Tax reform continues to confuse many taxpayers, including the wealthy, who despite professional tax help can remain unclear on many aspects of the Tax Cuts and Jobs Act.
“The TCJA made dramatic changes to the rules impacting tax planning for years to come,” said Richard Hendrickson, Benton, Ky.-based advisor at Concurrent. “While many of the changes were favorable, some of the old tax breaks can no longer be used. There are a few basic areas where investors, especially high-net-worth investors, should have a better understanding of the TCJA’s impact.”
“The TCJA was a complicated piece of legislation that was written relatively quickly, resulting in some vagaries in drafting and even some mistakes,” said Robert Finkel, partner at the New York law firm Moritt Hock & Hamroff and a former senior trial attorney with the IRS. “High-net-worth taxpayers should be reassured that having lingering questions and concerns is understandable.”
One fallacy of reform: The changes will benefit all taxpayers. “This is slowly being proven untrue,” said Steven Wittenberg, director of legacy planning at SEI’s private wealth management group in Oaks, Pa. “Others will benefit more than some. Some, particularly in high-income tax states, will be taxed more under the new tax regime.”
Nor are income tax law changes the same for 2020 as they were for 2019. “There are a few adjustments that kicked in after Dec. 31, 2019, that will impact taxpayers differently in 2020, though potentially not meaningfully. At a minimum, for example, tax brackets have been tweaked, along with the standard deduction,” Wittenberg said.
Reform’s provisions are due to sunset at the end of 2025. “The most opportune time to leverage the TCJA is right now,” said Scott Morris, advisor with International Assets Advisory in Glasgow, Mo. He points out to wealthy taxpayers that tax reform reduced deductions for mortgage interest, as well as capped state and local taxes.
Changes to AGI rates present a big opportunity for high-net-worth earners. “In 2017, a married couple filing jointly with a household AGI of $470,001 or more would have found themselves in the 39.6-percent tax bracket,” Morris said. “The TCJA adjusted not only the income threshold but the incremental tax rate itself, increasing the top bracket to $600,000 or more but at a reduced rate of 37%. This creates a more efficient opportunity to convert both traditional IRA assets and in-service rollovers from employer retirement plans to Roth IRAs.”
Even though the TCJA did index the capital gains rate brackets to increase with inflation until 2025, “in 2020 the tax rate on long-term capital gains and on qualified dividends is zero until joint income exceeds $80,000 (for married filers), then 15 percent until income exceeds $496,000, then 20 percent on gains with income beyond that,” said Thomas N. Alvaré, CPA/PFS, managing principal at JFS Wealth Advisors Doylestown, Pa.
“At over $80,000 in income, these capital gains rates are a significant discount to [corresponding levels of] ordinary income tax rates,” he said. A decade-plus of bull markets has also paralyzed investors to make sales and incur capital gains.
In the wake of the TCJA’s larger standard deduction, charitable donations require more planning to be deductible. One possible solution: taking advantage of qualified charitable distributions (QCD) directly from IRAs.
“Taxpayers can exclude up to $100,000 of QCDs each year. QCDs also count toward satisfying required minimum distributions,” Hendrickson said.
“What’s lost in all the rhetoric and media stories is that TCJA is a half-baked product, which includes reform mostly on the corporate and international side and some on the individual side, as well,” said Chaim Kofinas of Beacon CPA and a committee chair with the NYS Society of CPAs. “There were significant errors that haven’t yet been corrected. In addition, it’s now two years out and many provisions have no guidance, so we’re working on best guesses. This makes the complicated returns that high-net-worth clients have even more complicated.”