More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
One of the most common questions that Financial Finesse has been getting from employees on our hotline lately has been “How will the 9-9-9 tax plan affect me?” We haven’t even elected a new president yet, but the idea of an overhaul to our current tax system is top of mind for many Americans. I’d probably bet your clients are also wondering about how many of the proposed policies would affect them, which means advisors have a difficult task at hand—maintaining the balance between helping clients prepare and plan for possible tax reform while also keeping them from overanalyzing and worrying about the specifics of any one policy. Here are some points to consider in performing that balancing act for your clients:
Avoid getting sucked into political conversations. You may know that Cain’s 9-9-9 plan was actually created by a fellow financial advisor. You may also have an opinion about it and other policies that might leak into your work with clients. Maybe you think that Obama’s tax plans will hurt the economy or worry that Cain’s plan will raise taxes on the middle class and widen the deficit, but your clients may or may not care. Even worse, they may not agree with you. Avoid politicizing with clients and shift your perspective to focus on what could change and how that would affect them individually. Focus less on the merits of any specific policy. Instead, be prepared to answer their questions objectively.
Have viable answers in your pocket to the ‘What ifs?’ While Cain’s radical plan may never be enacted (Intrade currently has his chances of being elected at around 2% as of this post), it shares many characteristics with the tax reform proposals of other Republican presidential candidates, as well as the President’s bipartisan Simpson-Bowles commission. They’re all headed in the same direction of fewer deductions and lower rates, especially on investment income.
On the other hand, with the deficit and spending continuing to rise, there’s also a good chance we could see tax rates go up in the near future. As you may already know, it could happen automatically in 2013 if no change is made, along with a new Medicare tax on net investment income for higher income individuals.
With all the ‘What ifs?’ the best place to start is gauging how each client feels about the current situation. You could find clients have questions or fears about losing their home mortgage deduction, so determine how that would affect their bottom line. When you factor in the standard deduction and how much of their mortgage payment is actually interest, it may not have as big an impact as they thought. If they’re worried that rates are likely to rise, they may have questions about converting their pre-tax retirement accounts into Roth accounts in order
Keep them focused on what’s really important. It’s easy for clients to get distracted with all the hype of each candidate’s policies and miss the big picture of what really matters to their financial success. One of our Financial Finesse CFPs recently talked to someone who spends a lot of time reading financial news and analyzing each candidate and their policies, yet he is living on credit cards, growing his debt daily (which is currently approaching $25,000) by frequently eating out and taking vacations, and is on the verge of filing bankruptcy. When he met with our planner, he said his single biggest concern was tax management, which as you can imagine was quite a shocker to our planner considering the employee’s overall financial picture. Luckily, our planner was able to turn what started out as a theoretical (and probably not very productive) conversation about the future of tax policy into a very meaningful conversation about the employee’s overall financial behavior.
Advisors have an important role in helping clients stay focused on what really impacts their big picture rather than on the things they ultimately can’t control.
When it comes down to it, how savvy your clients are with their finances and in their investing decisions is going to far outweigh any impact a change in tax law would have on their ability to retire. There are millions of people working with financial advisors. You can have a huge impact on your clients’ lives and, dare I say it, in helping to turn around this economy without taxing anyone at all. How many politicians can say that?
Additional Resource: Forbes: What could tax reform mean for you?