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Indexing, structure help ETFs win tax battle: Tax Strategy Scan

Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

Indexing, structure help ETFs win tax battle
Clients will be better off holding ETFs than mutual funds in a taxable account, according to this article on Morningstar. The ETF's underlying strategy makes it more tax-efficient than actively managed mutual funds, an expert says, adding that the ETF package is another advantage. "It's that it's an ETF, and the way ETFs work is that new shares of ETFs are created, and unneeded shares of ETFs are destroyed via this so-called in-kind creation and redemption mechanism," says Ben Johnson, director of global ETF research at Morningstar. “When those shares are no longer needed, when there is excess supply in the market, the process works in reverse.”

Do your clients own a home? 4 things to know about filing 2017 taxes
Although home-related tax deductions become less valuable under the new tax law that takes effect this year, taxpayers can still claim these tax breaks on their 2017 returns, according to this article on Motley Fool. Homeowners can deduct home equity loan interest payments as well as mortgage interest payments on loans up to $1 million. They can also claim a tax break for their property taxes and may qualify for a home office deduction.

Tax refunds: Most clients expect a solid return this year, survey finds
Fifty-three percent of investors polled by TD Ameritrade said they were expecting up to $2,500 in tax refund on their 2017 tax returns, according to this Fox Business article. The expected refund rose 5% from the amount taxpayers said they expected to get last year. Moreover, 26% of the participants expected a tax bill after filing their returns, the survey found.

What the new tax law will do to your mortgage interest deduction
The Tax Cuts and Jobs Act limits tax breaks for homeowners, according to this article from MarketWatch. Home acquisition debt on which interest payments are tax deductible is reduced to $750,000 ($375,000 for couples filing separate returns). Interest payments for up to $100,000 of home equity debt can no longer be deducted under the new law.

The weird, the oddball and the most far fetched tax deductions clients have tried to take on their returns.
February 9

529 savings plans have more uses — but states need to catch up
Under the new tax law, parents can now make tax-free withdrawals from their 529 savings plans to pay tuition and other education expenses for their children in kindergarten through 12th grade, according to this Kiplinger article. However, these clients may have to wait for their home state to update its own rules to adjust to the new law, or they will end up paying taxes for the withdrawals. Moreover, they may also need to make changes to their 529 portfolio. “If you’re going to take advantage of the K-12 tuition change, you need to take into account your time horizon,” an advisor says.

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