Capital Gains
Capital gains tend to be a hot topic. Any changes – even just the suggestion of change – can really affect the timing of decisions when it comes to your investment income.
For 2022, long-term capital gains will be taxed at the rate of 0%, 15%, or 20% on the federal level, while varying at the state level. Short-term capital gains will continue to be taxed as ordinary income. Also - easy to forget - is the net investment income tax (NIIT) that was created in 2013. This brings an additional 3.8% surtax into the picture depending on your household’s modified adjusted gross income (MAGI) and investment performance. A lot of moving parts, right?
Some things to consider for my business owner clients:
One of the most common methods of ownership in a business is through a Limited Liability Company (LLC). Through ownership in an LLC, you will receive a Schedule K-1 annually. We’re all familiar with this. What is important, however, is to ensure you are being appropriately identified on your Schedule K-1 as a passive vs nonpassive owner.
Two reasons:
1. The IRS is a stickler for this issue and will regularly challenge taxpayers with sizable nonpassive losses due to their ability to fully deduct those losses in the year incurred. This is materially different compared to the treatment of passive losses where there is a limit to the amount you can deduct. You need to carefully consider this decision and discuss with your CPA if you have any questions. It’s also important to point out that this is not something you should be changing year-to-year. This is a flag that will be raised with the IRS.
2. Understanding how you are treated on any K-1 will allow you to have a better idea on what to potentially expect on income and loss flows from those assets. This ultimately allows you to have a more comprehensive view when it comes to your business assets and all other sources of passive and nonpassive income and losses.
At the end of the day, taxes are often the largest transaction cost an investor will face. Because of this, we prioritize coordination with your tax advisor to achieve the greatest total return on your money. We also value your time, as it is a precious commodity. By working in tandem with your CPA, it removes the need for you to independently analyze each party’s recommendations; cutting down on your time spent connecting the dots between advisers.