A new year with nothing to fear: Five steps to tax change preparedness

As the fourth quarter of 2021 kicks into gear, it’s safe to say that for American families and individuals, some significant tax changes loom. In September, the U.S. House Ways and Means Committee released its proposed tax legislation in an 881-page document. (And to think: The entire income tax code introduced in 1913 was a mere 27 pages.)

To be certain, nothing in the document is close to ironclad, as it will pass through much debate on Capitol Hill at a time of high political polarization. There is also good news based on recent precedent. Remember the major tax changes signed into law in 2017? While they were the most sweeping in more than three decades, they did not impact taxes for that calendar year. That gave financial professionals and taxpayers time to get up to speed.

The House document signals which way the winds blow. For financial stewards, your clients are counting on you to ensure they are ready for any financial gust. What’s more, many tax rates will likely rise this time around, not fall, as they did four years back.

What makes your checklist, then, will determine the best course for clients and prospects — and how well they fare and prepare. Here are some things to consider, as you stack the calendar with year-end planning sessions.

1. Segment clients by potential tax bracket impact

If the forecasts bear out, not all of the seven individual income tax brackets will sustain the same impact. It’s especially noteworthy that in 2017, the top rate fell from 39.6% to 37%. But under the proposed legislation, that cut would reverse itself. (It’s bound to expire after 2025 anyway, a fact that taxpayers may not realize.)

As a smart financial professional, it’s up to you to recognize the potential impacts and adjust for tax efficiency. If higher incomes will sustain an increase, then it’s time to look at vehicles that cut net income and allow money to grow tax free, for example.

2. Know how to answer “How?”

If your message about tax changes gets through, a client or prospect eager to minimize negative impacts will want to know: “How?” As much as they may need to prepare, professionals do too. Here some key highlights:

• It may be an opportune time to harvest capital gains and losses, so that they offset each other.
• Taking advantage of state tax differences can transform your tax picture greatly (especially if relocation is already a strong possibility).
• Consider possible estate tax changes. These may negatively impact estate income tax, so it’s a good time to review and possibly change wills, trusts and beneficiaries.
• Contributing more money to 529 plans will offset both rising taxes and soaring tuition costs. Setting your 401(k) contributions to hit the employer match could significantly enhance retirement account contributions.

3. Rethink the long-term view

Any tax legislation that President Biden signs into law won’t just change the numbers on the next pay check or income tax return. Laser-like focus must be paid to retirement and legacy planning, so that overlooked details today don’t turn into the financial worries of tomorrow. Here, you’ll want to think about the following strategies, as you sit down with clients:

• Review existing trust plans. Look at irrevocable life insurance trusts (ILITs) and grantor trusts as options to lessen the tax burden to your family after your death.
• Plan for Social Security enrollment. Timing is everything if someone wants to take benefits at 62, as opposed to the full retirement age of 66. Waiting may add up to a bigger monthly benefit.
• Review possible Roth conversions. The proposed legislation may impact the ability to convert IRA and Employer Sponsored plan after tax dollars opening a potential window between now and year-end.

4. Leverage your best relationships

The degree to which you help clients (and prospects) succeed and prosper can be greatly enhanced by tapping the expertise of those around you. Turn to the strategic relationships that you have. If there’s a trusted CPA in your orbit, consider a tax planning seminar that shares vital information and shows that you are proactive and care about their future success.

Remember that just a click or phone call away, financial professionals have their Nuveen Advisor Consultant. Together, you can work out potential tax efficient strategies that may be appropriate for your clients’ portfolios.

5. Reach out to clients — and prospects — as an informed ally

Did you know that the average person spends 11 hours a week just going through business emails, according to recent estimates? Between our daily information overload and the demands of busy schedules, many clients and prospects aren’t aware of the extent of the changes in motion. Now’s the ideal time to contact clients and prospects — and prove your value, on the spot.

Don’t just tell them how your actions can have impact: Show them.

• Use your "Higher taxes likely" checklist as a tool to support conversations.
• Share the latest from the nation’s capital.
• Prepare theoretical scenarios to show a general dollars-and-cents difference that could come by adjusting tax strategy before 2021 closes.

You can prepare the people you serve now — and in the process, deepen those relationships. Meanwhile, it is important to remember that money and stress are usually related. Regardless of how well positioned clients or prospects may find themselves, everyone to some degree experiences anxiety and uncertainty around the details and timing.

By stepping in with confidence, positivity and knowledge, you can prove yourself an ally whose worth is measured beyond a positive bottom line or any investor timeline. Tax rates may rise or fall; the ability to execute sound strategy is a reassuring constant.