Advisors Dealing With A Flood Of Tax Anxiety

By Steven A. Morelli

Talk of pending tax increases has some advisors busy with clients who are anxious to plan now.

Much of the focus lately has been on companies because of President Joe Biden’s latest proposal that includes infrastructure spending and corporate taxes through undoing some of the Trump administration’s tax cuts.

Top earners and asset-holders have also been in the spotlight because of Biden’s plan to raise taxes on people making more than $400,000. This week, the administration clarified that the income limit applies to households, not individuals. As a result, many more families might be paying higher taxes than some might have thought originally.

The specifics are targeted on individuals earning more than $400,000, such as the top tax rate increasing to 39.6%, up from 37%, and applying withholding taxes for income higher than $400,000. That has top earners concerned, but that tax anxiety is spreading across the wage spectrum.

“I mean, everybody's talking about it,” said Nadine M. Burns, a planner with A New Financial Plan, Ann Arbor, Mich. “We deal with the mid-affluent, who are usually employees as opposed to business owners. The majority of their wealth is made up of retirement savings in tax-deferred accounts, which means that they're concerned about taxation in retirement. Something might look like a million dollars in their portfolio, but is that not really $700,000?”

Two strategies that frequently come up are Roth IRAs and charitable donations. Burns said that although Roth IRAs are a central part of tax planning, they are limited.

“You can't put a million dollars into it,” Burns said. “You can only put $7,000 in a year if you're over 50. Then that amount grows tax free.”

But there are other strategies available with a Roth for high-earners who are making a few hundred thousand annually before retirement.

“So now they're just getting Social Security and whatever they take from their account or small pension, very small pensions, usually,” Burns said. “So then we might take some of their IRA money, pay the taxes on it each year, and convert it to a Roth.”

Another strategy for high-asset holders involves the required minimum distribution.

“If you regularly donate to a charity, you can take the distribution that's required and donate that to a charity directly from your IRA account,” Burns said. “You don't get taxed on that amount personally, because you don't have to show it as income.”

Fewer people are taking charitable deductions because of the tax cut act, which increased standard deductions and simplified taxes for many people. But Burns said people can still enjoy an extra benefit from their charitable giving by satisfying their RMD without having the distribution count as taxable income.

Life, Inflation And The Long View

May Jiang, a tax and financial advisor at Offit Advisors, Laurel, Md., has a range of clients. Many of them are concerned about taxes but her wealthier clients have more to be worried about. They are not concerned only with earnings and assets, but with estate taxes as well.

Along with all the other tax strategies, it is important to remember the role life insurance can play in planning. A cash value policy can allow money to grow tax-deferred and cover estate taxes, another growing concern as Biden has discussed lowering the exemption.

A whole life policy and a trust strategy can help reduce the impact of estate tax changes.

Matt Stephens, a financial advisor with AdvicePoint, Wilmington, N.C., said he has been talking to anxious clients about Roth and charitable giving strategies, but another concern is the possibility of a villain rearing its head again.

“A conversation we’re starting to have more now is about inflation,” Stephens said. “Taxes will probably go up to pay for all the government spending, but they can also take steps to devalue the currency, causing inflation to make the debt easier to pay. That’s like a stealth tax on all of us, so we are taking steps to prepare for that as much as we can.”

Christopher Lyman, a planner with Allied Financial Advisors, of Newtown, Pa., said he is hearing from clients about tax concerns. He recommends Roth IRAs and other strategies, but he also urges clients to take the long view.

“People are certainly worried about these tax increases and we advise them to stay focused on their long-term goals,” Lyman said. “Tax law changes frequently and we do not want to completely change course due to something that could be fairly short term.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].