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You’ve filed your taxes. Now what?

This year’s tax changes raise special wealth and investment considerations for next year’s filings.

April 17, 2018
Emily Acquisto

The Tax Cuts and Jobs Act of 2017, passed in the last days of December, brings significant changes to tax law. If you have investments or estate plans, next year’s tax return could look a lot different from the one you just filed.

“Now more than ever, taxpayers need to start from scratch in their tax planning,” said Grey Merryman, senior director of wealth planning for Wells Fargo Private Bank in the mid-Atlantic. “Don’t rely on what you did this year because the rules have changed.”

New tax brackets and increases to the standard deduction are among the sweeping changes expected to have a broad impact on taxpayers, Merryman said. With the standard deduction raised to $24,000 for married couples and $12,000 for single filers, he said, it might make more sense to take the standard deduction instead of itemizing.

Taxpayers who continue to itemize may want to keep other new changes in mind, such as deduction limits on mortgage interest and state, local, and property taxes. Business owners will also want to review new rates and deductions for corporations with their tax advisors, he added.

Tax implications for investors

According to a recent Wells Fargo/Gallup survey, investors are largely divided on the possible effects of recent changes to the income tax law, with those earning $90,000 or above more likely than those earning less to expect personal benefits from the personal income-tax changes.

However, it’s important investors realize any benefits could be temporary because Congress set the law to expire in 2025, said Kris Gretzschel, Wells Fargo Advisors Planning & Life Events manager.

“The 2025 sunset can make planning difficult,” she said. “Investors looking to maximize these gains will want to consider their long-term strategies. You don’t want to have a permanent solution for a temporary problem.”

For example, Gretzschel said, the new tax law repeals a 2 percent deduction on investment expenses, which could lead some investors to reconsider the use of certain investment products.

“Investors really need to think about the reason they chose the approach or product that they did and then weigh the advantages of meeting an investment goal over a tax goal, or vice versa,” she said.

While the 2017 tax law preserves many incentives for retirement savers, it removes the ability for investors to recharacterize, or undo, Roth IRA conversions occurring in October 2018 and after. Because of that change, Gretzschel said, taxpayers who are thinking of converting their traditional IRA to a Roth IRA will need to carefully consider the tax consequences, as they will no longer have the ability to change their mind.

“A Roth conversion can still be a useful tax strategy in years with low taxable income or a market decline in retirement plan assets,” she said.

Review your estate plans
Investors may want to review their estate plans to ensure changes in the tax code align with their long-term wishes, said Marcia Urban, senior legacy and wealth planner for Abbot Downing. For example, the new law doubles the “applicable exclusion” for estate plans to $11,180,000 per person, effective in 2018. Existing documents may include “formula clauses” that may now result in all or more assets being used to fund credit shelter trusts, with little or no assets left to the surviving spouse, Urban said.

If Congress lets the changes in the tax code expire in 2025, she said, failing to plan may result in lost opportunities if those amounts and other changes go back to what they were before.

Estate plans created before 2013 should be reviewed, she added, and even recently created plans may need to be reconsidered.

Instead of doing less estate planning, these higher thresholds could be viewed as an opportunity to do more. In particular higher generation-skipping exclusions provide an opportunity for multigenerational wealth preservation planning, she said.

Charitable giving strategies
Estate planning is not solely about estate taxes, Urban added.

“Individuals with charitable planning goals may benefit from adjustments to strategies and timing,” she said. “If no estate tax is owed, and a charitable bequest doesn’t result in any tax reduction, perhaps now is a good time to consider a lifetime gifting strategy.”

Taxpayers who are itemizing next year’s returns will find that cash contributions to charitable organizations may now offset up to 60 percent of adjusted gross income, instead of 50 percent. However, the higher standard deduction may make it harder for some investors to realize tax benefits from individual charitable activities.

“For investors not itemizing deductions,” Gretzschel said, “it may make sense to bundle charitable contributions into years when a taxpayer is able to itemize.”

Donor-advised funds, or accounts available through public charities, offer a way for investors to contribute as often as they like, grow the contributions tax-free, and then issue grants to qualified charities.

“This could be an option for charitable-minded investors looking to get above the new, higher standard deduction,” Gretzschel said.


Investment and insurance products: NOT FDIC-Insured NO Bank Guarantee MAY Lose Value

Wells Fargo Advisors is not a tax or legal advisor. If legal, accounting, or tax assistance is required, the services of a competent professional should be sought. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company. Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Abbot Downing, a Wells Fargo business, provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

Contributors: Julie Andrews and Vince Scanlon
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