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 to capitalize on a lower tax rate. Or maybe they’re considering taking capital gains now to avoid paying 20% in taxes, which is scheduled for 2013. Give them all of the scenarios associated with their questions, without overwhelming them. Provide them with the knowledge to make an informed decision rather than speculate on what could happen.