The Effect of Tax Law Changes on Financial Planning

by Guy McPhail, CPA, CFP, Sax Wealth Advisors – August 2, 2018
The Effect of Tax Law Changes on Financial Planning

Many of us have been busy educating clients on the 2018 tax law changes. As a CPA financial planner, I have had more questions regarding how the tax law affects my client’s personal financial plans this year than I can ever remember. However, with change comes opportunity.

In a recent AICPA poll, “three in five affluent Americans (63 percent) said they’re very or somewhat likely to change their personal financial plans based on the new federal tax law.” Given this statistical information, those of us in the financial planning arena should be very busy work­ing with our clients’ financial plans and updating them with any necessary changes regarding the new tax law. Here are some specific items to consider:

Investment Expenses

One of the changes to look at immediately is the repeal of the deduction of investment expense, such as quarterly asset management fees. Can those fees be shifted to an IRA account since they are no longer tax deductible as a miscellaneous expense? Paying the fee from the IRA is not con­sidered a taxable withdrawal, meaning the client is paying an expense with dollars that have never been taxed. Charging an IRA for its own fees reduces the balance in the account, which then reduces the Required Minimum Distribution (RMD) once they reach 70 ½ years of age. Clients may find their RMD is more than they actually need — making this an effective strategy.

Qualified Charitable Distribution 

Speaking of RMDs, the new tax law favors charitable giving from IRAs. More clients may be using the standard deduction going forward given that the state and local income tax deduction is now limited to $10,000. The Qualified Charitable Dis­tribution (QCD) law is still in effect for those after age 70 ½. So, making a QCD instead of a regular charitable gift has two big advantages: the QCD counts toward satisfying the individual’s RMD for that year, and the distribution is excluded from the taxpayer’s income.

Let’s take a 71-year-old couple who, between them, had a $30,000 RMD and directed $10,000 to a charity as a QCD. They are also taking the $26,550 standard deduction. If this couple is in the new 32-percent bracket, they would save $3,200 in federal taxes and possibly on their state taxes.

QCDs are limited to $100,000 per individual. You must take care not to miss the deduction as the IRA custodian is not required to specifically identify the QCD on the 1099-R form. If a CPA doing a return does not know about the QCD, it is likely they will report the distribution as fully taxable.

Interest Deductions

One of the more frequent questions I am asked as a CPA financial planner is, “Should I pay off my home-equity loan or line of credit?” If the client uses it for anything other than purchasing or improving a home, they will no longer be able to deduct the interest. This change may alter the thinking of paying off a debt sooner than later in your client’s financial plan.

I have many clients in the 60- to 70-year­old range, and I find these years to be where we can maximize tax strategies if the client has retired. Today’s federal income tax rates may be the lowest we’ll see for the rest of our lives. This gives us a great opportunity to look at Roth Conversions for these clients at lower rates if their tax rates during retirement will be the same or higher than their current rates.

I usually take a multi-year conversion strategy where I convert just enough to avoid pushing the client into the next marginal tax bracket. Looking at clients’ personal financial plans coupled with a long-term tax plan is where the CPA can differentiate his or her value to clients over a non-CPA planner. Most of my clients do not bring this thinking into their retirement planning when I first start to work with them, but when I do, they can see the tremendous value.

Taking advantage of tax efficiency can make a significant difference in your clients’ personal lifestyles during retire­ment. It is most often the clients’ biggest expenditure, so it is important to help them reach their goals by following the new strategies available.


Guy  McPhail

Guy McPhail

Guy McPhail, CPA, CFP, is a principal at SAX Wealth Advisors. He is a member of the NJCPA Content Advisory Board.

Read more by Guy McPhail:

This article appeared in the July/August 2018 issue of New Jersey CPA magazine. Read the full issue.