The Showdown Over Taxes

The Tax Cuts and Jobs Act, the tax law in place today, was passed by Congress in December 2017.

However, many individual and small business TCJA provisions will expire at the end of the year unless Congress does something.

With a thin Republican majority in the House, the Republican majority in the Senate, and President Trump in the White House, it's widely believed they will pass the TCJA and extend it into the future or even make it permanent.

But the thin Republican House majority makes passing legislation complicated.

The state and local tax (SALT) cap is a thorn in the side of Congress members who live in high-tax states.

Fiscal hawks are concerned with increasing debt and deficits.

A wild card is whether a new tax provision is added to the TCJA to win votes and pass the legislation.

Many hurdles exist if Congress wants to extend the TCJA into the future. Major tax changes do not come around very often. When they do, they often create uneasiness about how they may impact individuals and their families.

So, what's next?

Regardless of how the debate in Congress ends, the increase in media attention allows financial professionals the opportunity for a legislative update with clients to discuss how taxes can impact their financial goals.

Here are four tax strategies to consider discussing with clients as Congress addresses the future of American tax policy.

1. Tax Gain Harvesting

Do your clients have mutual funds inside of a non-qualified account?

If so, do they receive unwanted or surprise capital gains distributions at the end of each year?

If so, it could be worth having a conversation about whether selling these mutual funds, realizing a possible tax event, and putting those assets into a tax-deferred vehicle makes sense.

An annuity can help defer taxation of these assets until they are distributed per qualifications, which may help minimize the tax impact they may have on your clients' portfolios.

2. Tax-Loss Harvesting

Tax-loss harvesting is selling non-qualified assets at a loss.

An investor would sell at a loss to realize the paper loss to offset capital gains.

If the loss is then consumed by purchasing a material good, the loss is realized.

If the loss is invested into another asset, it has the potential to grow and earn back the loss based on the market performance of the asset.

But beware of the wash sale rule: Assets cannot be reinvested into a substantially identical security within 30 days for fear of wiping out the tax loss.

3. Partial Roth Conversions

Your clients could consider doing partial Roth conversions.

This strategy can be an effective planning tool for clients who are small business owners who expect to have lower cash flow and may see the potential of lower taxes for the year.

These gains and losses flow from the business to the individual.

This will give some extra room to realize taxable gains without putting the individual into a higher tax bracket.

4. Roth Contributions

Do not sleep on discussing the opportunity of Roth contributions.

Often, clients can be nervous about putting money away that they can only get back once they reach 59½ years of age and reach a five-year holding period.

Understandably, life happens, and clients may want access to cash in case of a major life event.

The beauty of the Roth contribution is that they can always access their contributions tax- and penalty-free.

This may give a client peace of mind knowing a contribution to a Roth doesn't necessarily mean they won't be able to access this money in emergencies.

The debate in Congress regarding the TCJA provides an excellent opportunity to highlight the value of proactive retirement planning.

Reach out now to high-net-worth clients to discuss various strategies that can have a long-term impact on their financial goals.

Don't miss this opportunity to have a timely and impactful conversation.