Jeff's Blog

2017 Tax Reform & Your Investments

NOTE: The information contained in this blog post may no longer be applicable. An update can be found here.

Tax Reform proposals in the House and Senate have been changing rapidly as Congress looks to complete a comprehensive tax reform bill, and we're here to provide updates on tax reform and the 2017 tax planning opportunities they present.

Proposed Change to Cost Basis Determination

The Senate draft of the Tax Cuts and Job Act proposes that investors selling securities in a company sell the shares in the order acquired, using what is known as the "First-In, First-Out" (FIFO) method. Currently, investors holding individual securities have the ability to specifically identify the shares they wish to sell. This allows investors the flexibility to minimize tax gains and/or maximize losses in a specific year. Under the Senate proposal, this flexibility will be eliminated and investors will be required to sell individual securities (mutual funds will not be impacted by this change) in the chronological order acquired.

The proposal would also apply to the gifting of appreciated securities to charity and/or lifetime gifts to family members. Investors would no longer be able to choose specific tax lots for gifting purposes and would instead have to rely on the FIFO method.

Potential Impact on Investors

Assume you acquired 1,500 shares of a company's stock over a multi-year period as detailed below, and you're looking to liquidate $30,000 worth of your holdings.

Under the current law, you are able to sell 500 shares of the 2015 tax lot. Under the Senate proposal, you would be required to sell the 2005 tax lot shares. As you can see detailed below, this option is less advantageous to your overall tax situation. 

2017 Planning opportunities 

Due to the loss of flexibility investors may face in 2018 and beyond with the proposed FIFO tax lot change, investors should review their year-end tax and investment plans while the ability to select specific lots is still available. 

There are multiple factors to consider when deciding on selling investments from a taxable account. Contact your M&S tax advisor or wealth manager today to learn how this proposed change may impact your specific financial situation.