The stock market has been on a major upward tick for the last few years. While many accountants’ clients have made a lot of money in the market, some have losses. These are either from carry forwards or current. Either way, now is a good time to touch base with your customers’ financial advisors and work with them on what you can do to save your clients money.
An individual’s “adjusted net capital gain” is taxed at maximum rates of 0, 15 or 20 percent. “Adjusted net capital gain” is net capital gain plus qualified dividend income and minus specified types of long-term capital gain that are taxed at a maximum rate of 28 percent (gain on the sale of most collectibles and the unexcluded part of gain on Code Sec. 1202 small business stock) or 25 percent (“unrecaptured section 1250 gain”—i.e., gain attributable to real estate depreciation).
“Net capital gain” is the excess of net long-term capital gains (from sales or exchanges of capital assets held for over one year) over net short-term capital losses for a tax year. Net short-term gains (i.e., from the sales of capital assets held for one year or less before being sold) are taxed as ordinary income.
The 0 percent tax rate applies to adjusted net capital gain to the extent that it, when added to regular taxable income, is not more than the "maximum zero rate amount" ($77,200 for joint filers and surviving spouses, $51,700 for heads of household, $38,600 for single filers, $38,600 for married taxpayers filing separately, and $2,600 for estates and trusts);
The 15 percent tax rate applies to adjusted net capital gain to the extent that it, when added to regular taxable income, is over the amount subject to the 0 percent rate but is not more than the "maximum 15 percent rate amount" ($479,000 for joint filers and surviving spouses, $452,400 for heads of household, $425,800 for single filers, $239,500 for married taxpayers filing separately, and $12,700 for estates and trusts); and
The 20 percent tax rate applies to adjusted net capital gain to the extent that it, when added to regular taxable income, is over $479,000 for joint filers and surviving spouses, $452,400 for heads of household, $425,800 for single filers, $239,500 for married taxpayers filing separately, and $12,700 for estates and trusts.
For example, if you have a married couple with $65,000 in adjusted gross income (AGI), they can sell up to $12,200 in securities and not pay any additional tax on the sale. Further, they can harvest their losses against their gains.
When you harvest losses, you simply sell securities that have a loss and then those that match the loss and have a gain. The result is either no additional capital gains or a minimal amount. And with interest rates going up, this may be a good time to take these gains off the table.
Another simple way to harvest losses: If a client is carrying forward a large capital loss from a prior period, they can take some gains off the table, to the extent of the loss carry forward, thus netting a zero capital gain.
However, it’s important to be careful. Under Code Sec. 1411, there is a 3.8 percent surtax on the net investment income (including capital gains) of non-corporate taxpayers whose modified adjusted gross income exceeds $250,000 for joint filers and surviving spouses, $125,000 for separate filers, and $200,000 in all other cases. If this surtax applies, it will result in a maximum tax rate of either 18.8 percent (15 + 3.8) or 23.8 percent (20 + 3.8) on adjusted net capital gain, depending on taxable income.
When handled correctly, this is something very simple you can do to save your client money on their taxes.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...