A joint statement from The Motley Fool, LLC, Motley Fool Asset Management, LLC and Motley Fool Wealth Management, LLC
"The difference between death and taxes is death doesn't get worse every time Congress meets."– Will Rogers
Dear Foolish Investor,
At The Motley Fool (and our affiliated companies) we're investors, just like you, investing our capital to earn long-term, tax-friendly, market-beating investing results for our families, our retirement, our future.
Our mission is simple, yet powerful: "to help the world invest, better."
So when we learned that the Senate version of the proposed tax rule changes could get in the way of you investing better and us fulfilling our mission, we just had to speak up.
And we're asking you to help us.
What you need to know
Both the Senate and the House have passed their own versions of the biggest tax changes of the last 30 years, and lawmakers are making progress on a joint bill through their committee work (reports from yesterday indicate they have a tentative deal). There is one particular part of the Senate bill that could disadvantage you as an individual investor if it makes it through to a vote -- the Mandatory FIFO Proposal.
Here is a brief primer on what this means and why it's important.
FIFO stands for "First-In-First-Out." It is a method for identifying specific tax lots when you have made your total investment over time -- using common strategies like dollar-cost averaging, dividend reinvestment plans, buying in thirds, or simply making annual lump sum contributions.
(By the way, senators, many of your constituents invest this way.)
The Senate's version proposes that all dispositions -- including sales, donations, and gifts of investments -- be on a first-in-first-out basis (FIFO). This means, if you want to sell, you must sell the oldest lot, which in all likelihood (especially after a very healthy 9-year bull market) has the lowest cost basis and the highest embedded capital gains. The proposal eliminates investor choice.
What does no choice look like?
Here's an example that might be common to Motley Fool investors.
Say you own 200 shares of Amazon that you purchased twice during the last five years: 100 shares at $300 per share in 2013, and another 100 shares at $700 per share in 2016. If you sell 100 shares at $1,100, then under the Senate proposal you would have to designate the older shares to sell and pay capital gains taxes on $800 instead of on $400.
Simply put, you wouldn't have the option to choose, for yourself and your family, which of your own shares of stock to sell!
Under current tax rules, individual investors have the choice of which tax lots to dispose of. This allows for such tax planning strategies as tax-loss harvesting and donating appreciated stock to charities.
It also provides individual investors the flexibility to create sensible financial plans that correspond to their circumstances by having the flexibility to take on a higher tax burden when the situation affords it and being more tax sensitive when times are tougher.
These tax-management strategies would be severely limited in the new tax world, and that could leave you and charities worse off.
Who could this hurt?
In a word: You.
More specifically, anyone owning stocks in a taxable account will be impacted.
Retirees will be especially hard hit, since many will have to sell investments in order to pay for medical expenses. Retirees typically have very long holding periods, with the oldest investments generally having the most gains built up over decades of buy-and-hold investing. Forcing retirees to recognize unusually high capital gains could increase the taxability of their Social Security Benefits, and lead to higher income-based Medicare premiums.
Investors that sell stock for a large purchase such as a home or a car are going to be especially hard hit, and the negative tax consequences could have a meaningful effect on consumption habits that would otherwise grow the economy (ahem, again, senators??)
Investors engaging in normal asset class rebalancing activities may place outsized weight on tax implications, resulting in poor investment decisions and an inefficient allocation of capital in our market system. That's the proverbial "tail wagging the dog" that we try to stay away from.
Investors may be tempted to get out ahead of changing tax rules and sell some later-dated tax lots while they still can. On the flip side, the looming tax bill on old tax lots may dissuade selling down a holding when it may be the sensible thing to do.
So what can you do about it? It's easy and very quick.
Contact your congressional representatives
Let your representatives know how the Mandatory FIFO provision in the tax plan will affect your family. Click here for an easy lookup of your representatives, along with their contact information. It will take only a few brief minutes to voice your opinion.
Not sure what to say? Here is the message that Megan Brinsfield, the Director of Financial Planning for Motley Fool Wealth Management, LLC, left for her Senators, Mark Warner and Tim Kaine:
Hello, my name is Megan Brinsfield and I am a constituent located at [address]. I am calling to convey my concern over the mandatory FIFO provision in the tax plan. This provision will increase my tax bill by thousands of dollars every year by eliminating my freedom of choice around investment management. Additionally, my time spent in recordkeeping will increase since my brokerage only has information on stocks acquired since 2011. I implore you to strike this provision from the tax plan on behalf of me and my fellow investing taxpayers.
For more than twenty years The Motley Fool and our affiliates have stood up for the individual investor, helping millions around the globe make better financial and investment decisions. The proposed Senate FIFO provision handcuffs everyday investors from making the best individual decision for their own, unique circumstance.
We ask that you join us in carrying our message to the halls of Congress by contacting your Senator's office to express your concern with the FIFO provision.
That's a great way to help the world invest, better.
Thank you for joining us in supporting the individual investor!
Megan Brinsfield, CPA, CFP, Director of Foolish Planning, Motley Fool Wealth Management, LLC
Bryan Hinmon, CFA, CIO Motley Fool Asset Management, LLC
Andy Cross, CIO The Motley Fool, LLC