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Advisor Education

Turning tax concerns into planning opportunities

James Bergeron
Managing Director, Advisor Education
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Important takeaways

Advisors receive many questions about how taxes affect clients’ overall wealth management strategy. The nature of these questions often evolves when there is a steady stream of headlines about proposed changes to tax laws.

While speculation about what changes might be implemented continues, it’s important to identify what the current law says: At the end of 2025, many of the individual income tax changes from the TCJA will expire. Visibility into what is scheduled to change at the end of 2025 creates ample opportunities to engage in meaningful planning discussions about ways to minimize investors’ taxes over the next three years and beyond.

It’s not too early to start multiyear planning

Plenty can change in three years from a tax perspective: Congress could pass changes to the tax laws in the interim or vote to make some or all of the TCJA provisions permanent. This uncertainty, however, doesn’t negate the opportunity to begin planning today for the scheduled changes.

Advisors can start doing the work to project what clients’ tax exposures could look like under various market conditions and legislative scenarios. These projections can help clients understand the “what ifs” and tradeoffs of various tax-planning strategies. From there, the discussion can move to developing a plan of action that can be executed when the situation warrants.

Consider these principles to guide your discussions:

Planning opportunities related to expiring TCJA provisions

The following TCJA provisions create meaningful planning opportunities that are worth a conversation with your client.

Change: The top marginal tax rate will revert to 39.6%.

Actions to consider: Many clients, especially business owners, have some flexibility to accelerate income to pay taxes at the current lower rate or hold off on taking deductions until after the tax rate changes, when the deductions become more valuable. For example, a client taking required minimum distributions may want to consider adjusting the timing and source of their charitable contributions over the next several years, perhaps by first looking to their IRAs to fund charitable plans and reserving direct contributions to later years.

Tax bracket changes on the horizon

Converting a traditional IRA to a Roth IRA may result in a hefty one-time tax bill, but this strategy may be worth considering now in light of the pullback in asset prices in the first several months of 2022. Similarly, if you and your clients have discussed transitioning a portfolio of mutual funds or exchange-traded funds (ETFs) to a separately managed account (SMA) to take advantage of SMAs’ greater tax efficiency but have held off because of the tax cost, now may be a good time to revisit that topic. Further, the challenging market conditions can also create opportunities for clients to consider diversifying a concentrated stock position.

Change: The alternative minimum tax (AMT) threshold will decrease.

Actions to consider: This change may have a dramatic impact on a significant number of clients’ after-tax investment returns. In 2017, 5.1 million filers paid AMT; after the TCJA increased the AMT threshold in 2018, only 200,000 filers were subject to AMT. But the AMT threshold is scheduled to revert to pre-2018 levels in 2026, and the number of taxpayers who will be subject to the AMT is projected to surge (Chart 1).

Chart: How many investors pay AMT

Strategies used to counteract the impact of a higher marginal tax rate, such as delaying deductions or converting to a Roth IRA, could also be effective in limiting a client’s AMT liability.

The lower AMT threshold is especially meaningful for clients who have incentive stock options; the income from exercising these options is treated in a much less tax-advantageous way for AMT purposes. This presents an opportunity for advisors to work with clients to determine the optimal time to exercise clients’ options given their liquidity needs, as well as expectations for the stock price and potential tax implications between now and the end of 2025. Clients who itemize will want to rethink how they use their state and local tax (SALT) deductions as those can often trigger an AMT situation.

Change: The standard deduction will be reduced.

Actions to consider: The TCJA nearly doubled the standard deduction; as a result, many clients who previously itemized their deductions have instead claimed the standard deduction.

Encourage your clients to speak with their accountant or tax advisor about when to utilize the standard deduction versus when it’s more advantageous to bunch deductions in one year and itemize that year. For some clients, it may make sense to reserve itemized deductions, such as charitable contributions, for after 2025 and continue taking advantage of the higher standard deduction while it lasts.

Change: The Pease limitations on certain itemized deductions will be reinstated.

Actions to consider: Before the TCJA, there were income-related limits on certain itemized deductions, such as mortgage interest, SALT, and charitable contributions. These limits are scheduled to return after 2025, which would reduce the value of deductions in 2026 and beyond for many clients. Creating a forecasting model that factors in these limitations could help some clients, particularly those of high net worth, plan for potential tax increases.

