Take control of the tax-reform conversation, because your clients are full of questions

Principal® Point of View analyzes financial news and trends face to face with our internal experts in a monthly roundtable discussion. Panelists highlight issues to help keep advisors up to date.

October 2018 panel

Robin Anderson, senior economist, Principal Global Investors

Tyler DeHaan, director, Retirement Solutions (pictured above)

Rachel Stanley Nguyen, assistant vice president, government relations

Scott Van Wyngarden, retirement income and tax consultant

Mark West, assistant vice president, Advanced Solutions

Heather Winston, assistant director, client relationship, direct to consumer

Principal Point of View: Tax reform

Photo of Robin Anderson speaking at a roundtable.
Robin Anderson

Tax reform (the Tax Cuts and Jobs Act) that took effect at the start of the year delivered a dose of financial juice to many households, despite economic hits they may have since suffered.

Robin Anderson, senior economist, says that the average household income will see an extra $930 in tax savings, even as trade-war tariffs nip $127 out of the same pocketbooks.

As 2018 winds down, taxpayers wonder if and how they might make last-minute adjustments to maximize returns.

“I think there will be a lot of surprises in the spring,” says Scott Van Wyngarden, a Principal tax consultant.

Yes, the average W-2 filer should have it easy. Self-prep systems such as TurboTax should work fine.  

Clients near retirement shouldn’t panic.

Photo of Scott Van Wyngarden speaking at a roundtable.
Scott Van Wyngarden

“Overreacting because of a tax-law change doesn’t make any more sense than overreacting to a shift in the market,” says Mark West. For more information check out tax reform: 13 things investors should know right now.

This is the time for advisors to be proactive, says our panel. Don’t be afraid to recommend that your clients supplement your own good investment ideas with tax expertise from a friendly CPA. They’ll respect you as the hub of a financial-knowledge network for your clients—in the same way you respect the car mechanic who recommends an auto body repair specialist for that fender bender instead of his own service.

Here's an opportunity to grow your business—a chance to trigger conversations among those who may have been less inclined to sign up for your services without today’s tax uncertainty and market volatility.

“A good strong advisor that’s building a network with attorneys and CPAs will be at a premium,” says West. “They will do well.”

Key points to consider

Remind clients of simple steps that make a difference.

Make sure to check withholdings. If those are out of alignment, even a tax savings could result in an unpleasant lack of refund or even a bill next spring. Consult the calculator at irs.gov.

Remember the federal deduction for your state and local taxes is capped at $10,000.

Neither will you be able to itemize as many charitable donations. (More on that in a minute.)

And be sure to maximize your retirement savings. That’s one of the easiest ways to reduce taxable income, even for small business owners.

Charitable giving gets more complicated.

The standard deduction threshold for charitable giving nearly doubled to $12,000 for individuals and $24,000 for couples—which makes itemized deduction generosity less of a tax savings from year to year.

Charities themselves may need to wrangle with inconsistent budgeting as some taxpayers donate in larger sums less frequently to try to reach the threshold for itemization.

Photo of Mark West speaking at a roundtable.
Mark West

Those age 70½ and older also should consider a qualified charitable distribution (QCD), paid directly to charities from their IRAs. These count toward a retiree’s required minimum distribution (RMD) but aren’t taxed as income. So, it’s a tax savings even without the added benefit of itemized charitable deductions.

Some taxpayers may opt for donor-advised funds, where they can control the withdrawals.

“Until we’ve been through a cycle or 2,” says West, “everybody’s going to be trying to sort out what this really means and what’s the best way to handle it.”

“I kind of go back to the fact that people usually give money to charities for reasons other than the tax deductions,” says Tyler DeHaan, director of Retirement Solutions.

Smaller small businesses may get surprised by a tax hike.

Many small businesses will benefit from a 20% tax deduction on qualified income. But it may depend on your type of business.

Service firms such as lawyers, doctors and accountants may not enjoy the tax break if their overall taxable income (not just business income) is too high—$157,500 for singles or $315,000 for married couples filing jointly.

Those pitfalls must be balanced with other features of tax reform that provide a boost to business.

Photo of Heather Winston speaking at a roundtable.
Heather Winston

“Like most things that are related to taxes,” says Heather Winston, “there’s a yin and yang to decision-making.”

Just don't let your clients outsmart themselves. Crunch the numbers. Even though a C corporation tax rate of 21% may look favorable compared to, say, a personal rate of 37%, you can’t be certain you’ll reap the benefits without making all the calculations.

What’s more, remember that some provisions affecting individuals and businesses other than C corporations are scheduled to end after 2025.

Get comfortable with change, because “tax reform 2.0” is on the horizon.

If a second wave of tax reform passes next year, that could add up to $2 trillion in lost revenue that may sap the broader market with slower GDP growth or other side effects.

But Rachel Stanley Nguyen, assistant vice president of Principal government relations, says that the likeliest legislation to emerge from Congress may be focused on positive innovation in retirement savings and not yet make individual tax reform a permanent feature.

Regardless, it’s good to stay on top of this season’s lively tax news.

West says, “You don’t want to be the advisor getting the call, Why didn’t you tell me about this?” 

The subject matter in this communication is provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.