Helping Clients Hit with Large Tax Bills

A proprietary survey by Janus Henderson finds that some households with incomes over $100,000 were hit with larger tax bills this year as a result of the Tax Cuts and Jobs Act of 2017. Matt Sommer, Director of the Retirement Strategy Group, discusses this and other survey results, and the opportunity for financial advisors.

As the old saying goes, nothing is certain in life but death and taxes. But for some households, how much they owed in income taxes this year proved to be less clear, thanks to the Tax Cuts and Jobs Act of 2017.

After hearing mixed feedback from advisors and clients regarding the impact of the new legislation, Janus Henderson Investors decided to directly survey taxpayers in its 2018 Income Tax Study, the results of which were released this week.

The data confirmed our suspicions: Some higher income taxpayers wound up paying more in taxes than they had expected. Furthermore, households tended to be uninformed about tax changes.

In our opinion, these trends suggest advisors have an opportunity to be more proactive in helping clients understand the new tax law and its implications.

Key Findings

  • Most Households Paid the Same or Less: Across all respondents in the survey, 32% expected to pay more income taxes this year than in 2017. However, only 30% actually owed Uncle Sam more.
  • For Some High-Income Households, Tax Bills Climbed: Among households with incomes above $100,000, 42% paid more in taxes in 2018, while only 36% had expected to incur a larger tax bill this year. This discrepancy may be due, in part, to the new $10,000 limitation on state and local taxes.
  • Consumers are Uninformed about Tax Changes: Despite being more than one year removed from the passage of tax reform, many consumers remain in the dark about the new tax law. When asked “How familiar are you with the 2017 Tax Cuts and Jobs Act?,” on a scale of one (not familiar at all) to five (very familiar), the average score was 2.05.

Advisors Could Be More Proactive

Not surprisingly, use of an outside professional was more prominent among high-income households. But importantly, many certified public accountants (CPA) and advisors were not proactive about the new tax law. Of high-income households who hired a CPA or an advisor, 22% and 42%, respectively, said their professionals did not provide information to help make the most of the new tax legislation.

We believe advisors have an opportunity to help households now dealing with higher tax bills from 2018, and who want to learn ways to mitigate the impact of the 2017 tax reform. Advisors who help take the guesswork out of taxes may bring greater certainty to another area of clients’ financial planning needs.

To learn more about tax changes, see our Wealth Advisor’s Guide to 2019.