The current tax reform bills leave the long-term capital gains taxes untouched. The tax plan does, however, set new income tax rates, potentially lowering your clients’ taxes on short-term capital gains and dividends.

Currently, taxpayers making less than $37,950 pay no taxes when they sell an asset held for at least a year. Your clients who earn $37,950 to $418,400 annually pay a 15 percent long-term capital gains rate; your clients who earn more pay 20 percent. Clients will pay their ordinary income tax rate for assets they held less than a year (short-term capital gains). Clients earning more than $200,000 must pay an additional 3.8 percent tax on capital gains and dividends.

Other provisions, however, might impact your high-net-worth clients’ capital gains and overall tax picture.

“With so many critical details still undisclosed, the effect that certain provisions of the current plan versions may have on our clients remains unclear,” said John Mezzanotte, office managing partner with Marcum LLP in Greenwich, Conn.

(The House passed its reform bill earlier this month; Senate action is expected this week.)

According to Richard J. Beason, a CPA practicing in Roanoke, Va., and Hilton Head, S.C., and member of the Virginia Society of CPAs, clients’ questions at this moment in the reform discussions involve potential removal of the estate tax in 2023 and how that might affect the stepped-up basis in investments, and whether a strict first-in-first-out (FIFO) method will significantly influence capital taxes and mutual fund taxation.

(A provision in the Senate reform bill would require your clients to use the FIFO method when selling stock, meaning they would have to sell their oldest shares first and face recognition of larger gains at tax time. Mutual fund investors would still be able to use the average cost of shares when they sell fund shares.)

The mix of capital gains versus ordinary income can also affect whether a HNW client is in the alternative minimum tax. The AMT, like the deduction for state and local taxes, is slated for elimination under both the House and Senate tax plans.

These factors come into play regarding when to structure deals that involve significant capital gains. “For a client who sold a business and realized a capital gain of $8 million, for example, we’d need to evaluate the deal to see if it made more sense in 2017 or 2018. To the extent the client was not in (AMT) in 2017, prepaying the state income tax by Dec. 31, 2017, to still get the deduction may make more sense,” said Bill McDevitt, shareholder and head of tax department for Wilkin & Guttenplan CPAs and Consultants in East Brunswick, N.J.

“Also, increasing the hurdle for homeowners seeking to exclude up to $500,000 of gain on the sale of a home could certainly force more sellers to defer their move,” Mezzanotte said, adding that along with the FIFO proposal “there’s little preparation a taxpayer can do to mitigate either of these changes except to liquidate high-basis lots of stock in 2017 and incur tax on a smaller gain if they expect to need to generate cash in the near future.”

First « 1 2 » Next