Page 19 - Investment Advisor July/August 2022

CAPITAL GAINS TAX SPOTTING TAX OPPORTUNITIES NET UNREALIZED
Elsasser also emphasized that ordinary A key way advisors can spot tax oppor- APPRECIATION (NUA)
income can increase a retiree’s capital tunities for clients is when the effec- This allows for a client who has appre-
gains tax rate. In 2021, the 0% bracket tive marginal rate on the next dollar is ciated company stock in their 401(k)
for the capital gains tax was $83,350. significantly different than the average to transfer that company stock in-kind
Add the standard deduction, and a lifetime EMR, Elsasser said. to a brokerage account, which allows
couple could earn up to $112,050, in them to pay ordinary income tax on only
capital gains and ordinary income com- ROTH CONVERSIONS the basis.
bined, before being liable for any capital Elsasser discussed different types of IRA For example, Elsasser said, a client
gains tax. opportunities, including Roth conver- paid $100,000 for stock that is now
But, Elsasser said, let’s say a worth $500,000. If they sell
client had $100,000 in capital An Orion study recently the stock and withdraw the
gains with $28,000 of ordinary money from the 401(k), all
income. The ordinary income found 80% of investors $500,000 of it will be taxed
is “stacked” under the capital as income.
gains, pushing the gains above believe their advisors should But if they transfer the
the $112,050 threshold into the stock to a brokerage account,
15% tax bracket. focus on minimizing their only the $100,000 basis will
“There is an interaction we be taxed as ordinary income,
really want to pay attention to tax obligations, especially while $400,000 will be taxed as
because it matters a lot when for clients in retirement. an embedded capital gain.
we’re working with clients In most cases the capital
on these tax plan strategies,” gain rate will be lower than the
he said. sions (which were a fan favorite in an ordinary income rate, Elsasser noted,
early poll by Elsasser). One factor to keep adding that clients might want to stretch
MEDICARE PREMIUM SURCHARGES in mind: Although Roth conversions out the NUA over a couple of years to
Couples with up to $182,000 of income are generally a smart strategy, amounts stay under the capital gains threshold.
pay a Medicare Part B premium of should be limited to avoid pushing capi-
$170.10 a month in 2022. Clients with tal gains into a higher tax bracket. HOW TO REDUCE CAPITAL
even a dollar of income above that level But advisors should begin with Social GAINS TAXES
must pay an income-related monthly Security strategies because they “add There are three key ways to reduce capi-
adjustment amount, commonly known significant value” to clients’ lives, espe- tal gains taxes, he noted:
as an IRMAA surcharge. cially when they allow clients to delay • Reduce ordinary income: A simple
For example, if the couple makes claiming, Elsasser said. way to do this is make an IRA con-
$182,001 in income, their Part B monthly Also important is the gap between tribution.
payment jumps to $238.10, and their when a client stops working and when • Harvest capital losses: Keep in mind
Part D monthly cost is plan plus $12.40. they collect Social Security. This is a that clients should harvest only
IRMAA surcharges increase furtheras good time to use Roth conversions, those losses that fall into the 15%
income rises. Elsasser noted. capital gains bracket. “Blindly har-
But he noted that there are times vesting capital gains losses can be a
3.8% NET INVESTMENT INCOME TAX when delayed Social Security claiming real waste,” he noted.
This is an additional 3.8% tax on net is not the best long-term strategy, a point • Harvest capital gains: This allows
investment income (applying only to he illustrated using his software. For a client to sell some of their port-
capital gains, interest and annuity pay- example, clients who withdraw from folio, realize the gains, then buy it
ments, passive business income and an IRA while delaying benefits might back so there is a step up in basis.
rents) of those with adjusted gross reduce the future value of their estate This may allow the client to take
income of $200,000 or more for single by more than they collect in extra Social advantage of the 0% capital gains
filers and $250,000 for couples. Security payments during their lifetime. tax bracket.

JULY/AUGUST 2022 INVESTMENT ADVISOR 17