How tax reform is changing clients’ financial plans

The passage of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, required CPA financial planners to make many changes to their clients’ financial plans. The areas they have had to adjust most frequently in response to the TCJA include charitable giving strategies, business structure, and estate plans, according to the most recent AICPA Personal Financial Planning Trends Survey.

The survey polled 631 CPAs who are members of the AICPA Personal Financial Planning (PFP) Section in August and September of 2018.

Charitable giving was the part of clients’ financial plans respondents said they adjusted most frequently following the passage of the TCJA. Half (50%) chose it as one of the top three areas they were most likely to adjust post-TCJA. The TCJA increased the limit for contributions to public charities and private operating foundations from 50% of adjusted gross income to 60%, allowing taxpayers to increase their charitable deductions. However, the TCJA also increased the standard deduction amount, which will reduce or eliminate the tax benefit of charitable giving for many moderate-income taxpayers who will no longer claim itemized deductions. The TCJA’s increase in the estate and gift tax unified exclusion amount (to $11.18 million for 2018), will also reduce the estate and gift tax benefit of charitable contributions.

Other areas of clients’ financial plans CPAs changed most frequently included:

• Business structure (49% chose this option)
• Estate plans (42%)
• Retirement savings (32%)
• Housing decisions (27%)
• Investment sources of retirement income (24%)
• Investment allocations (22%)

Clients appeared anxious or optimistic about the TCJA in about equal numbers, the survey found. Forty-five percent of respondents said their clients seemed optimistic about the impact the legislation would have on their finances, while 40% said clients seemed anxious.

Most frequently, clients were optimistic about the TCJA because they thought it would save them money on taxes, respondents said. Seventy-eight percent of the CPAs with clients optimistic about the TCJA said that saving on taxes was the reason for their clients’ positive outlook.

CPAs whose clients were anxious about the TCJA said that clients most frequently named losing itemized or other deductions (41%) or not knowing how much tax they would have to pay (40%) as the major reasons.

Despite the TCJA’s impact, CPAs said that life events such as getting married, getting divorced, or retiring had a more significant impact on clients’ financial plans. Over three-quarters (77%) of respondents said that these milestones were more likely to affect clients’ plans than tax reform. Only 6% said the TCJA had a larger impact than life events, and 17% said the impact would be about the same.

The majority of respondents (88%) said that their clients would say having a CPA guide their financial plans after tax reform was either “extremely” or “very” valuable.

“CPA financial planners can leverage their technical tax knowledge and familiarity with a client’s full financial picture to crunch the numbers and model out different strategies,” said Robert Westley, CPA/PFS, a member of the AICPA PFP Executive Committee. “Since the tax laws are integrated with personal financial planning, many strategies that were once worthwhile may no longer be best in the new tax environment. A CPA financial planner can help clients navigate the changing tax laws and appropriate planning strategies and tactics.”

— Samiha Khanna is a freelance writer based in Durham, N.C. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA‘s editorial director, at Kenneth.Tysiac@aicpa-cima.com.