President Trump signed sweeping tax legislation last month and the changes will impact investors in a variety of ways. Here, we address some of the changes you may want to discuss with your accountant in 2018.
Roth IRA conversion
Investors sometimes convert IRA accounts to Roth IRA accounts in order to capture the long-term tax benefits offered by the Roth. When this happens, the conversion from traditional IRA to Roth is a taxable event. If there is a significant market correction following the conversion, an investor might regret converting (having paid the tax to convert when the market was high and then subsequently watched the account value drop). The IRS used to allow investors an opportunity to back-track on the conversion and re-characterize the account as an IRA, as long as the conversion and market drop occurred in the same tax year. This option to re-characterize a Roth to a traditional IRA has been repealed by the Tax Cuts and Jobs Act.
Family office and financial advisor fees
Many investors have been paying their financial advisors with “sixty or seventy cent dollars” – meaning the investor has been deducting financial advisor fees as an itemized deduction on Schedule A of the his or her income tax return. These investment expenses are part of a larger group of miscellaneous expenses that used to be subject to a threshold of 2% of Adjusted Gross Income. Deductions for these miscellaneous expenses will no longer be allowed under the Tax Cuts and Jobs Act. This has particularly large implications for those families who employ a family office, as the operational cost of that office is no longer deductible in the same manner. Note: Investment expenses are still allowed as a deduction from net investment income for calculating the 3.8% Affordable Care Act net investment tax.
Investors have long used Section 1031 to defer gains by exchanging into different property of a similar type (a “like-kind” exchange) – including real estate, collectibles, artwork, and other personal property (including tangible and intangible property). These exchanges will be limited to real property going forward — meaning you will have to pay the gain on your Honus Wagner baseball card, even if you use the proceeds to add a Babe Ruth card to your collection. This is likely true if you sell one type of cryptocurrency (an intangible asset) and buy another.
Finally, Congress negotiated about – and ultimately did not include – a provision which would have prevented investors from selling securities by the individual lot, instead requiring all trades be on a First-In-First-Out (FIFO) basis. This would have dramatically impacted the management of capital gains in taxable accounts, but it did not come to pass.
We are not accountants and do not provide tax advice to our clients. We do, however, work with our clients’ accountants to make sure we are educating our clients and building portfolios optimized for their unique tax circumstances. Please reach out to Arnerich Massena if you would like to learn more about how we can create a tax-efficient portfolio to help you meet your financial goals.