Tax-Efficient Financial Plans Help Affluent Achieve Goals: AICPA

In a survey of affluent Americans conducted early in the fourth quarter before the GOP tax overhaul became law, 63% of respondents said they were likely to adjust their financial plans in line with changes in tax policy.

Fifty-three percent of well-off respondents said that working with an advisor with tax expertise could make them likelier to meet their financial goals, while only 6% said this was less likely.

Harris Poll conducted the survey for the American Institute of CPAs among 507 U.S. adults who had either $250,000 in investable assets or more than $200,000 in household income.

For affluent Americans in the survey, "tax efficiency of savings and investment" was a key aspect of a financial plan, cited by 43% of respondents. Only "retirement savings and income" was cited more often, by 68%.

Other aspects of a financial plan were "health care plan," 39%; "achieving investment return goals," 36%; and "estate plan," 26%.

AICPA noted that although affluent Americans recognize tax efficiency as a crucial aspect of their financial plan, on average, only 43.5% of their total investments and retirement savings are in tax qualified accounts or tax-favored investments.

"Given the sharp bite taxes can take out of returns, the importance of structuring investments and income-generating savings in a tax-efficient manner cannot be overstated," Andrea Millar, director of the AICPA's personal financial planning division, said in a statement.

The survey showed that respondents saw a connection between tax-efficient financial plans and prosperity. Eighty-seven percent said they would be more likely to reach at least one of their financial goals with a tax-efficient financial plan:

Avoiding outliving assets in retirement: 46%
Establishing their long-term medical care: 28%
Retiring earlier: 22%
Delaying taking social security in retirement: 21%

A quarter of affluent respondents said they would be likely to provide a more substantial inheritance for their children or grandchildren with a tax-efficient financial plan, and 18% said they would have an increased likelihood of paying for their children's college education.

Potential lifestyle improvements could also result from tax-efficient financial planning: 44% cited traveling more in retirement and 12% purchasing a vacation home.

According to AICPA, tax-efficient financial planning over the course of a career can have a big effect on an individual's nest egg in retirement. Ninety percent of affluent respondents agreed, saying that effective tax planning would be either very or somewhat important to their overall financial well-being in retirement.

Tax Tips From CPA Financial Planners

CPA financial planners recommend a variety of strategies for their clients to consider based on the new tax law, AICPA said.

For those who regularly make charitable gifts, it may be more advantageous to place a few years' worth of contributions in a donor-advised fund. Bunching contributions together, rather than making annual gifts, may put donors over the standard deduction hurdle and help them receive a greater tax benefit for their charitable giving.

For someone with a home equity loan or line of credit with a balance, accelerating the payoff may be a good move. If the funds were used for anything other than to buy or substantially improve one's home, the interest paid will no longer be deductible as mortgage interest, AICPA noted. This could result in paying a higher effective rate than in prior years when the interest reduced one's taxable income.

However, financial decisions should not be based on the tax effect alone, AICPA said. Consideration must be given to how the loan will be paid off to ensure it is a wise overall move.

American business owners should consider whether the current structure of their business continues to make sense, as this deduction can be significant for businesses that qualify. Record keeping and documentation is crucially important, because wages paid and cost basis (purchase price) information will be factored into the calculation.

The estate, gift and generation-skipping transfer tax exemptions doubled to $10 million, adjusted for inflation, in the new tax law. CPA financial planners can discuss the trade-offs and run the analysis of whether it makes sense to gift assets during life and remove the future appreciation for their estate, or retain the assets until death and receive a step-up in cost basis.

Finally, if a taxpayer's documents were drafted when the transfer tax exemption amount was $5 million, it may have made sense to fully fund an exemption trust and pass the remainder to the beneficiary.

AICPA noted, however, that with the exemption increased to $10 million (adjusted for inflation) in the new law, the entire value of the estate could be transferred to the exemption trust, with nothing passing to the beneficiary. This could present a problem in that the beneficiary might not want to have all the assets tied up in trust.

— Check out Estate and Gift Tax Changes in the Tax Cuts and Jobs Act on ThinkAdvisor.

Tax-Efficient Financial Plans Help Affluent Achieve Goals: AICPA

Resource Center

Trending Stories

Tax-Efficient Financial Plans Help Affluent Achieve Goals: AICPA

Related Stories

Resource Center

Trending Stories