roth conversion. Why? “First of all, it eliminates some of the RMDs,” he said. “Most of your clients don’t want to take them, but they don’t have a choice, and it increases their AGI and all the bad things that happen when you increase AGI.”
But a more interesting reason is what Slott calls “the widow’s penalty.” “In many cases, with a married couple, when the first one dies, everything is left to the spouse,” he said. “Other than the difference in Social Security, the surviving spouse is going to have the same income that the couple had before. Except,” Slott added, “now she’s paying taxes at single rates—on the same income.”
Having lower RMDs, and money in an account where it can come out without impacting AGI, could be a handy thing for that spouse.
Idea: Do your Roth conversions opportunistically, on a day when the market has suffered a dramatic drop.
This was almost a throw-away line in Slott’s session, but I thought it was interesting. He said that sometime this year we may experience a significant correction in the markets. (Don’t we always?) We know that the market values will eventually recover. Why not watch for that downturn and then pounce on Roth conversions for your clients at the lower values, when the tax impact will be lower?
Slott also said that clients in their later years will often incur huge medical expenses, which start showing up as deductions on their tax form. “That’s the time to do some Roth conversions,” he said, “and eat up those medical expenses.”
Idea: Make deductions relevant again by “lumping and clumping” as many as possible into the same tax year.
Kitces addressed the fact that the standard deduction is much higher under the new tax regime: $12,000 for single filers, $18,000 for heads of household; $24,000 for joint filers, plus an extra $1,600 for single filers over age 65; or an extra $2,600 for joint filers who are both over 65.
“The impact of the higher standard deduction is very under-appreciated,” he said. “In the past, most advisors I know had most of their clients itemize. But now, with the miscellaneous itemized deductions above the 2% AGI threshold gone, and especially the cap on state and local taxes (SALT) at $10,000, which is the same for single or married folks, it’s sometimes hard to see how you can itemize and get the total deduction over that $24,000 finish line.”
In his experience, only clients with a very large mortgage or substantial charitable deductions will get a benefit from itemizing under the new tax law. “So we are spending a lot of time trying to figure out: can we get you over the line, even if it is for just one year?” Kitces said.
The most flexible strategy involves “prepaying” charitable contributions. “If the client does charitable giving,” Kitces told the group, “we’re recommending that they do five or seven years worth of it all at once this year, putting the money into a donor-advised fund, and then over the next five or seven years, they are going to use the donor advised fund to distribution the same charitable gifts they were making before. Instead of giving $5,000 to charity, they can do $25,000 this year into the donor-advised fund, which at least gets them a partial deduction over the line.”
The alternative, he said, is that they would get no deduction at all from their annual $5,000 gift.
Also related to the high standard deduction, Benson added that he’s talking with clients who are thinking about paying off their mortgage. They won’t get a deduction any more if they aren’t itemizing. “It may make sense to pay it off, even if it is a low-interest mortgage,” Benson told the audience. “On an after-tax basis, there’s really no benefit to having it.”
Idea: Make a client’s charitable contributions deductible again through qualified charitable distributions.
If the client has charitable intent and doesn’t need the required minimum distributions (RMDs) from his traditional IRA for living expenses, then Slott says the qualified charitable contribution (QCD) can be a great strategy under the new tax law. Don’t worry about the high standard deduction threshold; instead, make some or all of the RMD (up to $100,000 under current law) directly to the client’s charity. “Instead of writing a check where you might not even get a deduction any more,” said Slott, “you have the money transferred to the charity, it qualifies as some or all of your RMD, and it lowers your client’s AGI.”
This is especially interesting for clients who are making modest charitable contributions each year. Slott showed the example of a client who made a $10,000 QCD, who would have gotten zero tax benefit for the donation if he’d written a check. Because no ordinary income taxes are paid on the QCD distribution, effectively the client gets back the charitable tax deduction through the back door. “It’s a triple win,” Slott added. “The charity wins, the client wins and you win.”
Of course, the standard advice has been to gift appreciated stock to charities, which makes the capital gains go away. Slott said that this is no longer the optimal strategy for people age 70 1/2 or over. “The simple truth is that people over 70 1/2 are closer to death,” he said. “At death, with appreciated stock, you’ll get that step-up in basis. Why would you give that up? If you gift appreciated stock, in the end your beneficiaries are going to be stuck with more taxable IRA assets and less step-up in basis property.”
At the end of this part of his presentation, Slott warned the audience that you cannot receive any benefit back from the charity when you make a QCD transfer. If you get even something as small as a tote bag back for your contribution, it kills the tax benefit.
