Speaker: Uncertainty Snarls Tax Planning

Chris Gaetano
Published Date:
Dec 11, 2017
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Congress is in the middle of crafting what has been promised to be the most significant overhaul to federal tax policy in decades, though a speaker at the Foundation for Accounting Education's Tax Planning for Individuals Conference on Dec. 7 noted that the timing of all this makes it difficult to plan for next year. 

Kenneth L. Rubin, a partner at RubinBrown LLP, said that when he was preparing his presentation, he had a slide that said "new developments" covering items that were in the House bill. But then the Senate began firming up its version, so he revised the "new developments" slide again. Then the Senate inserted last-minute changes, leading Rubin to, yet again, revise the "new developments" slide. Needless to say, he said, the bill is something of a moving target. 

"The problem with this is you've got three weeks left. You'll probably have a week left at the end of the year, when you know what the law is, to figure it out. So the question is: Is there planning to do here?" he asked. 

One issue is that the tax bill is in a state of constant flux. The Senate was going to eliminate the alternative minimum tax, as the House already did, before deciding to keep it at the last minute. Owners of pass-through entities were originally going to be able to deduct 17.4 percent of their income, but then this rose to 23 percent. The Senate was going to eliminate all deductions for state and local taxes but then added a $10,000 exemption for property taxes, as in the House. Needless to say, it can be unclear as to exactly what advice someone should be giving a client at this time. 

For example, Rubin said that he has a lot of S corporation clients, and over the years he has told them that they should try to minimize their salaries while maximizing their distributions. At the same time, they cannot avoid the imposition of payroll taxes by forgoing reasonable compensation. So tax planning becomes a delicate balancing act to minimize their taxable income, but not too much. One such client, he said, recently began making much more money this year, and so took $80,000 in bonuses, which pushed the client's compensation up to $180,000 total. 

"Are they going to go back and say, 'Why didn't you take $250,000? Are you just playing with your number instead of what was really reasonable?' Is that W2 piece [where the amount of the deduction is limited to 50 percent of the W-2 wages of the taxpayer] kind of a way to say, 'Don't worry anymore--you just won't get the lower rate?' I don't know," he said. 

Rubin brought up another example regarding the elimination of many itemized deductions and the alternative minimum tax (AMT): The client is a semi-retired doctor with a very large retirement plan: $8 million with a minimum distribution of $400,000, though he also has a large number of advisory fees because most of the money is in retirement plan accounts. This year, though, the client had a large loss on a rental property, so he worked with his accountant to convert some of his IRAs to Roth IRAs, which then meant that he didn't have any taxable income for that year, and likely will not have any this year either since he's had no income except dividends and interest. However, he said, the client does owe $30,000 in state taxes on the $400,000 distribution.

So the question came up: Should the client pay this year or next? The client gets no deduction this year because there's no taxable income. The client might not get the deduction next year either because the bill will probably wipe out the state and local tax deduction and he isn't entirely sure whether the $10,000 property tax exemption will still be there by the time the bill becomes law. 

"So what do I tell this client today? ... If I am 100 percent sure [he's] in AMT, I would tell [him] to wait until next year and take a chance that maybe some of it will be deductible. That is a real-life example I was on the phone with yesterday," he said. 

Rubin said that the uncertainty regarding the bill is already affecting ongoing divorce cases, as the bill proposes eliminating the deduction for alimony payments. Congress, he said, decided to put in this provision because Republicans believe there is a significant amount of unreported alimony income, though he was skeptical that this is the case. Regardless, though, he said that he has already been getting calls from clients going through divorces about what exactly this means for them. Clients with older agreements, he said, shouldn't have anything to worry about so long as they don't change the agreement in a way drastic enough to count as a new agreement. For those whose divorces are ongoing, though? 

"I don't know exactly what's going to happen with this one," he said. 

Then again, he's not confident that most people in Congress do either, with both the alimony section and with the bill overall. 

"If you read through this thing, there is absolutely no way that, and they're very smart people in Senate and Congress, but there is no way they understand this. No possible way. I will say there's a few of them. ... But if you read through it, there is always something in there that is so far removed that maybe one person in the room has even seen this, but somewhere there was a lobby to make it happen," he said. 

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