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Are you trying to learn how to deliver massive tax value to your clients? Then look no further. Retirement Tax Services Podcast, Financial Professional’s Edition is a show hosted by Steven Jarvis, CPA. Steven aims to bridge the gap between tax professionals, financial advisors and their mutual clients in their quest for reducing tax expenses in retirement.
Welcome back to the Retirement Tax Services Podcast! It’s Tax Q&A Friday again. As a result, Steven is addressing concerns about rumors of possible retroactive taxes in the future. To date, nothing has been formalized. However, some people in professional circles are already considering potential ramifications.
As always, Steven has no interest in politicking here. Therefore, don’t expect comments on whether backward taxation is good or bad. The simple, objective truth is that the Biden administration has proposed a retroactive capital gains hike.
Don’t panic. It bears repeating that nothing has currently been decided. Congress still has to weigh in. However, the possibility remains. As a result, financial advisors should know as much as possible in advance.
There are precedents in the United States. In 1798, the Supreme Court ruled that restrictions on taxing laws after the fact are limited to criminal matters. In other words, Congressional retroactive tax law changes are currently legal.
The last such change was made in 1993. Today, some in the financial industry are wondering if a new long-term capital gains rate will be made effective after the fact. If passed, it could become effective as of April, May… or even January 1st of this year.
On the other hand, not everyone agrees that retroactive taxes are a certainty. At a recent CPA convention, Steven heard passionate arguments that it either is or isn’t likely.
So, given the lack of concrete information, he’s waiting to see rather than trying to give odds. Meanwhile, your clients are probably worrying about the potential changes. Some may ask you about it soon, if they haven’t already.
With this in mind, get ready. Expect to be asked, for example, how this will affect distributions from an IRA you recommended funding. Or, if Roth accounts are eventually taxed, expect to hear “What are you going to do?” periodically.
Believe it or not, most of your clients won’t be asking their CPA. Since your name is on their quarterly account statements, you’re the one they will look to for answers.
That’s why you need to at least get familiar with the likeliest potential outcomes. Do your homework, but don’t try to guess the future. Provide maximum value by being ready to reassure them.
Try to keep from straying into politics. Avoid discussing what tax laws should or shouldn’t be instituted. At the same time, don’t ignore the topic of retroactive taxes altogether.
Some prospects or clients may be out-of-the-loop. Therefore, they may come to meetings, oblivious of these concerns.
Regardless, you need to be prepared to act quickly on their behalf. Keep as up-to-date as you can in order to help them get proactive, where possible.
Forget trying to memorize proposed changes line-by-line. Just keep track of which way the tax legislation wind is blowing. To think outside of the box, you should at least know its dimensions.
Work with clients to potentially accelerate existing goals. Don’t try to dream up new strategies based on maybe-s.
Thank you for listening.
Hello everyone! Welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals Edition, I’m your host, Steven Jarvis, CPA, and in this show, I teach financial advisors how to deliver massive value to their clients through tax planning. We are once again, back to a Tax Q&A Friday. So today I want to talk about a question I’ve heard several times personally, and it also came up multiple times last week as I was at the AICPA Engaged Conference in Las Vegas. Now advisor friends, before you tune out, because I mentioned the AICPA or American Institute of Certified Public Accountants, just want to remind you that you have been listening to me most likely because I am a CPA, and in addition to that, the AICPA actually has a financial planning related designation, and there were a lot of great sessions targeted at financial planners that I was able to attend.
So the question I want to talk about is what is the likelihood that any of the proposed tax legislation will be enacted retroactively? So I’m not even gonna tease this. The short answer is that, until one of the proposed pieces of legislation passes, that impacts taxes, no one knows for sure; there are multiple pieces of proposed legislation with potential tax changes, some of which could even be passed this year, including talk that certain changes could be retroactive to the date of announcement earlier this year, but anyone promising you, the outcome of those changes, including whether they will be retroactive is either lying or selling you something, maybe both. So like you, I do not have a crystal ball, and I’m left having to make decisions and serve clients anyways. Quite a few ideas were shared at the conference about precedents as it relates to retroactive tax changes, but it’s really important to remember that those discussions, as well as this one are meant for a professional audience. So this is for your benefit and for you to consider, make sure you’re really thinking about the specific client situations as you decide, what of this information you would share with a client. So a couple of objective facts when it comes to retroactive tax changes, first of all, yes, they are legal. There is precedence around this, they have happened before. In fact, going as far back as 1798, the Supreme Court has ruled that restrictions on passing laws after the fact are limited to criminal matters. So this has been to the Supreme Court before, and they have determined that Congress can in fact, retroactively make changes to tax rules. Retroactive tax law changes have happened as recently as 1993. So although it started in 1798, there are recent examples of this happening as well. So Congress can in fact make these changes retroactive, including what the hot topic around this is – whether the long-term capital gains rate will be made retroactive, to earlier this year? And again, we’ll have to wait and see what actually passes to see whether that would be back to the date of announcement, which there’s some debate, whether that would be April or May, or they could even go back as far as making any changes effective on January 1 of this year. So they can in fact do it.
