With the first year of the Trump administration’s new tax law—the Tax Cuts and Jobs Act—under their belt, financial experts have gotten a grasp on the new system and what strategies work best when it comes to tax planning, especially for high net-worth individuals. While tax rates have dropped, other changes could still leave high earners who don’t plan accordingly with a higher tax bill. So what are the major changes taxpayers should be aware of, and what planning strategies should they embrace? Business Report called on a panel of local tax and financial experts for their top advice:
1. The most dramatic change involves standard and itemized deductions. While the new tax law nearly doubles the standard deduction, it also eliminates several itemized deductions, primarily those used by wealthy individuals. The options remaining essentially boil down to three areas for high earners, says Jason Windham, president of The Shobe Financial Group:
• Charitable contributions
• State and local taxes, now limited to $10,000
• Mortgage interest expense
Tip: Focus on is charitable contributions, says Windham. To surpass the standard deduction, taxpayers may want to consider stacking annual donations. Windham suggests giving one charitable contribution on Jan. 1 and another on Dec. 31, so that they’re in the same year but still spread out. Others suggest stacking multiple years.
“Where you can really have an impact is charitable giving,” says Bob Weylandt, a wealth advisor with the J.P. Morgan Private Bank. “For those who give at the standard level, think about accelerating donations five to six years in the future.”
2. The estate tax exemption also temporarily rose to $11 million for individuals and $22 million for couples, meaning estates valued up to that amount can be transferred without a 40% tax. The previous limit was $5.49 million, which will return in 2026, so experts encourage individuals with large estates to make transfers now.
Tip: Elderly individuals with appreciated assets, like stocks or mutual funds, should hold onto those until death. That’s because the assets get a step-up in basis at death and can be sold immediately without owing capital gains tax. “If you die owning a house or stocks, your heirs get a basis on it equal to fair market value at your death,” says Jones Walker partner and tax attorney Trevor Wilson. “They could sell it and not pay tax. Real estate is where this really comes into play.”
3. For retirement accounts, wealth experts have a strategy to avoid high taxes when it comes to required minimum distributions. After age 70 1/2, clients with IRAs are required to withdraw annual distributions from the account, which is then taxed. But those taxes can be avoided by gifting the money to charity, says Steven Morgan, executive director and market lead for the J.P. Morgan Private Bank in Baton Rouge.
“Today, wealthier clients don’t need the money, but by law they have to take it out,” Morgan says. “So what clients are doing is gifting it to a nonprofit. It counts as a minimum distribution, not as income. The nonprofit benefits, and clients don’t have to pay a nickel in taxes on the money that came out.”
4. A new tax-break opportunity, created by the new tax law and generating a lot of buzz, is the Opportunity Zones program. Businesses and individuals can curb capital gains taxes when they invest in qualified opportunity zones. The program intends bring new investment to underserved communities in need of revitalization.
“For the right client, it makes sense,” Morgan says. “Someone who has had large capital gains may want to invest in opportunity zones. We have a couple around here. It’s a long-term investment for someone to defer taxes. We’ve had people really interested in it.”
5. Another money-saving strategy under the new tax code involves Section 199A, which allows a 20% deduction on qualified business income of pass-through entities. High net-worth individuals often own pass-through businesses like S corporations and can see big benefits from 199A.
“If you’re a small business owner, an area to investigate is Section 199A to reduce business income,” says Windham, who also suggests business owners look for ways to maximize income from the pass-through entity to get a larger deduction, such as reducing expenses or reviewing compensation.
Wilson, meanwhile, adds business owners should also revise leases from triple net to a gross- or full-service lease to increase the likelihood of rental income qualifying for the 20% reduction. “Rental income from triple net leases generally does not qualify as qualified business income.”
6. Creating donor-advised funds is also a good strategy for high earners. With their own private foundations, they can donate large sums at one time and have multiple years to spread it out as they wish. The best way to do this is with stock, Windham says. “It’s worth a ton but will be taxed like crazy,” he says. “You can gift it to a donor-advised fund and get a full deduction, avoid taxation. It’s a double whammy.”