Each new day brings a new headline about upcoming changes to tax law. As Congress weighs major decisions on the renewal of Tax Cuts and Jobs Act (TCJA) provisions and the White House issues new tariffs, tax planners may find themselves scrambling to provide answers and reassurance to their clients. If this is you, consider this your invitation to slow down and take a deep breath. Amid all the uncertainty, our job as tax planners is to focus on what we know here and now and to build flexibility into our tax plans so that we can pivot as new legislation is approved.
In our previous blog, we covered key tax laws that may shift in 2025. In today’s blog, we’ll be discussing the importance of scenario modeling and the three statements that will help us sell tax plans this year.
Practicing Scenario Modeling
Accelerating and Deferring Deductions
As an example of scenario modeling, imagine we have a couple who earn $250,000 a year in pass-through income. Right now, they would be able to enjoy that 199A deduction for qualified business income and an effective tax rate of 18%. If the TCJA tax provisions are not extended, this couple’s effective tax rate jumps up to 25%. Keep in mind that this scenario actually increases the value of our tax planning strategies—they become worth 7% more on average.
How might we lower their tax bill? We might be able to stagger deductions—accelerating them into this year or deferring them into next year depending on what makes the most sense. To accelerate income, we might look at a Roth conversion or execute some trades to pull income into this year when income tax rates are lower. These decisions could potentially be made in the fourth quarter of 2025.
We might also defer property taxes or state taxes. The cap for state and local tax (SALT) deductions is currently set at $10,000. Let’s look at a couple of different scenarios here. If the current SALT cap stays in place but other TCJA tax provisions expire, then the standard deduction will shrink. In this case, we want to look at the possibility of bunching itemized deductions to work around that. The same is true if the cap is repealed and the taxpayer lives in a high-tax state—we will want to look at itemizing deductions.
If, however, the current SALT cap and the rest of TCJA is extended and our clients are business owners with high W-2 income, we might suggest converting the business to a pass-through entity. This enables the taxpayer to opt into the pass-through entity (PTE) tax and possibly bypass higher taxes. This does require careful timing since the taxpayer would need to opt into the PTE tax in advance.
Managing the Impact of Tariffs
What about the uncertainty around increased tariffs for imported goods from China in particular? When it comes to business owners, tariffs impact inventory costs and the timing of those expenses, since the tariffs are typically going to be assessed when the goods arrive at the docks. In order to offset these tariffs costs, we’ll be looking for tax deductions—but first we need to determine if you are looking to accelerate or defer deductions.
If we want to secure more deductions by accelerating them, we want to explore the inventory methods that will give us bigger deductions. However, if taxes go up, we may want to defer those deductions by using any expense-shifting strategies available like cost segregation or our accounting methods. These can allow us to play with the timing of when those deductions kick in. Now if the client uses the accrual method, then we can already accrue the cost of those tariffs and impact the taxes today.
Tariffs also affect the cost of capital goods. So we want to consider how this impacts cash flow for our clients’ business. We also want to look at the timing of equipment purchases or expanding the business, keeping in mind that fluctuating tariffs have resulted in disrupted shipping schedules. So if we have business owners that aren’t sure if they should make a large purchase or when, we can build “what-if” scenarios into their tax plan. What if they place it in service this year versus what if they place it in service next year? These are questions we can guide them through as we formulate the tax plan.
Using the Right Language
As we talk clients through all this evolving tax legislation, remember that they don’t need certainty as much as they need clarity. Right now, no one has certainty, so instead of feeling pressure to project outcomes, we can leverage these three important statements:
1. Here’s what we’re watching
2. Here’s what we know to be true right now
3. Here’s what we can do now
These are the three statements that are going to help you sell tax plans this year. We want to educate our clients, not speculate. We’re not fortune-tellers. We want to stick to informing the client about what’s been proposed, what’s at stake, and the historical pattern of what type of legislation we know actually gets passed.
So rather than saying that a deduction is definitely going to expire, we can say, “What we know right now is it is scheduled to expire.” When it comes to possible changes that are being floated in Congress, we can say, “Here’s what’s been proposed. Here’s how it might affect you if it becomes law.”
Other Best Practices
When it comes to updating our clients or our tax plans, we want to wait for legislative texts, not press releases. In particular, don’t make any moves that are not reversible. For example, if a potential tax strategy would include canceling an S corporation election or making that election for a client’s business, once we change that there’s a five-year window before we can change it again. So we need to be very careful about what we recommend until a bill has been signed into law. We want to make decisions because they align with our clients’ long-term goals, not because they are panicking about hypotheticals that have not happened.
We also want to use tools that are definitely available now. Use adaptable strategies. This might include timing deductions and deferring or accelerating expenses, especially using strategies with optional exits. This might also include the Spousal Lifetime Access Trust that allows you to reduce estate taxes. Look for strategies like these that are likely to be available this year regardless of legislative changes.
Summary
When speaking with clients about tax law and tariffs, a good rule of thumb is to stick with the facts. Remember, we are not here to speculate about the future or share our political opinions. As tax planners, we focus on what policies are in place right now and what legal workarounds exist to lower our clients’ taxes.
By focusing on preparing for whatever happens next and acknowledging our clients’ concerns, we can provide reasonable reassurance without falling into the trap of making assumptions about the future. To maximize your tax planning skills and level up on your scenario modeling abilities, sign up to become a Certified Tax Planner today.
