How The New Tax Law Will Change Wealthy Americans’ Financial Plans

Three in five affluent Americans (63%) said they’re very or somewhat likely to change their personal financial plans based on the new federal tax law, according to a poll conducted on behalf of the AICPA.

The online Harris Poll released today surveyed 507 affluent Americans, defined as individuals with either $250,000 in investable assets or more than $200,000 in annual household income. The survey was conducted in September and October, before the passage of the law known as the Tax Cuts and Jobs Act, P.L. 115-97.

More than half of those who took the survey (53%) said they believed working with a professional such as a CPA financial planner with specific expertise in taxes would increase their ability to meet their personal financial goals.

“A CPA financial planner can assist by educating clients and their families on the short- and long-term impact of the new tax law,” said Dave Cherill, CPA, a member of the AICPA’s Personal Financial Planning Executive Committee.

Sixty-eight percent of those surveyed said that the most important aspect of their financial strategy was planning for retirement. Though 90% said that tax planning would be somewhat or very important to their overall financial well-being in retirement, just 43% said that evaluating the tax efficiency of their savings and investments was the most important aspect of their financial plans.

Capitalizing on tax efficiency can make a huge impact on a person’s retirement, said Robert Westley, CPA/PFS, a member of the AICPA’s Personal Financial Planning Executive Committee.

“Tax-efficient financial planning is absolutely critical for the average American, as taxes will be their largest lifetime expenditure,” he said. “Additionally, the tax drag on investments over a long period of time can make for significant differences in retirement income and assets.”

The new tax bill has opened up new opportunities for clients to revise their financial plans. Some strategies that CPA/PFS credential holders from various AICPA groups suggest clients consider include:

• Using the 20% deduction against qualified business income. Not all small business owners will qualify for this deduction. Some might require a change to their current business structure and internal processes to make the new law work for them. Cherill recommended that business owners meet with a CPA to determine whether or how they can benefit from the new deduction. “CPAs can calculate whether your current entity structure is correct, but also assist you in knowing what records to begin maintaining, as this deduction requires support for wages paid and assets being used in the business,” he said.
• Bunching charitable contributions. Under the new tax law, the standard deduction has been increased, which, as Westley noted, could “have the effect of decreasing the number of taxpayers who itemize their deductions and therefore derive a tax benefit from their charitable contributions.” Clients who regularly make charitable donations may want to “bunch” them, or donate several years’ worth at once rather than giving annually. That way, they will be able to itemize their donations in certain years that they give, and take the standard deduction in years that they do not. In some cases, this can increase the tax savings they will obtain from giving to charity.
• Paying off home-equity loans or lines of credit more quickly. If clients are using a home-equity loan or line of credit for anything other than buying or improving a home, they will no longer be able to deduct the interest as mortgage interest. As the deduction will no longer be available to reduce their taxable income, they may find themselves in a higher tax bracket. A CPA can help such clients take all factors into consideration and determine whether it makes sense to pay off a home-equity loan.