Category: Helpful Articles

When it comes to tax planning and your investments, it can be difficult to know where to start. First, tax treatment of investments varies based on a number of factors, such as type of investment, type of income it produces, how long you’ve held it and whether any special limitations or breaks apply. And you need to understand the potential tax consequences of buying, holding and selling a particular investment. Higher-income taxpayers also need to know when higher capital gains tax rates and the NIIT kick in. The Tax Cuts and Jobs Act (TCJA) didn’t repeal the NIIT or change the long-term capital gain rates, but its changes to ordinary income tax rates and tax brackets are having an impact on the tax paid on investments. 

Yet, it’s unwise to make investment decisions based solely on tax consequences — you should consider your investment goals, time horizon, risk tolerance, factors related to the investment itself, fees and charges that apply to buying and selling securities, and your need for cash as well. 

Finally, your portfolio and your resulting tax picture can change quickly because of market volatility. Vigilance is necessary to achieve both your tax and investment goals. 

Being tax-smart with losses

Losses aren’t truly losses until they’re realized — that is, generally until you sell the investment for less than what you paid for it. So while it’s distressing to see an account statement that shows a large loss, the loss won’t affect your current tax situation as long as you still own the investment.

Realized capital losses are netted against realized capital gains to determine capital gains tax liability. If net losses exceed net gains, you can deduct only $3,000 ($1,500 for married taxpayers filing separately) of losses per year against ordinary income (such as wages, self-employment and business income, interest, dividends, and taxable retirement plan distributions). But you can carry forward excess losses until death. In the current market, you may not have enough gains to absorb losses, which could leave you with losses in excess of the annual ordinary-income deduction limit. So think twice before selling an investment at a loss. After all, if you hold on to the investment, it may recover the lost value. In fact, a buy-and-hold strategy works well for many long-term investors because it can minimize the effects of market volatility.

Of course, an investment might continue to lose value. That’s one reason why tax considerations shouldn’t be the primary driver of investment decisions. If you’re ready to divest yourself of a poorly performing stock because, for example, you don’t think its performance will improve or your investment objective or risk tolerance has changed, don’t hesitate solely for tax reasons.

Plus, building up losses for future use could be beneficial. This may be especially true if you have a large investment portfolio, real estate holdings or a closely held business that might generate substantial future gains.

Finally, remember that capital gains distributions from mutual funds can also absorb capital losses.

Background

On August 8, 2020 the President of the United States issued a Presidential Memorandum directing the Secretary of the Treasury to use his authority to defer the withholding, deposit and payment of certain payroll obligations.  Accordingly, the Secretary of the Treasury determined that employers that are required to withhold and pay the employee share of social security tax (FICA – 6.2%) or the railroad retirement tax equivalent could defer the withholding of that tax on payroll payments from September 1, 2020 to December 31, 2020 and collect from the employee (withhold) during the period January 1, 2021 to April 30, 2021.

Late on Friday, the IRS issued minimal guidance on the payroll tax deferral regarding the employee portion of social security taxes.

Implementing the payroll tax deferral

Under the guidance issued, this program is optional to the employer and is not an employee elected deferral. Employers can defer the withholding, deposit, and payment of certain payroll taxes on wages paid from Sept. 1 through Dec. 31, 2020. The deferral applies to the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3101(a) and Railroad Retirement Act Tier 1 tax under Sec. 3201 (FICA – 6.2%). The due date for withholding and payment of these taxes is postponed until the period beginning Jan. 1, 2021, and ending April 30, 2021.

The deferral applies to any employee whose pretax wages or compensation during any biweekly pay period generally is less than $4,000 (approximately $104,000 annually). The notice defines applicable wages, for these purposes, as wages as defined in [Sec.] 3121(a) or compensation as defined in [Sec.] 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.

The amounts to be deferred are ONLY the employee portion of the FICA / Railroad Retirement Act.  THERE IS NO DEFERRAL OF THE PAYMENT OF THE EMPLOYER’S PORTION OF TAXES OR THE EMPLOYEE’S WITHHELD FEDERAL INCOME TAX AND MEDICARE TAX.

Under the notice, the determination of applicable wages is to be made on a pay-period-by-pay-period basis — meaning that if the amount of compensation payable to an employee for a particular pay period is less than the threshold amount ($4,000 for biweekly pay periods), then the payroll tax deferral applies to that compensation, irrespective of the amount paid to that employee in other pay periods.

The notice requires affected employers to withhold and pay the deferred taxes from wages and compensation paid during the period between Jan. 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says, that, if it is necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide details on that requirement. This would ultimately appear to place the liability on the employer.

Optional to the employer

Employers, if you defer your payroll taxes from your employees and your employee leaves for any reason and is not employed during the period beginning Jan. 1, 2021, and ending April 30, 2021, then employers would take the responsibility of paying the deferred taxes and not the employee. While the employer would have the right to attempt to collect these amounts from their former employee, it could be a difficult and time-consuming task.  This may lead many employers to choose not to defer the taxes. The decision is left up to the employers to decide if they want to implement the deferral.

We strongly recommend that you as an employer consider the consequences of deferring the withholding of the employee payroll tax. For further questions, contact your CPA at https://www.atacpa.net/our-leadership/.

Listen to a podcast from the Journal of Accountancy on implementing the payroll tax deferral.