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Amid Tax Cut Debate FAs Eye Red Flags

By Murray Coleman September 7, 2017

As President Donald Trump moves into campaigning for tax cuts, advisors closely monitoring political developments on Capitol Hill are finding a few key areas where consensus seems to be forming.

While they remain wary of ongoing political gridlock in Washington, several experienced FAs who are also trained as CPAs tell FA-IQ they’re seeing momentum behind a set of four proposed reforms. Recently, Politico reported finding consensus forming around similar areas.

Included in such lists are efforts to allow businesses full expensing of investments in facilities and equipment. Likewise, cuts to corporate interest deductions – a way to help companies leverage debt-related costs – are also expected to be part of any tax reform package.

Restricting or eliminating homeowners’ ability to deduct mortgage interest payments is another box potentially checked off by lawmakers. Taking away clients’ state and local tax deductions also appears to be increasingly reported as on the political chopping block.

But with a packed legislative agenda, advisor Donna Cuiffo says even the most bullish tax planning experts remain deeply divided about anything “actionable” taking shape before early next year or 2019.

The director of estates and trust tax planning at Clarfeld Financial Advisors, which manages about $7 billion, is telling clients that reshuffling strategies isn’t realistic at this point.

“But we are using today’s headlines to keep the dialogue alive and help to complement our end-of-year discussions about taxes and estate planning,” says Cuiffo, who doubles as a CPA and is based in Tarrytown, N.Y.

One of those topics includes making sure clients who live in high tax cities and states aren’t caught flat-footed. In particular, Cuiffo is keeping on top of changes that could eliminate deductions on local taxes for families living in New York, Massachusetts and California.

“I have clients who are living in New York City, for example, who are paying the top individual tax rate,” she says. “In some situations we’re gauging their feelings about moving outside the city [to] save on local taxes.”

Although it’s very rare taxes will dictate a move, Cuiffo believes it’s important for advisors “to be proactive now” to gain “valuable feedback” and “jump-start more in-depth tax planning conversations later in the year.”

Leon LaBrecque, managing partner of LJPR Financial Advisors, sees positive signals coming from Washington for business owners. In particular, he predicts entrepreneurs will gain "a great deal of latitude" in the future to write off facilities and equipment-related costs.

At the same time, he believes that counter to reports projecting an end to deductions for interest paid on debt, owners will be given a green light to do so -- as long as they forgo those same facilities and equipment write-offs.

The Troy, Mich.-based advisor, whose firm manages about $700 million, is on a special task force of CPAs in the state who are monitoring tax reform efforts in Washington.

LaBrecque says the accountants he works with on that committee are also expecting "full expense" reporting being included in any reforms – though probably not until 2019.

Full expense reporting, he adds, would be a big deal to about a quarter of his practice who own small or mid-sized businesses. In fact, one family he’s working with is weighing building a new plant and hiring employees in Mexico as opposed to expanding locally.

“They’re so busy that if they could get a full deduction they’d go out and buy new machines right away and start expanding in their own backyard,” LaBrecque says.

His clients are discussing delaying any offshoring plans until the U.S. tax reform picture becomes clearer.

“If they can write off their expenses we figure they could save another 10% – maybe as much as $1.5 million a year – on their tax bill,” LaBrecque says.

Donna Cuiffo

Some sort of a cap on mortgage interest deductions is likely to present a somewhat mixed bag for high net worth clients, notes Anjali Jariwala, founder of FIT Advisors in Redondo Beach, Calif.

The CPA-turned-financial advisor, who works on retainer, doubts that if such itemized deductions go away families won’t be deterred from buying houses.

“Most people who want to purchase a home are making an emotional decision – it’s about raising a family and living a certain lifestyle,” Jariwala says.

Younger families she works with “get a strong sense of accomplishment in being able to make such a major purchase,” making home ownership “much more than just a financial decision.” As Jariwala puts it: “I don’t advise my clients to let the tax tail wag the dog.”

Yet rising expectations that standard deductions will get bumped up should prove beneficial to early and mid-career professionals who don’t itemize. But for high-income earners who do save on taxes by itemizing their deductions, Jariwala believes the loss of such strategies will probably outweigh any “relatively small” hike in standard deductions.

“Although some figures I’ve seen would double the current standard deduction,” she says, “it’s still going to be a drop in the bucket for some of my clients who are used to taking much more in itemized deductions.”