Idea: Eliminate the RMD obligation altogether for clients who are still working.
If the client owns a traditional IRA, SEP or SIMPLE, the law specifies how much must be taken out of the account each year after age 70 1/2—and that’s that.
Or is it? In his individual session, Siegel noted that clients who are still employed, who are participants in an employer-sponsored qualified plan (and who are not 5% or more owners of the employer company), don’t have to take distributions from the qualified plan until they retire.
“All of us have clients who are working and making a comfortable salary, who don’t need the RMD distributions and would like them to go away,” Siegel told the audience. “What can you do? If the employer’s plan accepts rollovers from IRAs, then IRS Private Letter Ruling 200453026 says that you can roll your IRA into a qualified plan. That means,” he added, “that it’s not an IRA any more. It is a qualified plan, and if you don’t own 5% of that company, those different rules apply and the client doesn’t have to take any money out of the plan.” He noted that some plans don’t accept IRA rollovers, but that can be easily amended by the employer.
What if the client has other plans at other companies where he or she no longer works? What if, with some of them, the client DOES own 5% of the company, but is also working for a place where she doesn’t? Siegel recommends that you roll those plan assets into the plan where the client doesn’t have a 5%+ ownership stake. Suddenly you’ve finessed away the RMDs.
Idea: Shift some of your property tax obligations to children and grandchildren, to get some of the SALT deduction back.
Siegel, living in the high tax state of New Jersey and consulting with tax practitioners around the country, has spent a lot of time thinking about the $10,000 SALT deductibility limitation on federal tax returns when, for so many clients, the state income and property taxes add up to far more than $10,000. He told the audience, only half-jokingly, that he expects to see a migration from places like Connecticut, New York, New Jersey and California to places like Florida, Texas, Nevada or South Dakota— places where there is no state income tax.
For clients who aren’t inclined to move, he is creating non-grantor trusts and moving partial ownership of real estate into the hands of children and grandchildren.
Why non-grantor trusts? “If it is a grantor trust, I’m still taxed on the income, and I would still get the deductions,” Siegel explained to the audience. “But if I set up a non-grantor trust for each of my children and grandchildren, and I deed the property to those non-grantor trusts, if there are four beneficiaries, each one gets a 25% interest as a tenant in common.” Presto! They are each now responsible for one quarter of the property tax. You have created a deduction where there wasn’t one before.
“I have gotten that property tax off of my tax return,” Siegel added, “and the beneficiaries have hopefully some income, and their income may be partially offset by the property tax, and if they are people who have small amounts of income, that can make sense.”
If they don’t have income, then the trust itself can get the deduction up to the $10,000 limit. “You don’t have to have any income being passed to the children or grandchildren,” Siegel explained. “You can have it stay in the trust. And because of the kiddie tax rule, the tax is the same for the trust as it would be for the kids.”
Anything else regarding the SALT limitation? “We’re trying to help clients find a way to have a home office deduction,” said Siegel. “To see if we can get that on the Schedule C.”
How? “Maybe they’re a director of a company,” Siegel proposed. “Maybe we can find or create some sort of self-employment income. We file the Schedule C and tell them to create a legitimate home office, because when you do the home office deduction, a percentage of your property tax is allocated to your home office deduction. You’re taking that part of the tax off of Schedule A and putting it onto Schedule C, or F if you’re a farmer.”
Finally, Siegel proposed that clients with a vacation home that has a property tax associated with it can give that asset to the younger generation. “They’re going to get it anyway,” he said. “Why not move it now in pieces in a trust, where they can’t sell it out from under you, but the property tax falls into a place where you might get some deduction.”
Idea: Revisit how you have clients make alimony payments.
This topic was discussed by Slott as well as by the “Best Ideas” panel, and I thought Slott offered a really interesting suggestion. He noted that the new tax law shifted the way that alimony is taxed. Before, alimony payments were deductible for the payor, and the recipient paid tax on the amounts received. Now, with the new provisions of the tax law, the alimony payments are no longer deductible, and the recipient does not pay taxes on them. (Agreements made before January 1, 2019 are grandfathered under the old law unless the couple agrees to have them taxed under the new law.)
This eliminated what Slott calls “the spread,” where in most cases the person paying the alimony was in a higher tax bracket than the one receiving it. The difference in brackets—“the spread”—created a net benefit for the couple as a whole. “Now,” said Slott, “the spread benefits the government.”
What’s his suggestion? “Under the law, tax-deductible alimony had to be paid in cash,” Slott told the audience. “But if it’s no longer deductible, why not use an IRA to make the payments?”
