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This HNW tax loophole is making a comeback: Tax Strategy Scan

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

An old tax dodge for the wealthy is making a comeback
Thanks to the higher estate tax exemption under the new tax law, advisors are revisiting an old strategy called upstream planning to enable their clients to save capital gains taxes on highly appreciated assets, according to this article on Barron’s. This strategy allows investors to give stocks and other assets that increased considerably in value to a parent or trusted elder to avail of a step-up in cost basis that will wipe out the taxable gains once the assets are sold. The arrangement is reached with the agreement that the parent or the elder will bequeath the asset back to them. “People didn’t want to use up their estate tax exemption, but the whole paradigm has shifted because of this new high exemption amount,” an expert says.

A big tax mistake clients can easily avoid
Retirees are advised to consult a tax professional before taking a hefty distributions from tax-deferred retirement accounts such as 401(k) and traditional IRA, according to this article on The Los Angeles Times. That’s because the distributions will be treated as taxable income and they could boost their tax income bill. Contributing to a Roth IRA is a good strategy to minimize the tax burden in retirement, as the distributions are treated as tax-free income.

How clients can use tax returns to fix retirement plans
Clients are advised to view tax returns as information that can be used to create or improve their retirement plans, according to this article on TheStreet. For example, they should check their filing statuses and look for disability insurance outside of their individual workplaces in order to protect themselves from risk. Those collecting Social Security should also check their taxable income as a portion of their benefits that may be taxed if their taxable earnings exceed a certain threshold. Self-employed taxpayers may also get the qualified business income deduction.

Ways to update client tax withholdings and avoid a surprise next year
Clients need to adjust their tax withholding to avoid owing the IRS at tax time next year, according to this article on Huffington Post. When filling out a new W-4, taxpayers should consider enlisting a tax professional to get advice on the number of allowances they intend to claim and the additional amount they would want to have withheld from their monthly salary to cover their tax liability. “Use the worksheets that come with the W-4 to help you determine the right amounts.”

What some clients tried to claim on their tax returns shows they often don't know much about accounting.
February 5

3 hacks clients can use to pay an unexpected tax bill
Do you have clients who are surprised to find that they owe the IRS? They can dip into their emergency savings to pay the tax bill, according to this article on Motley Fool. They may also take on a part-time job or side hustle to earn extra income to cover the tax liability. Another option is to sell personal items in the house that they no longer need.

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