Explaining that balance due - capital gains from stock

[Rapid Robert]

Not a question, just a comment.

I have encountered more than the usual number of taxpayers this year who have a larger-than-normal tax liability (especially on the federal side) primarily due to capital gains from stock sales and/or mutual funds, which in turn triggers a higher percent of SSA benefits being taxable (so-called "phantom tax").

It's tempting to blame the worse tax result on the financial advisor at Schwab or Wells Fargo or Fidelity or ETrade or whatever for making the sales that bumped up cap gains -- but are they really to blame? Last time I checked, the stock market peaked right at the end of 2021 and has dropped a fair amount since then, so I suspect any sales made in 2021 had the result of realizing gains that have subsequently been lost to those who did not sell. So wasn't the taxpayer really better off, even with the higher tax bill? Better to have investment income and pay tax, than not have investment income. Especially when tax bracket rates are at historic lows.

Incidentally, this is not usually a big factor for California, since it does not tax SSA benefits. So I find the total tax liability in CA does not change nearly as much. CA as a "high tax" state mostly applies only to high-income people, not those at or below typical AGI phase-out ranges.

[New York Enrolled Agent]

Better to have investment income and pay tax, than not have investment income.

You hit it on the head.

I'm fond of telling my complaining clients "When you're poor you have problems and when you're rich you have problems but it's better to be rich and have the problems"

[FEDUKE404]

I bet things get REALLY interesting when you have to tell them what IRMAA will do to them starting in January of 2023 !!

As for those complaining about capital gains et al, I guess they could just keep their funds in a money market account and maybe earn 0.5% interest. . .

[Beersheba]

Taxpayer: "Mr. Congressman, I thought you had a war against poverty....
Govt Spokesperson: That's exactly right sir.
Taxpayer: "Well how come I'm still poor???"
Govt Spokesperson: "You lost."

[Beersheba]

Not a question, just a comment.

It's tempting to blame the worse tax result on the financial advisor at Schwab or Wells Fargo or Fidelity or ETrade or whatever for making the sales that bumped up cap gains -- but are they really to blame?

There are times (and I believe more often than not) that the stockbroker really IS to blame. Too often, I see 1099-Bs/DIV where the brokerage firm has told the taxpayer "We are experts at managing your investments, let us do this for you." And the result is a churning of mutual funds (all of which pay commissions) occurs. They are really "experts" at sucking money out of the taxpayers' account.

Very commonly I see 1099-DIVs for maybe $500 in dividends and $1800 or so in stockbroker fees. Stockbroker fees are no longer deductible. When confronted with questions as to why this happens, the answer is "Yes, we charged you fees, but the value of your portfolio is way up $10,000." Sounds good in a bull market, right? But the measure of whether the portfolio is really "up" are the dividends who have capital gain distributions and or 1099-B gains.

Sorry - I'm just not a fan of banks who pretend their only goal is to serve their customers, stockbrokers who pretend they are only serving in the customers' best image, or for that matter, tax preparers who are there to help the taxpayers but charge $500 to advance a $5000 refund that they will receive in 10 days.

[FEDUKE404]

Your points are valid. But, to a certain extent, there is some burden on the client re selecting who "manages" their money.
A long-time client is a CFP with a well-known regional bank. She explained to me how, several years ago, the SEC (?) started cracking down on "investment dealers" versus someone working in a true fiduciary capacity. A client has the right to ask/demand that a financial person certifies they are working in a fiduciary capacity, i.e. looking out for the investor's best interest and not just churning the account and/or generating commissions. There is indeed a difference.
Most investment firms now charge asset-based management fees, which although graduated can increase as the value of assets increases. Whether the "free" trades or fancy reports are worth the money is sometimes questionable.
Some years back I was working on a tax return for a gentleman (from TN) who presented me with his tax papers. At the time he was in his mid-80s, and his "investment advisor" had put him into several limited partnerships. The client was still mentally sharp, and I explained to him that such an action probably was not a wise idea for him at that stage in his life. He had NO idea of the purchases until I asked him where those K-1s came from. He personally traveled to the bank, expressed his displeasure, and yanked all of his assets that day. Everything went to a new firm, where he made it clear what he would and would not tolerate. (This was all before the "fiduciary" changes mentioned above.)
Bottom line is the investor should keep his eyes wide open. If age / other issues are a problem, have a trusted individual look over things. While I don't think the banks are evil, there are indeed folks there who will try to get away with whatever they can. And there is a special place in The Hot Place when elderly people are taken advantage of.
Sorry for the rant. All my 2021 tax work was completed earlier this month, so I had a few moments to type a response.

[Gretel]

I agree with Burke, it is the TP responsibility, 100%. I often feel as though I am the cleaner and not the tax return preparer let alone adviser. Just like all of you, I see people hurt because they did not ask for advise and rather take the word from people that know nothing of taxes. We are all responsible for our choices and what we want to believe in. And yes, I am also getting furious when other people take advantage and there is really no answer to that.

[Rapid Robert]

"I bet things get REALLY interesting when you have to tell them what IRMAA will do to them starting in January of 2023"

Most of the examples I was referring to were people whose SS benefits were still less than 85% taxable even after the one-time cap gains, so not subject to IRMAA increases (AGI below $91K single, $182K MFJ).

"the value of your portfolio is way up $10,000." Sounds good in a bull market, right? But the measure of whether the portfolio is really "up" are the dividends who have capital gain distributions and or 1099-B gains."

Right - that was my point. If you can lock in $10K of L/T cap gains by selling some stock at today's tax rates, but instead decide to "let it ride" and then lose the unrealized gain in a down market, I think that is a mistake. I mean, you can always immediately re-invest the money if you want. Too often people let the tax tail wag the income dog.

[ATSMAN]

I think a large percentage of folks who open up a brokerage account have no idea what they are doing. I hear all the time why am I paying taxes on dividends and Capital Gains? I have not sold any thing. All the money is in he account I did not take a cent out???

If it was not crunch time I would give them a short tutorial why, BUT I politely ask them to contact support at their platform and ask them why you have to pay tax!