Depending on who you listen to from there, there are of course different political arguments for and against the likelihood Congress makes any changes retroactively, but that’s all speculation, and you can find strong opinions on both sides of that. In fact, as I was at these different sessions, it felt like it kind of depended on whether I was in a session speaking to advisors or CPAs, what the general message was. But I heard presenters who were adamant on either side of this, that because of this, that, and the other, there’s no way it would be retroactive, and then for completely different reasons, there were other presenters who assured the audience that this was in fact a possibility, no one tried to guarantee the outcome, but I definitely heard it both ways.
Okay. So if I’m not going to give you odds on whether any tax law changes get passed this year, or if they will be retroactive, why bring it up? I think there are a couple of reasons that we should be talking about this and considering this now. The first reason is that your clients are most likely already asking you about it, and if they’re not, I’m sure they were already worried about it and will be asking you soon; even the advisors who don’t do tax planning, which I definitely say with sarcastic air quotes, because virtually everything a planner does has tax implications – even those advisors will still have clients asking about these upcoming changes. Why? Well, because from the client standpoint, its things like: “well, Miss Advisor, what does this mean for my distributions from that IRA that you recommend, I fund?” or “Mr. Advisor, my friend told me they heard Roth accounts might eventually be taxed, what are you going to do about that?” These questions are going to come to you every single time and not necessarily the CPA because the CPA’s name isn’t on their quarterly account statements, their CPA is not the one doing an annual review of their retirement savings because unfortunately, for as often as advisors have a disconnect between planning for retirement and taxes, clients maybe even more often have that disconnect if they see tax return preparation in the CPA bucket – anything related to the retirement accounts must be in the advisor bucket. So your clients already see it that way. We just need you all to see it that way as well.
So when these come up, it’s really important that even though you don’t know what the outcome of the proposed changes are going to be, because no one does, we need to understand what has been proposed so that you can still help add value to your client’s experience. You don’t need a slide deck detailing all the nuances of every proposal, but it’s a disservice to your clients if you are surprised by some of the areas impacted by the proposals, when the clients bring them up. In other words, if the first time you’re considering those proposed changes or even aware of them, is your clients asking you about them – how are you in a position to help them reduce the anxiety and confusion around these issues? Not that you can take it away, but you can help them understand what the plan is. This can certainly be a tricky area to keep the conversation away from getting political and have it turned into debating what tax laws should or shouldn’t happen, but trying to ignore the topic altogether isn’t the answer either. Even if you have the rare clients who don’t watch the news or unconcerned about their taxes going up, understanding what has been proposed puts you in a better position to act quickly when changes do become effective. One of my favorite quotes from the conference last week was – to think outside the box, you have to really know the box – which was from a session with Andy Katzenstein, who is an estate planning attorney in California, talked a lot about what’s in some of these different proposed legislative upcoming changes. So if you want to help your clients be proactive and not just reactive, you need to make sure you really understand what we’re dealing with, or what we might be dealing with. Don’t take the time to commit proposed changes to memory, but stay aware of the proposed changes to impact your clients, so you’re ready if, and it seems more likely when changes happen, because again, if we want to be proactive and do more than just follow along with what everyone else is doing, we have to really understand the situation, we have to really know the box so that we can think outside the box. So as we wait to see what Congress comes up with later this year, my general recommendation would be that you work with clients, potentially accelerate existing goals, not dream up new strategies based on maybes. Keep in mind that changes from the tax cuts and jobs act expire at the end of 2025 if Congress takes no action at all. So proactive tax planning, based on the idea that tax rates might go up is worth considering on a client specific basis, whether these proposed laws get put into place this year or not.
Okay. So with that, let’s switch to action items. So the first action item – what is your process for staying up to date on tax law changes both pending and when they are approved? The evening news is probably not the level of detail your clients are looking for from you. So the action item is to put a process in place for staying current on these topics, and then having an action plan of what you’re going to do to inform and make changes if necessary with your clients on an individual level, if changes happen. Second action item, make sure you are reviewing your client’s tax returns, so you know where they will be impacted, if tax law changes do take place – understanding the consistent themes of your client base and looking for areas, you can add value beyond just telling them what their marginal rate will be this next year, is a great way for you to set yourself apart. For listeners who have asked questions about strategies, we talk about for working with centers of influence, tax law changes are a fantastic opportunity to call CPAs you want in your network and say, “Hey, can I pay for an hour of your time to hear your thoughts on implementing the new tax bill” or on “How this might affect my client base” or better yet “Can I pay for an hour of your time to go through some information I’d like to send to my clients to see if there’s anything that sticks out” – because then you’re going to have opportunity to learn from the CPA, you’re showing that CPA, how you add value to your client experience. You’re not going to ask them for referrals, we’ve talked about that before, but you get to both learn and demonstrate to them that you pay attention to these kinds of things, and that you’re willing to work as a team. Okay, last action item – I would actually love to have guests that are part of the compliance department of your firm or the company you outsource compliance to, if you’re in the independent space, I think it would be great for me to be able to ask some questions, to get their take on compliance and tax planning as an outsider, for you all to hear and benefit from. So if you know someone that you can recommend or want to virtually introduce me to someone who you think would be great for that, please send an email to email@example.com, I think that could be a super valuable conversation for the audience to hear. All right, that’s it for today. Good luck out there, everyone and remember to tip your servers, not the IRS!
The information on this site is for education only and should not be considered tax advice. Retirement Tax Services is not affiliated with Shilanski & Associates, Jarvis Financial Services or any other financial services firms.
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