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With the impending sunset of the Tax Cuts and Jobs Act ("TCJA"), investors face unprecedented uncertainty about the impact to their portfolios. With the future of tax law unknown, how do you help alleviate existing and prospective clients' concerns? Consider an ism inspired by a famous Wayne Gretzky quote: "Skate to where the puck is going to be, not where it has been."
Although we can't predict how tax laws will evolve, you can help clients "skate to where the puck (in this case, tax law) is going" by discussing strategies to help reduce their tax bill. Here are a few to consider:
- Roth conversions. While the upfront tax bill may be significant, a Roth conversion can provide clients with the opportunity to take advantage of tax-free compounding returns on their retirement investments for decades to come.
- Tax-advantaged bonds. Treasuries and municipal bonds can help reduce clients' taxable income. Before investing, clients should evaluate yields on a tax-equivalent basis and account for the after-tax income a taxable bond could earn.
- Charitable giving. Clients who itemize deductions could offset a portion of their income with charitable giving. Split-interest giving vehicles, such as charitable remainder trusts and pooled income funds, allow clients to retain an income stream from contributed assets while receiving an upfront charitable deduction for the actuarial value of what will ultimately pass to charity.
- Tax-loss harvesting. Harvesting losses to offset taxable gains can reduce taxable income in a given year and effectively defer the tax burden to a future date or even eliminate it completely on death.
- Exchange funds. Clients with large, concentrated positions with significant built-in capital gains may be able to use an exchange fund to diversify and defer tax consequences. If certain conditions are met—such as minimum wealth requirements and acceptance of the stock by a private offering—clients could exchange the concentrated position for shares of a broadly diversified portfolio in a non-taxable private partnership transaction while deferring taxes until the future sale of the securities. Alternatively, these assets could be held until death and receive a step-up in basis thus eliminating the capital gain consequences.
Bottom line: A well-articulated ism can open the door to a conversation about strategies to help clients skate to where the puck is going as the sunset of the TCJA draws near.
"Although we can't predict how tax laws will evolve, you can help clients 'skate to where the puck (in this case, tax law) is going' by discussing strategies to help reduce their tax bill."
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The Firm does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Tax laws are complex and subject to change. Investors should always consult their own legal or tax professional for information concerning their individual situation.
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