CFP Board, FPA and others call for tax incentives

Five of the most important organizations in the planning profession are pushing for lawmakers to restore tax incentives for financial advice ahead of a massive potential deadline next year.

In a letter to the U.S. House Ways and Means Committee, the CFP Board, the Financial Planning Association, the Financial Services Institute, the Investment Adviser Association and the National Association of Personal Financial Advisors described the loss of a deduction for financial advice as “an unintended consequence” of the Tax Cuts and Jobs Act. The message last month came about six weeks before one of the most consequential elections for tax policy in recent memory will decide the fate of the many expiring provisions of the law.

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The letter represents an area of agreement among wealth management trade and professional organizations that have split in other policy debates — such as the Biden administration’s rule expanding fiduciary duties to 401(k) rollovers and other types of retirement advice. The groups are just a few of the many that will be vying to get back their highly specific tax credits or deductions once the dust settles on the election and the next president and Congress work out what to do about the parts of the 2017 law with a sunset date at the end of 2025. For example, the doubling of the standard deduction, the end of personal exemptions and other changes have drastically reduced itemization in recent years.

Repeal of “a limited tax deduction for investment advice” as part of the law essentially raised the “cost of financial advice crucial to Main Street investors saving for retirement, college and other important life events such as home purchases,” according to Erin Koeppel, the managing director of government relations and public policy counsel of the CFP Board. Reinstating incentives could bring tax savings for those who weren’t previously eligible for the deduction because their fees didn’t go above 2% of their adjusted gross income, Koeppel noted.    

“Congress and the new administration will have the opportunity to restore and expand tax incentives to make financial advice more accessible to everyday Americans,” she said in a statement. “Tax credits or other subsidies aimed at moderate-income individuals would encourage these investors to seek professional financial advice, which, in turn, will improve financial outcomes. This ultimately will allow a broader range of Americans to access financial advice for major financial milestones and everyday needs.”

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However, the earlier deduction and other “miscellaneous” items eliminated by the Tax Cuts and Jobs Act added up to roughly $32 billion worth of revenue in the first 10 years of the legislation, according to Garrett Watson, a senior policy analyst and modeling manager at the nonprofit, nonpartisan Tax Foundation. The writers of the legislation were seeking “to broaden and simplify the tax base as a partial offset to other tax changes in the law that were scored as losing revenue under the baseline,” Watson said in an email.

“I have not seen any specific evidence suggesting that the repeal of this deduction led to a decline in Americans seeking financial advice or if it noticeably impacted the prices for those services,” he said. “The AGI floor means that a portion of those services were not impacted at all, and taxpayers received tax breaks elsewhere that would offset (or more than offset) this tax increase in insolation.”

In their letter, the organizations argued that the earlier tax incentives “may have appeared inconsequential” at the time of the 2017 law, but the COVID-19 pandemic and accompanying economic volatility demonstrated the importance of “having access to affordable, professional advice from trusted financial professionals.” 

“As Congress considers extending the expiring provisions of the TCJA, we ask that Congress restore and expand tax incentives for financial advice, including financial planning,” the organizations wrote in the Sept. 16 letter. “Such tax incentives may include deductions, credits, or a combination thereof. Further, Congress should ensure that these incentives are responsive to the needs of Main Street Americans. All taxpayers need help to obtain the critical financial advice they need now, and any tax incentives should be widely available to American households.”

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They had responded to a call by House Ways and Means Committee Chairman Jason Smith, a Republican from Missouri, and other members for public input on the expiring portions of the law. For future occupants of the White House and Congress, the looming deadline will create difficult choices about the economy, the federal budget deficit and a variety of other issues. 

“The challenge heading into next year is every specific tax deduction, credit or other expenditure has a specific use-case and set of folks who argue that they should be retained, but this comes at the cost of greater complexity in our tax code and higher tax rates,” Watson said. “If anything, we may need to further base broadening efforts to ensure the fiscal situation improves federally, and that would include retaining the progress policymakers made on base broadening in 2017. This can help keep tax rates lower, which is helpful for taxpayers and American families across the country.”