Redrick Terry:
It’s time for 4 Your Money. We’re joined by John Nelson, NelsonCorp Wealth Management. John, welcome back.
John Nelson:
Thanks, Redrick. Happy to be here.
Redrick Terry:
Absolutely. We’re glad you’re here. We did finish up a big decade for stocks, and people are starting to get those tax documents in the mail. What stands out to you as you start thinking about taxes going forward?
John Nelson:
I think we’ve talked about it a lot on this show before, but just how great this last decade has been. Markets, we’re almost at 10 and a half years into a bull market. It’s been an incredible run. Looking at big positions, individual positions, it’s not uncommon for us to see individual positions making up a large percentage of client portfolios, whether that’s through stock options that they have available to them at work, maybe inheriting a position, or just positions purchased by themselves. The last 10 years, a lot of gains built into those. Just considering those with tax time coming in, plans going forward to address those gains.
Redrick Terry:
And if people find themselves in those situations, how can they address that?
John Nelson:
Our first slide here illustrates a number of options that they could take to help address those large gains. Charitable donations, of course. We’ve discussed that many times before on the show. Giving maybe potentially appreciated positions rather than cash to charities can have a big impact in terms of addressing that. Investing the gains in opportunities zones: This is a relatively new one with the Jobs Act in a tax cut of 2017. These opportunities zones are identified, their census tracks determined by the states. They allow people to take gains, invest into areas where they want to encourage investment and opportunity at a tax advantage rate.
John Nelson:
And holding the positions and hedging the risks. This is very common. We see this very often where people do have those large positions. What can we do if we don’t want to sell? You can hedge those strategies, hedge out the risk, or sell the position and pay the tax. Not necessarily appealing one on the surface but can make a lot of sense.
Redrick Terry:
If you could, walk us through a scenario to illustrate when it might make sense to take that approach.
John Nelson:
The second slide is just illustrating $100,000 investment that has grown to $300,000. we’ve got a $200,000 gain. Over here, we’re illustrating selling the position and paying the tax. The tax ends up being a little over $47,000. You’re netting roughly $252,000. This is assuming the highest capital gains rate, 23.8%. Over here, we’re keeping the investment. We’re not doing anything, and we’re illustrating just a 25% decline in the markets and what that would mean. Come out to about $225,000, so sometimes paying the tax, as tough as it is to write the check, paying the tax, diversifying can make a lot of sense in situations like now with big gains.
Redrick Terry:
Good advice as always, John. Thanks so much for joining us.
John Nelson:
Thank you, Redrick.
Redrick Terry:
And if you missed any part of our discussion, put it on ourquadcities.com.