How would that work? “Let’s say the husband is giving the IRA to the ex-wife, which is basically giving away pre-tax money that he would have paid tax on,” Slott explained. “So when he makes that transfer, he is, in fact, getting a deduction, and when the ex-spouse takes the money out, she will pay taxes at her lower rates. Kind of like the system we had,” Slott concluded.
He cautioned that clients have to be careful in how they handle the money. The IRA assets have to be moved according to a divorce or separation agreement, and there has to be a direct transfer from one spouse’s IRA to the other spouse’s IRA; otherwise the transfer will be taxable.
In the “Best Ideas” panel, Siegel pointed to a change in the grantor trust rules which might allow advisors to accomplish something similar for clients. “Until the end of 2018, the grantor who creates a trust to make the alimony payments out of income does not have to pay the income tax on that income,” he said. “That law is abolished beginning in 2019. For a new alimony trust created in 2019, the grantor is taxed on all income, and the recipient pays tax on nothing.”
His “best idea:” Have a client pay alimony through a grantor trust set up specifically for this purpose, and fund it with tax-exempt municipal bonds, so the paying spouse doesn’t get hit with a lot of taxable income.
Idea: Have clients think carefully about the new 529 plan rules.
Under the new tax code, owners of 529 plans can now take out up to $10,000 a year of 529 assets to pay for tuition to a private K-12 learning institution. But Benson told the audience that for higher-net-worth individuals, who may have to pay estate taxes in the long run, it would be more cost-efficient for them to leave the accelerated contributions that they have already gotten out of their estate in the plan, and instead pay the K-12 costs directly. “It doesn’t count toward the annual gifting if you pay the tuition directly to the schools,” he pointed out.
Related to divorce agreements, Siegel noted the change in the rules could lead to unexpected consequences if clients aren’t careful.
“Think of a divorce situation where, when the marriage was together, the spouses funded a 529 plan intending that it would pay for college,” Siegel proposed. “And then they get divorced, and in the divorce agreement it says that one spouse is obligated to pay for college. “But,” he continued, “who is in control of the 529 plan? Maybe not that spouse. The other spouse can use the money for K-12 education and then turn to the ex-spouse and say: it’s college time. Where’s the money?”
Idea: Deliberately sabotage sophisticated estate tax reduction strategies that were created when the estate tax exemption was much lower—in order to get the full value of the step-up in basis.
Looking back ten years, when the estate tax exclusion amount was a “mere” $2 million, or 17 years ago, when it was $675,000, who would ever have imagined that the federal estate tax exemption would now be $11.2 million for individuals, $22.4 million for couples—with portability, which helps ensure that the couple gets every dollar’s worth. In those simpler times, advisors were concerned with getting as much wealth as possible out of the estate for their higher-net-worth clients, using Qualified Personal Residency Trusts (QPRTs) for the family home, and family limited partnerships so that heirs could claim a discounted estate value on investment property and other assets.
Fast forward to today, and many clients no longer worried about the estate tax, but they ARE concerned about getting a step-up in basis on their low-basis stock and the appreciated value of the family home. The family LP discount is now working against them (the step-up itself becomes discounted if the assets are assigned a fraction of their fair market value in the estate), and having the family residence in the hands of the kids before the death of the client has the perverse effect of eliminating the valuable step-up in basis.
What to do? Benson has been categorizing his firm’s clients into three groups: those who were under $5.5 million before the new tax law, who didn’t have to worry about federal estate taxes in the past, and still don’t. No need for a change in strategy there. At the other end of the spectrum are people who are wealthy enough to fall above the new exemption amount, and interestingly enough, they, too, don’t need much (or any) strategy adjustments. They’re still focused on reducing their taxable estate.
But those in a new middle group, who have been planning for an estate tax that is no longer relevant to them, represent an interesting challenge.
“We’ve been spending time figuring out how we can dismantle all the old estate planning strategies in cases where they no longer apply to clients,” Kitces told the audience, “in order to bring those assets back into the estate.”
He said that it is relatively straightforward to unwind a family limited partnership, and Siegel said essentially the same thing about the provisions in an LLC designed to allow discounting. With the QPRTs, Kitces said, there is a long list of Tax Court cases and guidance from the IRS on things you are not supposed to do if you want to avoid having the assets accidentally pulled back into the estate.
“Now we’re sitting down with clients and saying: The IRS has provided us with a really handy list of everything we’re going to deliberately screw up now,” Kitces told the group. “You’re still paying rent to the kids? We’re going to stop doing that. You’re supposed to treat the property separately? We are going to give you all the property taxes. And when the IRS comes in to say, you haven’t honored the QPRT, so we’re going to put it back in your estate, we’re going to say: great! Thanks for the free step-up in basis.”