Change: The SALT cap will be lifted.

Actions to consider: The TCJA limited the amount clients could deduct for state and local income, and sales and property taxes to $10,000; previously, there was no limit on the amount of these taxes that taxpayers could deduct. The silver lining of these expirations is that the $10,000 cap is scheduled to end. This could affect decisions about whether and when to claim itemized deductions, particularly for clients who live in high-tax states.

Change: The federal estate and gift tax exemption will decrease by almost 50%.

Actions to consider: The TCJA doubled the estate and gift tax exemption amount, and thanks to adjustments for inflation, that amount is $12.06 million for individuals and $24.12 million for married joint filers in 2022. These amounts, which are quite high by historical standards, are scheduled to revert to their pre-TCJA levels (plus adjustments for inflation) starting in 2026.

Table: Where the estate tax exemption is headed

As a result, the estates of more high net worth investors will become subject to the top estate tax rate, which is 40%. Clients often own more than they realize, so showing them an inventory of all their assets, including life insurance policies they own, will help them see whether their estates might exceed the projected 2026 exemption of approximately $5.5 million per individual (adjusted after inflation).

If that is the case, clients may consider gifting and estate planning strategies to take advantage of the current high exemption amount. Some of these strategies may involve trusts that can be structured in a way that allows the donors to benefit from the trust assets or income generated from the assets during the donor’s lifetime.

Change: The qualified business income (QBI) deduction, which allows pass-through businesses to deduct up to 20% of their business income, will be eliminated.

Actions to consider: The TCJA created the QBI deduction for owners of S corporations and other pass-through entities. Because the QBI deduction is scheduled to go away after 2025, clients who own these types of businesses may want to identify ways to accelerate income while delaying expenses to post-2025.

Additional expiring TCJA provisions

There are other TCJA provisions that will sunset after 2025. It may be valuable to be aware of these on behalf of your clients; we’ve highlighted two key provisions here:

Tax uncertainty creates opportunity to demonstrate your value

Enhancing the amount of income and investment returns that your clients retain is one of the most powerful ways that you add value as an advisor. While 2026 may not yet be on clients’ radars, the scheduled expiration of many important TCJA provisions creates an ideal opportunity for you to engage clients in conversations about multiyear tax planning.

Some of the expiring TCJA provisions may suggest accelerating income and delaying expenses, while other expiring provisions may suggest doing the reverse. Determining how these competing effects net out requires somewhat complex modeling in conjunction with clients’ tax advisors, but don’t let that stop you from having these important conversations. These changes create a wonderful opportunity for advisors to partner with clients’ external tax experts.

It’s never too early to start engaging your clients about long-term planning opportunities. The expiring TCJA provisions — and a steady stream of headlines about other proposed changes in the meantime — provide the perfect opportunity to start these conversations today.

If you have questions or would like to explore other ways Nuveen can help your clients maximize tax efficiency, please reach out to your Nuveen Advisor Consultant or call 800.221.9271.

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This material is provided for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market, economic, or other conditions, legal and regulatory developments, additional risks and uncertainties, and may not come to pass. Although this material contains general tax information, it should not replace an investor’s consultation with a professional advisor regarding their tax situation. Nuveen is not a tax advisor. Investors should consult with their legal and tax advisors regarding their personal circumstances. This report contains no investment recommendations and should not be construed as specific tax, legal, financial planning or investment advice.

Tax rates, IRS and Social Security Administration regulations are subject to change at any time, which could materially affect the information herein.

The TIAA group of companies does not provide legal or tax advice. Please consult with your personal legal or tax advisor regarding your personal circumstances.

Important information on risk
Past performance is no guarantee of future results. All investments carry a certain degree of risk including, the possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Certain products and services may not be available to all entities or persons. There is no guarantee that investment objectives will be achieved. See the applicable product literature for details. Economic and market forecasts are subject to uncertainty and may change based on varying market conditions, political and economic developments. This material should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.

Economic and market forecasts are subject to uncertainty and may change based on varying market conditions, political and economic developments. This material should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. 

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