You have probably heard much about the pending tax legislation and all the provisions that are being debated.
We believe that tax reform that simplifies the tax code and spurs economic growth is a noble aim. However, we believe Section 13533 of the Senate Tax Cuts and Jobs Act may have a significant negative impact on individual investors.
The Senate Bill imposes a single cost basis methodology for investors. Investors would be required to use first in, first out (FIFO) on all dispositions of securities (except mutual funds). Today when an investor sells a stock they own in a taxable brokerage account, they can pick which tax lot they want to sell if they have acquired multiple blocks of shares over time. The Senate Bill eliminates the ability to choose and instead requires an investor to sell the first shares they bought. Typically, the oldest shares have the largest gain. This means the average investor may be required to pay higher capital gains taxes where a stock has appreciated over time.
We strongly oppose this provision, believing it will harm individual investors by eliminating their freedom to decide when to take losses or gains on their investments. This could potentially result in an increased tax burden to investors. The Joint Committee on Taxation is estimating this rule will require investors to pay an additional $2.7 billion in taxes over 10 years.
Let’s consider the impact this change would have on an individual that holds a significant amount of a company’s stock, accumulated over a 20-year career. Now retired, this shareholder wants to sell some company stock to diversify his or her portfolio. Assume the purchases over time range from $5 per share up to $90 per share, but the stock is now trading at $50.
Under current law, the shareholder would be able to select which shares to sale. If the stock is sold at $50, the shareholder could do some planning to decide whether to recognize gain or loss. The realized gain or loss on the transaction would range from $45 of gain to $40 of loss.
Under the Senate proposal, rather than being able to take losses on the stock purchased above $50, the Senate Bill would require this individual to pay capital gains taxes on the appreciation of the stock from $5 to $50 assuming the first shares purchased were at $5 per share. Even though the shareholder has experienced sizable paper losses on the purchases above $50, the Senate Bill might force him or her to pay taxes calculated on the largest gains possible.
Today a retiree can choose which shares to sell as they try to minimize taxes or for any other reason. More taxes mean less money available for retirement. Many individual investors are not aware that this change applies to all dispositions of stock including charitable donations and gifting of stock.
We feel this is not fair and feel the Senate should stand up on behalf of individual investors and reject imposing a FIFO cost basis requirement on the disposition of securities.
If you are concerned about these changes, you can contact your congressional representatives today and express your views. TD Ameritrade has created a site, http://www.tdameritrade.com/takeaction, that will enable individual investors to stay informed and easily reach out to government representatives on issues that matter to them. The site hosts a summary of current issues along with template letters.
Regardless if you are a current client of Barber Financial Group or not, if you have any questions, please do not hesitate contacting Barber Financial Group at 913-393-1000 or schedule a complimentary consultation below.
JoAnn Huber and The Advisors of Barber Financial Group
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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.