Siegel said that technically, one has to have a retained interest in the property when he or she dies, in order to have it includible in your estate. So to make extra sure, he’s supervising some correspondence between parents and kids.
“I’m having the parents write a letter to the kids saying: the QPRT was great, but we still like the house. We are not moving, we are not paying rent, and we are retaining an interest in the property for the rest of our lives; love Mom and Dad. And,” Siegel continued, “the kids write a letter back saying, Dear Mom and Dad, we love you; we respect what you’re saying. No problem. Retain the interest for the rest of your lives. That becomes Exhibit A if you are ever challenged by the IRS.”
But is it wise to blow up these estate planning strategies when the current tax law is due to sunset in 2025, bringing back the $5.49 million exemption? Kitces had an interesting take on whether the exemption would ever go down in the future.
“Congress has threatened to decrease the estate tax 20-something times in the past 100 years,” he told the audience. “But we have never ever actually done it.” Then Kitces cited two times when it did happen: in 1933, because the government deflation-adjusted the exemption amount in the Great Depression, and again in 1935, because the government deflation-adjusted it again. (He neglected to mention the interesting period in 2010 when the estate tax was repealed entirely, and then reinstated at $5 million with portability the following year.) “For that reason,” Kitces said, “we heavily discount the possibility that the exemption will be lower in the future than it is today.”
Can this actually be true? The IRS website has a “history of the estate tax” chart with rates and exclusions up through calendar year 2006, and you can fill in the rest of the years to get the chart on this page, which shows that, indeed, the government has played with the top estate tax rate a bit, but has consistently raised the exclusion amount over a very long time period.
Idea: Plan to reduce or eliminate state estate taxes.
Not every state assesses state estate taxes, but those that do all have a lower exemption limit than the new federal law—creating what Slott called “the gap.” In New York, the state estate tax exemption is $5 million, creating a $5 million “gap” between that and the federal exemption. “If you’re in Oregon or Massachusetts,” he told the audience, “there’s only a $1 million state estate tax exemption. This requires real planning, especially for people whose assets are below the federal exemption.”
What to do? Slott said that one option is to do a Roth conversion for some or all of “the gap” amount—and the net result is that the state (due to foregone state estate taxes) effectively pays your client’s tax bill on the conversion. This will also reduce the client’s taxable income going forward.
Most clients can also gift taxable assets to their children and grandchildren, lowering their estate down below the state estate tax exemption (remembering not to gift low-basis positions). They can do this without tax consequences, since only one state collects state gift taxes on those transfers (Connecticut).
“Wouldn’t it be great to make these big gifts to get under your state estate tax exemption, and wipe out your big estate tax?” Slott asked the audience. He added that he is a big fan of using not just the $11.2 million or $22.4 unified exemption, but also the generation-skipping tax exemption at the same time. “Remember, the estate tax exemption is portable, but the GST is not,” he told the audience. “If you don’t use it in the first estate, you lose it.”
Later in the presentation, Slott said that one of his single clients could actually make a $15 million gift without gift tax consequences. How? His wife had died a couple of years ago and with the portability rules the client still had $4 million of unused exemption. “Don’t forget about the deceased spouse’s unused exemption,” Slott reminded the audience. “It can add a lot to the amount you can give away.”
Idea: Make sure, with all new clients especially, that their wills conform to the new estate tax realities.
Welch told the audience that she has seen clients come in with estate documents that were drafted way back when the exemption was $1 million. The family might have $5 million in assets, and the will, drafted many years ago, would specify that everything up to the federal estate tax exemption goes to the kids, and the spouse gets the rest. The old A-B trust arrangement would do the same thing: the full amount of the exemption goes into a trust on behalf of the kids, and the spouse gets what’s left over.
If the exemption had stayed the same, that would have given the spouse (in this example) $4 million and the kids $1 million. Today, the same document completely disinherits the surviving spouse. Is that the intention?
Idea: Transfer low-basis property to aging parents—and receive it back with a step-up in basis.
Siegel says that basis planning—that is, maximizing the step-up in basis—has become the most important aspect of tax and estate planning in the post-tax-law reality. “I’m now looking for families that have older family members who are alive and reasonably well,” he says. “And I’m having their kids give them the low-basis property that they own.”
For instance, suppose a client has stock that was purchased in the 1980s, that has a basis of $2 a share and now sells at $100 a share. She could transfer that stock to her mother, who is 92 years old, with the agreement that it will be left to her when the mother dies.
