Wealth Management & the New Tax Landscape

How the new tax law might affect your decisions about investing, wealth management and estate planning?

Even when they’re simple, taxes can seem complicated. And the landmark Tax Cuts and Jobs Act (TCJA) of 2017 is anything but simple. Chances are, the sweeping new law, which took effect in January, is already touching many aspects of your life. As its name suggests, the law includes business and individual tax cuts, resulting in larger paychecks for many Americans. At the same time, the act includes plenty of trade-offs, such as limits on a variety of deductions that taxpayers have come to count on.

“It’s great to have the lower individual rates with expanded brackets,” says Jeffrey H. Winick, Wealth Strategist for Regions Private Wealth Management. Yet considering the law’s complexities, figuring out exactly where you and your family stand “is a matter of number crunching and looking at each individual circumstance.” It’s a process that calls for detailed conversations with your CPA as well as your Regions Wealth Advisor, but there are a few basics to explore first.

To Itemize or Not to Itemize

For many, the most basic decision will be whether to continue itemizing returns in light of several new limits. For example, you may now deduct only $10,000 of combined state and local taxes, and the interest deduction for new mortgages and new home equity loans (used to buy, build or substantially improve the home that secures the loan) is limited to $750,000. This is a total limit for all combined new mortgage and home equity debt. At the same time, the standard deduction has been nearly doubled, to $24,000 for couples and $12,000 for individuals.

The number of Americans who itemize deductions on their tax returns is expected to drop from 30% to just 10%, says George K. Yin, Edwin S. Cohen Distinguished Professor of Law and Taxation at the University of Virginia School of Law.

But even taxpayers who plan to claim the standard deduction should keep careful records of mortgage interest, charitable gifts and other deductible expenses throughout the year, Yin advises. An unexpected event such as a medical expense late in the year could change everything.

Your Home and Hometown

The deduction limits could also influence key decisions about where you live, especially in areas with high home prices and high state, income and property taxes, says William J. Scofield, Director of Wealth Planning for Regions Private Wealth Management. If you’re looking to buy, the reduced deductions can effectively increase the cost of your property compared with previous years’ assumptions.

“Some folks are going to absorb that extra cost and say, ‘It’s more expensive, but I like this house and the school district, and I’m going to buy it,’ ” Scofield says. Others may opt for a less expensive property.

But if you’re purchasing an expensive home and have sufficient cash on hand, you might consider putting enough down to limit your mortgage to $750,000, Winick says. That would optimize your income tax deduction under the new law, while limiting any new indebtedness.

Estate Planning

The TCJA doubles the estate tax exemption to $24.4 million for couples in 2018 (indexed for inflation) and $11.2 million for individuals. That’s good news for families with sizable estates or family businesses to pass along. But it’s a mistake to assume that this means you no longer need to do any planning at all, Scofield says. “Trust planning is still critical for protecting your assets, controlling distribution to heirs and providing professional administration,” he adds.

Another consideration is the fact that the higher estate tax exemption, like much of the tax act, will revert to previous levels after 2025, unless Congress extends the new transfer tax exemption amounts. To hedge against this uncertainty, “you basically have a seven-year planning window,” says Winick. Because the higher exemption applies to gift and generation-skipping taxes as well as estates, now may be a good time to start planning trusts or other means of transferring assets or a family business for the benefit of your kids and generations to come.

A Fresh Look at Philanthropy

Taxpayers who claim the standard deduction versus itemizing will lose a key incentive for charitable giving—the ability to deduct gifts from their taxes. But at the same time, Winick says, “bunching two or more years’ worth of charitable gifts into a single tax year, and shifting between itemizing and using the standard deduction, might generate enough overall deductions to make itemizing still worthwhile in alternating years.”

If you’re looking for a way to support the causes that matter to you while still getting a tax credit for your generosity, you may want to consider contributing to a donor-advised fund like your local community foundation. A donor-advised fund enables you to transfer cash or other assets for charitable purposes and receive the same income tax deduction as you would when donating directly to a qualified public charity. “You can then advise the fund to make gifts to individual charities from the fund on your own schedule,” Winick adds.

A Retirement Boost?

The rules regarding 401(k)s, SEP IRAs and other tax-advantaged retirement plans are largely unchanged under the new law. Nonetheless, now is a good time to sit down with your Regions Wealth Advisor to discuss how other aspects of the law may affect your planning for retirement, Scofield says.

You may, for instance, want to talk with your tax specialist and Wealth Advisor about ways to make the most of the new lower tax rates right now, Scofield suggests, since they’re set to expire in 2025 unless Congress extends the law.

You might consider converting all or part of a standard IRA to a Roth IRA. With a Roth IRA conversion, the amount of the pretax balance of the standard IRA being converted is subject to being taxed today, and you pay no income tax on future withdrawals from the Roth IRA. Although conversions do increase your adjusted gross income, with income taxes currently reduced, a Roth IRA conversion might enable you to pay tax on the converted amount at comparatively low rates, and pay no tax on the withdrawals later on, when income tax rates may have gone up.

Investing in New Business Opportunities

Businesses large and small emerged as some of the biggest winners under the law, says the University of Virginia’s Yin. Corporate income taxes dropped from a high of 35% to 21%, while owners of generally smaller “pass through” entities such as sole proprietors, LLCs, partnerships and S corporations may be able to deduct 20% of their qualified business income. The law also allows businesses to expense many of their capital investments for five years.

Despite those advantages, the rules regarding business taxes are among the act’s most complex, Yin says. He offers one example of how quickly these simple benefits get complicated. The 20% deduction for small businesses does not apply equally to all types of companies. Medical practices, lawyers and most other professional services may claim the full deduction only if their income is below $315,000 for joint filers and $157,500 for single filers. Another planning wrinkle is that the deductions are set to expire after 2025.

For some businesses, with the new rule governing C corporations and pass-through business entities (i.e., S corporations, partnerships, sole proprietorships and most LLCs), “this may be a good time to evaluate if it could be beneficial to change legal or tax status,” Winick notes. “This may not be immediately clear and may require significant analysis—one business at a time,” he says.

Talk to your Regions Wealth Advisor about:

  • How the new tax laws might affect the ways in which you’re investing for your financial goals
  • The potential effect the new law could have on your income
  • Whether your estate plans should be updated

On a scale from 1 to 5, with 1 being 'Not Good' and 5 being 'Excellent', how would you rate this article?

Press enter to submit your rating

Rate this Article

Use this form to provide additional feedback based on the rating you provided.

Thanks for Rating

Would you like to provide feedback?

Thanks for your feedback!

This information is general in nature and is not intended to be legal, tax, or financial advice. Although Regions believes this information to be accurate, it cannot ensure that it will remain up to date. Statements or opinions of individuals referenced herein are their own—not Regions'. Consult an appropriate professional concerning your specific situation and irs.gov for current tax rules. Regions, the Regions logo, and the LifeGreen bike are registered trademarks of Regions Bank. The LifeGreen color is a trademark of Regions Bank.