The latest Republican tax reform plan is a mixed bag for advisors' clients.
Those living in high-tax states such as California, New York and New Jersey could face a net tax hike rather than tax cut if the deduction of state and local income taxes from the federal income tax bill is eliminated, as suggested in what the White House and Treasury Department are calling the "Unified Framework for Fixing Our Broken Tax Code."
The framework doesn't specify which deductions will be erased but rather indicates which ones won't be, although that could change: "In order to simplify the tax code, the framework eliminates most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions," the framework says.
Given the historical antipathy of many Republicans to the state and local tax deduction, analysts expect it is back on the table.
New Jersey taxpayers could be especially affected by this change because it, like other high-tax states, would have difficulty raising taxes, and the Garden State is currently operating with a budget that is "deeply out of whack," says Matt Fabian, partner of Municipal Market Analytics. (Moody's has downgraded New Jersey's debt 11 times since Chris Christie became governor in 2010).
At the same time, many wealthy taxpayers in New Jersey and every other state would no longer be subject to the Alternative Minimum Tax, which has precluded them from deducting state and local taxes, says Matt Sommer, vice president of the Retirement Strategy Group at Janus Henderson Investors, adding that any impact is still uncertain.
The lack of specific information on the plan — it is just a framework — makes it difficult for advisors to recommend any specific strategies yet.
"While the proposed tax plan looks to chainsaw the current federal income tax brackets from seven down to three, there is not any information provided on where each bracket begins and ends," says Jon Ulin, CFP, managing principal of Ulin & Co. Wealth Management in Boca Raton, Florida.
He recommends against "any big changes before year end regarding income or expenses reported for this calendar year, or to make a Roth conversion from an IRA — as there is no way yet in knowing if you may be better or worse off in 2018 and beyond. "
Sommer agrees. "It is too soon for advisors or clients to take any action regarding the GOP tax reform proposal as it still has a long way to go and many of the details need to be filled in."
Among those things he's watching is whether the tax plan is done through budget reconciliation and whether the 10-year sunset applies in order to make the numbers work "because then pretax retirement contributions could be limited or eliminated outright. Those scenarios will require a revised financial planning playbook."
