A common question we’ll hear from clients when we present a retirement income plan is, “what are the taxes going to be?” While some components of that answer are very straightforward, when you consider all the components together the answer can be quite complex. Today I want to focus on the taxation of non-retirement assets, specifically individual and joint brokerage accounts and homes.
A term you’ll often hear from us or from accountants when describing taxation of non-retirement assets is the word “basis”. In financial terms, basis refers to the original value of an asset for tax purposes. When you sell an asset that has gone up in value, the IRS uses basis to calculate the taxable gain on your yearly tax return.
A few examples of Basis in Different Scenarios:
Selling Appreciated Stock
Suppose you purchased 10 shares of XYZ company in 2020 for $100 a share. Your original cost, or basis, would be $1,000 (10 shares * $100 a share). If you chose to sell the stock today and the stock price had increased to $150 a share, your original cost, or basis, would still be $1,000. However, the current value of the stock shares you own would be $1,500 (10 shares * $150 a share). When you reported that stock sale on your tax return, you would note the proceeds from the sale of $1,500 and then subtract your basis of $1,000 to determine your taxable gain of $500.
Thankfully, most custodians have been great about tracking basis over the last decade but sometimes we run into clients who have stock purchased so long ago they don’t have basis information. Certainly there was basis, but after 20 or 30 years no one has any clue what it is! In that case it’s best to try and determine a paper trail of when or with what brokerage the stock was originally purchased. Or the last resort is to work with your accountant and determine something you and they determine is a ‘reasonable’ basis based upon the timeframe the stock was purchased.
Selling a Home
Buying and selling a home is often the most complex and largest financial transaction Americans make during their lives. When determining basis in the home, there is a little more to it than the original cost of the home. As in the example above with old stocks that don’t have basis, it’s important to consider tracking your basis in your home throughout your lives. This is because basis in your home includes the original cost of acquiring the home, any capital improvements you made to the home, some fees such as legal, recording, or survey fees when buying and selling. Capital Improvements can include things like updating a bathroom, adding landscaping or swimming pool, a new roof, and many other things. Often those capital improvements happen over time so they are easy to lose track of, or it’s easy to lose the original closing documents from when you first purchased the home. Having a process to track basis over time can save you money in the long run.
In both cases, selling stock and a home, how long you held the asset is a very important component of determining how the taxable gain will be ultimately taxed. Without getting into too much detail, any gain on an asset like a stock or home is said to be short term if it is held for one year or less. If it is held for one year and a day, it is long term. For example, a stock purchased on 1/1/2024 would not be considered long term until 1/2/2025. In a future blog post, we’ll discuss the differences between short- and long-term gains on appreciated stock in more detail and how important paying attention to these dates can be for retirees!
If you are unsure about how to best build and navigate your retirement income plan while considering taxes, please reach out to us at 219-465-6924.
Mark Rosinski, CFP®, CPA
Wealth Advisor
Please note that this blog is for educational purposes only and Kotys Wealth Professionals does not prepare taxes. Always consult your accountant about your personal tax situation.
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