Financial advisors in high-tax states are figuring out how
to help clients hit hard by added tax burdens and retain
those who are pulling up stakes and moving to lower-tax states.
Many of their clients are impacted by the current federal
tax law’s $10,000 cap on state and local tax (SALT) deductions. In a number of
municipalities in the New York tri-state area, $10,000 barely makes a dent in
property tax bills alone. On Tuesday, New York, New Jersey, Maryland and
Connecticut filed a joint lawsuit to strike down the cap, claiming
it’s unconstitutional and designed to hurt “blue” states that lean toward
Democrats.
Advisors in high-tax states (where residential real estate
values are often very pricey) are also helping clients understand the new cap
on home mortgage interest deductions. Homeowners can now deduct interest paid
on new loans of up to $750,000 of debt (old loans are grandfathered at $1
million). In Westchester County, N.Y., where 73 percent of homes have property
taxes above $10,000, 19 percent of home purchase loans exceeded $750,000 last
year, according to ATTOM Data Solutions, and home sales there have plunged.
Steven Kaye, president and founder of AEPG Wealth
Strategies, an RIA firm in Warren, N.J., has been sharing tax-saving strategies
when he meets and corresponds with clients. Although some people are angry
about the tax law changes, he said, “It hasn’t really hit anyone in the
pocketbook yet.” He expects clients’ interest in SALT strategies to “ramp up”
once they see their year-end tax bills.
One strategy he suggests is for homeowners to fractionalize
ownership of a residence with tax-paying children or with parents, either
directly or through a non-grantor trust arrangement, he said. He has also
talked to clients about changing a second residence to a rental property.
However, homeowners who do this must be very aware of the rules regarding the
number of days a home may be considered for rental or personal use, he said,
and they should make sure they have enough liability coverage.
Another potential tax-saving strategy is to buy a condo,
instead of a second single-family residence, and put it in a rental pool. Kaye
said he purchased a “hotel condo” at a resort, for zero down, and is enjoying
its services, amenities and positive cash flow.
Barnum Financial Group, a financial planning and advisory
firm headquartered in Connecticut and with offices in five states, has seen
more significant client interest in the recent tax changes than it did for past
tax changes, said Adam Belardino, a financial planner in Barnum’s Elmsford,
N.Y., office.
“Our clients in California and New York were the most
proactive in discussing their respective income-tax liabilities due to the tax
code change,” he said.
With help from their accountants and their Barnum teams,
many clients prepaid a significant amount of their 2018 taxes in 2017 in order
to be grandfathered into the 2017 tax exemptions, said Belardino. Another
strategy the firm has always used, but which has grown in significance due to
the tax code changes, he said, is converting clients’ current IRAs to Roth
IRAs. Many people have benefited from a decrease in their federal tax rate, he
said, so it was “quite advantageous” to review these conversions.
Another tactic Barnum has used, also with assistance from
clients’ accountants, is maximizing clients’ charitable organization donations
through family foundations and donor-advised funds.
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