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What FAs Must Do in Light of the New Tax Bill

January 9, 2018

The GOP’s tax overhaul may give a shot of adrenaline to the economy in the short term but will lead to bigger budget deficits over the next decade, InvestmentNews writes in an editorial. It could also mean more work for financial advisors and their clients when it comes to investment portfolios, according to the publication.

The income tax cuts are expected to swell the deficit by over $1.5 trillion over the next 10 years, according to Congressional Budget Office estimates cited by InvestmentNews. At the same time it’s “difficult to find significant corporate loopholes” eliminated to pay for the massive corporate tax cut, the publication writes.

There are major differences in how the new tax law and its various loopholes affect different industries, according to InvestmentNews. Manufacturers, for example, are projected to see the biggest tax savings in the next two years, according to an analysis by the University of Pennsylvania’s Penn Wharton Budget Model cited by the publication. On the other hand, the Republican overhaul eliminated deductions for lobbying and credits for drug-testing and enhanced oil recovery, InvestmentNews writes. As a result, investment portfolios will have to be reviewed and altered, resulting in higher research and trading costs, according to the publication.

The new tax law may also change the way clients invest, according to former tax attorney Andy Friedman, ThinkAdvisor writes.

The law has repealed deductions for investment fees and expenses such as fees paid for advice in connection with separately managed accounts, he tells the publication. At the same time, mutual funds and annuities now offer a tax advantage, “because fees [paid on them] are netted against the fund’s or annuity contract’s distributable taxable income,” Friedman tells ThinkAdvisor.

However, separately managed accounts still offer an advantage because of the ability to harvest losses in such accounts, he says.

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Advisors should review how these changes affect their clients’ overall situations, Friedman tells the publication. They should also pay attention to the repeal of the limitation on itemized deductions imposed on high-income taxpayers, known as the “Pease limit,” the repeal of the ability to recharacterize a contribution to a Roth individual retirement account as a traditional IRA contribution, and the increase to the exemption from the alternative minimum tax, according to Friedman.

And for clients with pass-through businesses, advisors should review how the deduction equal to 20% of their business income would affect their overall financial standing, he tells the publication.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.
  • To read the ThinkAdvisor article cited in this story, click here.