Your older, wealthy clients probably hold stock that they acquired years ago that have appreciated greatly. Clients wishing to help younger family members with the money they get from selling long-held stocks, however, should know the tax implications.
“We often see investors in this position, typically with blue-chip stocks that have been in the family for a long time,” said Jimmy Lee, founder and CEO of The Wealth Consulting Group in Las Vegas. “They’re subject to capital gains taxes and to spiking their AGI (adjusted gross income); they could lose out on certain deductions if their AGI is high enough. They may also incur the 3.8 percent Medicare surcharge.”
“There’s a basic thought that by selling these assets [wealthy clients] get a whole bunch of cash. Sometimes they forget to factor in the capital gains ... or that the gain on sale could have some other adverse impact,” added Michael Eisenberg, principal with Squar Milner Financial Services in Encino, Calif.
The biggest misconception among high-net-worth clients who want to cash in such assets? “That avoiding the tax bite will always supercede any other strategies,” said David Levi, a CPA and senior managing director in the Minneapolis office of CBIZ MHM.
Long-term capital gains rates for assets held more than a year are zero, 15 and 20 percent. Most wealthy clients might know that the long-term capital gain rate is 15 percent “but might not be aware that all or a portion of it could be taxed at 20 percent if they have high net income in the year of the sale,” said Mary Kay Foss, a CPA in Walnut Creek, Calif.
Lawrence Pon, a CPA/PFS in Redwood City, Calif., helps clients structure and lower income to tap zero-percent capital gains. “It’s amazing to see $77,200 of income on a couple’s tax return with a zero tax. Or we can work numbers to stay in the 15-percent bracket for capital gains and avoid the net investment income tax surcharge,” he said.
Richard B. Wheeler, a CPA with Wheeler & Associates in Indianapolis, said that many wealthy clients actually don’t look to sell long-held assets for fear of what it would do to their taxable income or because they look to pass the assets directly to heirs. Others, he said, look to gift appreciated stock directly to charity.
Wheeler’s older high-net-worth clients are invested in the likes of Caterpillar, John Deere and similar big companies with a tangible inventory. Rarely do HNW clients cash in long-held, appreciated assets to pay medical bills, Wheeler noted.
“I normally recommend that younger family members receive cash gifts rather than appreciated assets,” Foss added.
For other ways the ease the tax bite, clients can “sell over a series of years to keep their AGI from entering territory that would cause additional taxes,” Lee said.
One big potential boon for taxpayers with long-held investments: President Trump’s recent proposal to reduce taxable capital gains by accounting for inflation.