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Property tax prepayment? Here are the answers | Biz Brain

Advisors have been responding to emails, writing blogs, updating their Twitter accounts and even running client tax returns with the new rates to keep antsy investors informed about the most sweeping tax overhaul in more than a quarter century.

Good news can be easy to communicate. In order to help investors understand exactly what their taxes will look like next year, Bernard Kiely, president of Kiely Capital Management, Morristown, N.J., has applied the tax plans’ new rates to clients’ 2016 income tax returns. “So far, I’ve run about half of my clients’ taxes and every one of them will see lower taxes in 2017,” Kiely told Financial Advisor magazine.

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One of Kiely’s clients who earns approximately $500,000 will save $12,000 next year, said Kiely, who had just prepared the client’s 2016 income tax statement with the newly-approved rates and standardized deduction for a client meeting. “At his income level, he hardly got benefits from individual deductions any way so he’s better off with the $24,000 new standard household deduction,” Kiely said. “Next year, he’ll also see $1,000 more in monthly gross income,” the CPA added.

“The higher you are on the income scale, the better off you are with this plan. You can’t give a tax break to someone who doesn’t pay taxes,” added Kiely, who said a number of clients had emailed him with concerns about the new tax plan.

The sprawling plan, which could land on President Trump’s desk by Friday, would revise nearly every part of the tax system by lowering income tax rates at all levels, restructuring deductions and providing lower income-tax bills to the vast majority of households, though the wealthy who pay more in taxes will see more relief. The sprawling plan cuts the corporate tax rate dramatically, provide new breaks for businesses and even removes the Affordable Care Act mandate.

Staying abreast of investor concerns is paying off, advisors told Financial Advisor magazine. Jon L. Ten Haagen, president of Ten Haagen Financial Group, Huntington, N.Y., said that he has had clients bring more money to the firm to invest in anticipation of the tax changes.

Ten Haagen has been sending out weekly emails and writes a weekly column for his local newspaper to keep his clients current on the tax plan and market changes. “We point out the long-term results of our plans and why people should not concentrate on the short term,” he added.

Chuck Donalies, president of Donalies Financial Planning, LLC, Washington, D.C., said he has been answering client emails and writing a weekly blog to stay in front of the fast-moving tax plan as it has made its way through various iterations in Congress.

“My clients in the Washington, D.C., region do tend to be aware of current events like this tax reform, so I have been getting emails from clients wanting to know if there is anything they should do now or know about,” Donalies said. “One move I had suggested for clients to consider to save them a little bit of money is prepaying their 2018 property taxes early to take the tax deduction in 2017.”

The Republican bill is silent on prepaying 2018 state and local property taxes, which suggests homeowners who pay their taxes directly (i.e. not through a bank) could pay those taxes this year, increasing the property tax deduction they can take on their 2017 federal returns while it’s still unlimited. But if clients are subject to the alternative minimum tax (AMT), say accountants, it does not make sense to pay property taxes early: They won’t get a deduction because the AMT requires state and local taxes to be added back into income.

Barbara M. O’Neill a financial advisor at Rutgers University, Newton, N.J., said that questions about prepaying property tax and charitable contribution deductions lead the inquiries she’s getting from clients. As for benefits from prepaying property taxes, “it depends,” O’Neill said. “If you pay your property taxes directly to your local municipality, check with the tax collector to determine if property tax prepayment is allowed, and if so, how many quarterly payments can be accepted in advance.” Property taxes paid via an escrow account held by a mortgage lender won’t be counted until the lender pays the IRS, regardless of when you send a payment to the lender,” O’Neill said.

Prepaying charitable contributions planned for 2018 in 2017 to take advantage of current laws can make sense since “the standard deduction will increase and SALT deductions will be capped, so many Americans will lose their ability to itemize deductions,” O’Neill added. “When this happens, many charitable contributions will no longer result in an income tax deduction.”

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Dermel Franklin, a financial advisor with Bump & Associates, Washington, D.C., said his firm is reaching out to clients before they reach out with questions. “We are pre-empting the conversation and bringing it up in client meetings,” said Dermel, who had just attended an in-house tax plan update “on what we need to tell our clients. We assume this will be an ongoing conversation. There might be a lot of misperception out there on whether our client are getting a tax cut or increase.”

While some clients are venting about perceived politics behind the tax plan, “as financial planners we are going to stick with our financial plan, our asset allocation plan and work with clients’ accountants,” Dermel said.

Scott A. Bishop, director of financial planning at STA Wealth Management, Houston, Texas, has most of his clients follow him on social media to keep them abreast of opportunities and fallout from the tax reform. “I have posted a lot about tax changes and put several posts in our weekly newsletter,” Bishop said. “I have been talking about this for the last year.”

John F. Bucsek, a financial advisor with MSI Financial Services, Iselin, N.J., said he has initiated all the tax conversations with clients to date. “We work with our CPA partners and have conference calls to answer questions,” according to Bucsek, who said he sees this as an ideal time to communicate with investors. “This is a great opportunity to reach out to clients as there will be many questions,” he said

Most advisors said almost all of their clients are staying put in their current states, despite the loss of state and local tax (SALT) deductions beginning in 2018.

“I’m 42 years old and have a lot of clients between their late 30s and mid-50s who have jobs and kids in school here in the greater Washington, D.C. region,” Donalies said. “Even if they’re frustrated by the changes, they’re not going to leave because it would be a major family disruption.”

Kiely said he has a few clients who may be incented to pick up and leave New York or New Jersey, states that both have higher than average income and property tax rates. “I have clients who have been considering moving already and this may be what pushes them over the top.”

Helping clients’ decide whether or not they need the tax savings enough to put it before their lifestyle and other considerations is also his job, Kiely said. “I have one wealthy client who already retired to Pennsylvania for cheaper income taxes. He has a vacation home in South Carolina and called me wanting to know which state would be cheaper for him now. When I ran the numbers, one state would save him $7,000 overall but I wouldn’t tell him which. He has so much money, it would be like you or I moving to save $15. I said ‘You don’t need the savings. You should live where you want to live,’” Kiely said.

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