Coordinating with Your Tax Professional and Financial Advisor

Coordinating with Your Tax Professional and Financial Advisor

February 05, 2018

Many of us have questions about how the new tax law will affect us going forward - namely, will I be paying more or less tax?!

Here are a few things for you to keep in mind as you prepare to meet with your tax professional this year:

  • Realize that they won’t have all the answers just yet! The tax bill is now a law. However, the regulations that provide clarity about how to interpret and apply the law have not yet been finalized - this will take some time.
  • If you own rental property reported on Schedule E of your tax return, you will NOT lose the ability to deduct the property taxes related to the rental(s). The new $10,000 limit on the deduction of state and local income tax and property tax refers to the deduction on Schedule A and does not apply to rental property on a Schedule E.
  • If you are a sole proprietor (your income is reported on Schedule C), you will still be able to deduct your ordinary and necessary business expenses. The elimination of the deductibility of unreimbursed employee expenses does not affect the deductions for a sole proprietor. This change WILL affect W-2 wage earners who had unreimbursed employee expenses which were deductible (on Schedule A) under the old tax law.
  • One of the most complex areas of the new tax bill is the deduction for pass-through business income. If you are a sole proprietor or recipient of pass-through income from an S Corp or other entity, be sure to discuss this with your tax professional. A common question is whether a change in business structure makes sense, but, as mentioned in the first point, it may still be too early to determine this.

Your tax professional will likely be able to run a comparison for you showing what your return would look like under the new tax law (this is the last year that tax returns will be prepared using the old tax law). This can give you a sense of how the changes will affect you. This will also help determine what your new marginal tax rate is. (see my previous article outlining the new brackets and rates)

Once you have this information, it’s important to share it with your financial advisor, as your marginal tax rate and where you fall within the bracket is the starting point for many financial planning assumptions and strategies. In fact, it’s a good idea to give your financial advisor copy of your tax return every year so they can work with you to plan ahead for the coming year.

Some things your financial advisor may take into consideration when planning ahead include:

  • Updating the withholding on your RMD based on your new tax bracket
  • Creating a new capital gain/tax loss harvesting strategy based on your new marginal tax rate and where you fall within that bracket
  • Reassessing a Roth IRA conversion strategy considering the elimination of the recharacterization option-Planning the timing of exercising stock options
  • Planning the timing of distributions/deductions: With the increase in the standard deduction, many people may find themselves no longer itemizing. To maximize the benefit from charitable contributions and other deductions, it may make sense to develop a timing strategy to lump them into one tax year.
  • Reassessing your overall wealth transfer/gifting plan considering the new lifetime exemption amount

Coordinating the efforts of your tax professional and financial advisor is an invaluable way to plan well and be well.