Blue Bell PWM


Pending Tax Bill: Items to Consider Prior to Year End

Scott Miller, Jr.

Scott Miller, Jr.

Managing Partner

December 13, 2017

Pending tax bill: items to consider prior to year end

Both the Senate and the House have passed their own versions of the Tax Cuts and Jobs Act. The differences between the versions must be resolved before the bill can be signed into law. While we do not have a final version there are some items to consider prior to year-end. It may be a good idea to speak to your tax preparer about how this will affect you.

Itemized Deductions

Currently both versions of the bill eliminates or reduces many itemized deductions. In their current forms both bills limit itemized deductions to mortgage interest, charitable donations, and property taxes (up to $10,000). Itemized deductions that may be eliminated include state and local income tax, medical expenses and the amount of property tax which exceeds $10,000. If you currently itemize any of the aforementioned itemized deductions scheduled for elimination it may be a good idea to contact your tax preparer and inquirer about prepaying these expenses prior to year-end. Remember the final bill may change to allow some or all of the itemized deductions currently scheduled to be eliminated.

Tax Loss Selling

Part of our account management includes tax loss selling when appropriate. Tax loss selling is the process of reducing realized gains (to reduce current year taxes) by selling positions that have a loss (for an in depth explanation please refer to our previous post). The senate version of the bill includes a provision that will make tax loss selling much more difficult. Currently when we sell a position we have the ability to choose the tax lot that we are selling. Please refer to the hypothetical example below.

The example above assumes that an investor purchased $10,000 of the same investment three separate times. The initial purchase was in 2007 and there were subsequent purchases in 2012 and 2017. Since the price of the investment increased over time the gain or loss of each lot will be different. Under current rules if we wanted to take a tax loss with the above example we would sell 667 shares and choose the lot with a basis (purchase price) of $15. By selling 667 share and choosing the high cost lot we would be able to recognize a $1,000 loss despite the fact that overall the investment has been profitable. Under the senate version we would no longer be able to select lots instead all sales would default to FIFO (First In First Out); in other words the oldest shares are sold first. In the example above any sales would constitute a sale of the shares that are the oldest and in this case create a large taxable gain. We hope that the final bill does not force FIFO accounting on sales as it would prove detrimental to tax planning.  We are also concerned how this would influence investors that have acquired large stock positions over time. Investors may already be wary to diversify out of large concentrated positions and that reluctance could be magnified if they are forced to recognize their oldest purchases first as it is likely that the earlier purchases have larger gains. It is our hope that the Senate provision forcing FIFO accounting on sales is removed from the final version of the bill.



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Pending Tax Bill: Items to Consider Prior to Year End

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