08 May What investing opportunities were created by Trump’s tax plan?

Q. Now that the new tax plan is really being felt by taxpayers, I’m thinking there are investing strategies made better or worse by the plan. Can you explain what investors need to know?
— Investor

A. There are several items that investors can take advantage of under the new tax plan.

First, taxpayers with income from an LLC, partnership, or S-corporation may be able to tax advantage of the reduced 20 percent tax on passthrough income, said Michael Cocco, a certified financial planner with Beacon Wealth Partners/AXA Advisors in Nutley.

He said some classes of business owners, mostly professional service businesses, can get this 20 percent tax treatment only if their household income is below certain amounts, he said.

“We have been encouraging clients in this situation to make sure they set up and fund retirement plans such as SEP IRAs, owners/solo 401(k)s, and traditional 401(k)s to make tax deductible contributions to keep their income under these limits,” he said. “They can also implement deferred compensation plans to delay the receipt and thus, taxation, on a portion of their income.”

He said business owners should speak to their tax advisors to see if makes sense to change the corporate structure of the business to take advantage of these new tax rules.

For individual investors, Cocco said tax-free municipal bonds still offer an attractive way to earn tax-free income while helping to keep taxable income in check.

“This, coupled with the fact that the limits on who may be subject to the Alternative Minimum Tax (AMT) are now higher, it can provide additional advantages to many taxpayers who may have been subject to AMT in the past, where some of this tax-free income needed to be added back to their AMT calculation,” Cocco said.

He said investing in Real Estate Investment Trusts (REITs) may be more advantageous to taxpayers than before because the tax rules and opportunities for REITs to deduct certain profits before calculating taxable gains has been expanded, if they meet certain criteria.

Then there are college savings. 529 plans were previously only allowed to be used for “post high school education” to get the tax-free treatment of withdrawals, but the new tax code allows for $10,000 to be used per year for a private K-12 education while still receiving tax-free treatment on withdrawals, Cocco said.

“If you think you child may attend a private high school, consider increasing your funding to a 529 to be able to get tax-deferred growth and tax-free withdrawals – up to a limit – to be used for these costs, he said.

Because many more taxpayers may choose to take the higher “standard deduction” rather than itemize, there are some opportunities in the charitable donation area, Cocco said.

“Instead of writing a check to give cash to a charity, consider gifting some stock where you have a low cost basis – what you paid for the stock – and you do not have to sell the stock, realize the capital gain, and then gift the cash,” he said. “Instead, if you gift the stock, you do not have to realize the capital gains, but you get credit for the total amount of stock you gift as a charitable donation.”

Another opportunity for charitable giving exists for those who don’t need their Required Minimum Distributions (RMDs) from their IRAs. Instead, you can have the RMD delivered directly to a charity so you don’t have to realize the distribution as income, Cocco said.

With all of these strategies, it’s important to speak to your tax advisor before making any moves.

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This story was originally published on May 8, 2019.

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