Groups representing the wealth management industry are celebrating after the House narrowly passed a Republican-backed tax and spending bill, 215-214. The bill extends 2017 tax cuts and includes long-sought measures for financial advisors, but it also brings a major drawback for the industry and its clients concerning their ability to deduct advisor costs on their taxes.
Tucked into the 1,100-page bill is the Freedom to Invest in Tomorrow’s Workforce Act. This provision aims to expand the definition of qualified expenses for 529 savings plans to cover postsecondary training and credentialing. This would encompass licenses and nongovernmental certifications, such as the CFP certification.
“This shift would turn college savings plans into career savings plans, helping students, professionals and career changers earn and maintain key credentials,” said Erin Koeppel, the managing director of government relations and public policy counsel at the CFP Board. “CFP Board supports the bill as part of its commitment to building a sustainable financial planner workforce and expanding access to financial planning for all Americans.”
READ MORE: IRS backs off Biden-era rule on partnership basis-shifting
Currently, three-quarters of all CFP candidates pay for at least part of the certification costs out of pocket. While the board has not directly studied the potential impact of the expanded 529 plans, Koeppel said that they expect the measure would “provide meaningful financial relief” for advisors interested in the CFP mark.
Under the current version of the bill, financial advisors operating with pass-through entities like LLCs and S corporations will also see the deduction for qualified business income raised from 20% to 23%.
William Nelson, the director of public policy and associate general counsel at the Investment Adviser Association, said that the increased deduction is a win for advisors and clients alike.
“We were pleased to see it increased and made permanent,” Nelson said. “A lot of our members’ clients do rely on that. They advise a lot of small businesses across the country.”
The measure would also revise the existing income limits on deductions for qualified business income, which apply to financial advisors and other select professions. The IAA worked to have financial advisors removed entirely from the income limit, which would give them access to the full benefit of the deduction; however, that modification wasn’t included in the current provision.
A bad rule made worse
Offsetting the industry’s potential legislative wins, the bill would also permanently eliminate miscellaneous itemized deductions — a key tax incentive that allowed for clients in certain instances to deduct the cost of a financial advisor on their taxes.
The deduction was already temporarily paused by the Tax Cuts and Jobs Act of 2017, but was set to return in 2025. Now, as the current tax bill seeks to permanently institute changes from the TCJA, the deduction for financial advisor fees could be eliminated entirely.
Wealth management groups say that the deduction helps advisors and clients alike.
“Recent CFP Board research shows that over half of CFP professionals believe eliminating the tax deduction for financial advice has harmed consumers,” Koeppel said. “More than half of CFP professionals believe reinstating or expanding the tax deduction for fees paid for financial advice would increase access for those who might otherwise be unable to afford such services.”
In 2017, over 14.5 million taxpayers claimed miscellaneous deductions, amounting to roughly $156 billion, according to the IRS. Although the IRS does not break out deductions for financial advisors specifically, industry groups say that the deduction is a meaningful incentive for investors looking to hire a financial advisor.
READ MORE: FPA president talks exit planning, priorities and AI
Despite the setback, wealth management organizations say they will continue to advocate for the deduction with members of Congress across the aisle.
“We have been advocating for that since it was eliminated. Because what do we want to do? We want to create greater access to financial planning, right? So, that tax benefit equates to greater access,” said Financial Planning Association President Paul Brahim. “We have been advocating for it and will continue to advocate for it.”
Industry groups point to a couple of possibilities if the current tax bill is signed into law later this summer.
“I think it’s just going to have to be stand-alone legislation,” Nelson said. “With today’s Congress, with the slim margins, it’s unclear exactly what form it would take, but … if there is stand-alone legislation that was introduced, we’d obviously support it.”
The CFP Board, meanwhile, has indicated that it would like any tax incentive for financial planning to be an “above the line” deduction, expanding accessibility to the deduction to filers who also claim the standard deduction. Koeppel suggested that such a measure could come in a later tax bill.
“Congressional leaders have signaled that they may consider an additional bipartisan tax package later this year,” Koeppel said.
Trying to turn back time
Industry groups have already spent years fighting for the reintroduction of miscellaneous itemized deductions since they were first eliminated in 2017, arguing that they’re a meaningful tool to increase access to financial advice for consumers. But not all advisors are so convinced.
“I don’t think it’s something that anybody really wanted. But, if we’re being truthful, I don’t think it’s really stopping people from getting financial advice,” said Jeffrey Levine, the chief planning officer at Focus Partners Wealth. “People who want it, still want it; people who don’t, don’t.”
READ MORE: An overlooked charitable IRA tool steps into the spotlight
As with tax deductions on charitable donations, Levine said that a tax incentive could “certainly incentivize folks” to seek financial advice. But the absence of such a deduction rarely stops people from working with an advisor if that’s something they want, he said.
“People don’t like things being taken away from them,” Levine said. “That’s really what it comes down to, right? Like, if you give somebody something and then take it away, you have moved the window of expectations. … If there was never a deduction for that, I don’t think this would be much of an issue right now. But it is.”