“If the mother keeps it for a year, and the clients get it back, as the donor, they get a stepped-up basis when the mother dies,” Siegel told the audience. “So clients will say to me, how do I know that Mom or Grandma is going to live a year? I say: we can add a couple of sentences to Grandma’s will. The will will say, if I receive this stock from my child and I lived a year from the time I got it, my child gets it back. If I didn’t live a year from when I got it, it goes to my grandchildren— the children of my child. So that way,” Siegel continued, “the grandparent can die the next day, leave it to the grandkids, THEY get the stepped-up basis, and they can sell it and no taxable gain is paid. Think of it as a way to help fund college.”
Idea: Instead of always paying retirement expenses out of the taxable account (to maximize the tax-free compounding of the IRA), start depleting the IRA so that you can leave low-basis assets to heirs and get the step-up in basis.
Benson’s long-term tax planning projections are much more broadly focused than this individual idea: they’re designed to creatively smooth out a client’s tax rate throughout retirement—meaning that it can be advantageous to make IRA distributions that aren’t required in some years, and especially to make Roth conversions that reduce future RMDs and the future tax rate.
But this is a particular part of that planning: Benson is paying special attention where he finds that clients have a substantial low-basis stock holding in their taxable accounts. “In those cases,” he said, “you can make an argument to start drawing down the IRA faster than absolutely required, to pay living expenses, leaving the low-basis assets to the heirs to get the step-up in basis.”
Benson also watches to make sure that clients don’t mistakenly gift away low-basis assets to heirs—for the same reason.
Idea: Do some careful tax planning around IRAs as a potential estate asset.
Welch said that it can be a mistake to leave an IRA to grandchildren, since the new Kiddie Tax is somewhat unforgiving about tax brackets. “It depends on what they’re planning to use the money for,” she says. Stretching out the distributions is fine, but what if the kids are planning to use the IRA money for college expenses? “In that case, it might make more sense to leave the IRA to the parents,” she said. “The highest bracket for the kiddies starts at $12,500. The parents can make a whole lot of money before they get into that 37% bracket.”
Idea: Now that employee business expenses are no longer deductible (due to the elimination of miscellaneous itemized deductions under the new tax act), have the employer pay those expenses and preserve their deductibility.
Welch said that the company could pay the employee less to cover some or all of the added expense.
The “Best Ideas” panelists and Slott also addressed how the elimination of the miscellaneous itemized deductions impacted planners—by basically taking away the deductibility of your fees. “We’ve been spending a lot of time looking at ways to get a portion of the fee deductibility back for our clients,” Kitces told the group.
One possibility, which both Kitces and Slott talked about, is to have the client’s IRA pay the portion of your fees that would be attributable to the management of the IRA assets. “When the money comes out of the IRA, it is, by definition, a pretax payment of our fee, because it is coming out of a pre-tax account,” Kitces told the audience. Of course, you can’t take out fees for taxable or Roth accounts or for the overall financial planning work, because that would represent a prohibited transaction. But at least SOME of the tax benefits could be recovered.
Also, Kitces said, if you’re doing planning for small business owners, see if you can characterize some or all of your financial planning and advice fees as business advice fees, which would be fully deductible from the client’s business tax return.
Slott said that most clients may not have realized that they were never getting that deduction anyway, either because the fees (aggregated with other miscellaneous expenses) didn’t rise above their 2% AGI level, or because the clients were paying taxes under AMT, where those miscellaneous deductions didn’t count.
The reader is probably wondering why the panelists or speakers didn’t address the most interesting and complicated aspect of the Tax Cut and Jobs Act: Section 199A, the 20% tax reduction on qualified business income (QBI) for owners of pass-through entities like sole proprietorships, S corporations, partnerships and LLCs. In fact, this was a big part of the buzz at the conference, and one of the most popular and influential speakers in the CPA world, Bob Keebler of Keebler & Associates in Green Bay, WI, devoted two entire sessions to it. The topic came up in the “Best Interests” panel a couple of times. But until the IRS comes out with its clarifying regulations, there wasn’t a lot of consensus on “best ideas” to help clients qualify for or maximize the deduction. That guidance is due out sometime this Summer, and until then, what we’re hearing is all kind of speculative.
Engage, for me, is a yearly reminder of the value of the technical planning work that advisors do for clients, and a chance to hear some of the deepest thinkers in tax and estate planning as they wrestle with new complexities thrown at them by Congress. I hope you enjoyed their best ideas and insights.