An obscure rule for tax-savings on highly-appreciated company stock may be more appealing to clients following additional clarification and guidance from the Internal Revenue Service on the investment income surtax.
Federal laws include special tax treatment for certain distributions of company stock held within a retirement plan. Under this rule, only the cost basis of the shares is subject to tax at the time of the distribution. The difference between the cost basis — what the individual paid for the stock — and the stock’s current price is the net unrealized appreciation.
When the stock is sold, the NUA is subject to tax at capital gains rates, not as ordinary income, which could be higher. Recently, the IRS issued its final guidelines for the 3.8% Medicare surtax and noted that the NUA is not subject to the surtax on net investment income. This tax advantage incrementally increases the benefit of using an NUA strategy, depending on the tax status of the investor.
The main benefit of the NUA rule is the capital gains tax treatment. This can provide an attractive tax advantage for higher-income taxpayers with a significant difference between their capital gains rate and ordinary income tax rate.
For more depth into how the NUA rule works and tax-saving strategies, explore the education piece, “Understanding the NUA rule,” with high-net worth clients.