The Republican tax bill has gifted many financial advisers with a lot of additional work in the last few days of 2017.
Advisers say they are getting peppered with questions from clients about prepaying property taxes before Jan. 1, when the new
tax bill signed into law last week by President Donald J. Trump goes into effect, capping state and local tax deductions at $10,000.
On Wednesday, the Internal Revenue Service released a
notice advising tax professionals and taxpayers that prepaying 2018 state and local "real property taxes" in 2017 may be tax deductible under certain circumstances.
"A lot of us are shaking our heads. It's hard to get a tax bill passed, but when you pass it two weeks left in a tax year, it's a lot of work for us," said Greg Gardner, president of The Gardner Group, an independent RIA with $85 million in assets under management.
ACCELERATING DEDUCTIONS
Mr. Gardner said he is telling clients who expect property tax above the new cap to pay what they can in the final days of 2017, when there is no limit on such deductions. He said the general advice he's giving clients is to accelerate deductions in the current higher tax environment, and defer income to next year when most clients' tax burdens are reduced.
"It could be a short win of $5,000, $10,000, or even $15,000 for some higher [tax] levels," Mr. Gardner said. He's following the advice himself, doubling up on his property taxes in 2017 to get ahead of next year's deduction cap, even though it'll make cash flows tight for the coming month.
Sheryl Rowling, a CPA who is also head of rebalancing solutions at Morningstar and principle at Rowling & Associates, an RIA with $330 million AUM, has been researching the tax bill since it first came out of committee and has been reaching out to affected clients.
Prepaying property taxes won't benefit everyone, Ms. Rowling said. Clients who already pay the alternative minimum tax (AMT) won't be helped, nor will clients who expect a total of property and state income taxes to be $10,000 or less.
COUNTY RULES
Also, not all counties allow taxpayers to prepay. Some local treasuries are welcoming the influx and encouraging prepayment, while others have been unable to calculate final obligations.
According to the Wall Street Journal, Connecticut isn't allowing prepayment at all.
Advisers are telling clients they should check with local authorities before prepaying. If their county allows it and they can afford to, Ms. Rowling said, clients would be wise to prepay, even if it bumps them into paying the AMT.
"If it turns out you pay a little too much earlier, you're going to get the maximum benefit this year," Ms. Rowling said. "Most people are not going to have time to prepare a mini-tax return before the end of the year. They're better off just going ahead and prepaying if you know you're not in the AMT this year."
She added that clients should avoid moves they would regret if it turns out they don't get a benefit, but prepaying is just paying bills a little early. If they end up getting a benefit on some of it, it's ultimately a good deal.
"That's the main thing — hedge your bets, no regrets," Ms. Rowling said.
RETIRED CLIENTS
Marguerita Cheng, the chief executive officer of fee-based financial planning firm Blue Ocean Global Wealth, agreed that clients should prepay if they have cash on hand, but said she is telling her retired clients that may not make sense if the money must come from qualified accounts. Because these funds are taxed at ordinary income rates, Ms. Cheng said withdrawing could bump them into a higher tax bracket and negate any benefits.
"This is true for clients with generous retirement income from defined benefit plans," Ms. Cheng said. "Also, we need to be mindful of the taxation benefits."
Michelle Fait, the president of Satori Financial, had one final piece of advice for any clients looking to prepay — save a copy of the paperwork for their tax preparer.
"Heaven knows they will have enough to do preparing clients for 2018," said Ms. Fait, whose firm focuses on planning instead of asset gathering.
