How Does the New Tax Legislation Affect Your POZ Clients and Prospects?

December 20, 2017

With tax reform passing both the House and the Senate, it now heads to President Trump’s desk where it will likely be signed into law some time before Christmas.  With tax reform now a virtual certainty, I’d like to comment on how this legislation will affect the typical POZ client or prospect who is looking to shield themselves from the impact of higher tax rates by getting to the zero percent tax bracket.

Most Americans should not be greatly affected by the addition and elimination of deductions and exemptions that resulted from this bill.  Deductions were added (e.g., the Standard Deduction was increased to $24,000, the child tax credit was increased to $2,000) and deductions were taken away (e.g., personal exemptions were eliminated, and a $10,000 cap was placed on state and property tax deductibility) but, in the end, none of these adjustments are major game changers (unless you have an enormous property tax bill and live in highly taxed states such as California, New York or New Jersey).

The real benefits of this tax reform are to be felt in the lowering of tax brackets.  As I’ve said previously, the creation of a 24% tax bracket that extends all the way up to $315,000 represents a massive planning opportunity for those who want to take advantage of lower tax rates before they go up for good on January 1st, 2026.  Why?  Because when clients and prospects shift assets to tax-free, those dollars get piled on top of all their other income and are taxed at their highest marginal tax bracket.  Under the 2017 tax code, most of these folks would have paid taxes at the 25%, 28% or even 33% tax bracket. Starting in 2018, they’ll fall squarely within the 24% bracket.  Taxes just went on sale!

What follows is a simple before and after comparison of a client who, under the 2017 tax brackets, was shifting assets up to the top of the 28% tax bracket ($233,350).  This example assumes that the client neither benefited nor was adversely affected by the changes to deductions and exemptions.  In other words, this is purely a comparison between the 2017 tax brackets and the 2018 tax brackets.

Under the 2017 tax plan, their total tax bill would be:  $52,223 (effective rate of 21.2%)

Under the 2018 tax plan, their total tax bill would be:  $44,583 (effective rate of 19.1%)

This represents a total annual savings of $7,640 per year. And this is assuming that in 2018 the client only chose to only shift up to the top of 2017’s 28% tax bracket–$233,350.  Now that the 24% tax bracket extends all the way up to $315,000, clients may want to evaluate the benefits of shifting even more money on an annual basis.  Remember, tax rates will stay at these historical lows for 8 years, and then they’ll revert to their 2017 levels.  We actually know the day and the hour when it will happen!

At the end of the day, the cost of getting to the zero percent tax bracket is this:  you have to be willing to pay a tax.  If tax rates will remain at historical lows for an 8-year period, then our clients and prospects have a limited window of opportunity within which to act.  Now is the time to educate our clients on this unprecedented opportunity before the window slams shut!

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