Anyone who prepares taxes has answered many calls that begin with the dreaded “I have a quick question”. Dreaded because 90% of the time there isn’t a quick answer, or at least one that is accurate according to your personal situation.
Taxes are complex, with many rules that only apply in certain situations, or that interact with other rules in ways that aren’t initially obvious. Most questions require a thorough knowledge of your personal situation, evaluation of your recent tax returns, and a discussion about your goals and future plans. To give an accurate answer, most accountants need more information and time to evaluate the situation. Giving you a quick answer may not be accurate or helpful in the long run.
Take this example:
Quick Question: What is the tax rate on stocks?
Quick answer: either your normal income tax rate or between 0-20%.
Better answer: It depends. While the rates are readily available on the internet, the tax rate on stocks isn’t usually the question being asked. You want to know what the tax rate will be on your stocks based on your circumstances.
To answer that, your accountant may need more information such as:
- How long have you owned the stocks?
- How much did the stocks cost?
- How much do you believe you will be selling them for?
- Did you inherit the stocks?
- Were these stocks part of an ESPP/RSU/ISO?
- What other income sources do you have?
- How much do you project your income to be including wages, interest, dividends, business income, passive income, retirement, etc?
- Do you expect to itemize? If so, how much do you expect the deduction to be (medical expenses, state taxes, personal property taxes, property taxes, mortgage interest, charitable giving)?
- Any other big changes in your life this year?
After asking these questions, and perhaps others, I can tell you the tax rate on your stocks will be x%.
But knowing the tax rate doesn’t give you a full picture of how the sale of the stocks will affect your overall tax situation.
Depending upon your overall income, you may also have the pleasure of paying the Net Investment Income Tax; an additional 3.8% on your investment income. I call it the “Congratulations! You earned money on your investments and now you get to pay more tax” tax.
- Income or losses on stocks may also affect:
- the income tax bracket you’re in for your regular income
- how much of your Social Security income is taxable
- the amount you can contribute to an IRA
- education credits
- credits related to dependents
- how much you pay for an ACA healthcare policy
Summary: Asking your tax professional for a quick answer is in many ways like calling your doctor, telling him your stomach hurts, and expecting him to diagnose and treat it immediately over the phone. Most of the time you’re not going to get the results you want. The doctor will likely need to ask additional questions, examine you, and maybe run some tests in order to treat you.
The same is true for taxes. In order to get the results you want, your tax professional will often need information and time to fully address your question.