What should be included in a client memo discussing the tax implications of withdrawing $60,000 from a non-retirement brokerage account for a married couple in New York?
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A client memo discussing the tax implications of withdrawing $60,000 from a non-retirement brokerage account for a married couple in New York should address the following key points:
1. Nature of the Withdrawal
- Non-Retirement Brokerage Account: Withdrawals from a non-retirement brokerage account are not, in themselves, taxable events. The tax implications arise from the sale or disposition of securities or other investments within the account, not from the act of withdrawal itself.
- Taxable Events: If the $60,000 withdrawal is funded by selling securities, the relevant tax consideration is the capital gain or loss realized on those sales, not the gross amount withdrawn.
2. Federal Tax Implications
a. Capital Gains Tax
- Long-Term vs. Short-Term Gains: Gains from the sale of assets held for more than one year are considered long-term capital gains and are taxed at preferential rates. Gains from assets held for one year or less are short-term and taxed as ordinary income.
- Calculation of Gain: The taxable gain is the difference between the sale proceeds and the cost basis (purchase price plus any adjustments) of the securities sold.
b. Federal Capital Gains Tax Rates for 2025
- Preferential Rates: For long-term capital gains and qualified dividends, the rates are 0%, 15%, or 20%, depending on taxable income.
- Thresholds for Married Filing Jointly (2025):
- 0% rate: up to $96,700 of taxable income
- 15% rate: up to $600,050 of taxable income
- 20% rate: applies to amounts above $600,050
- Short-Term Gains: Taxed at ordinary income rates, which for married filing jointly in 2025 range from 10% to 37%, depending on total taxable income.
c. Net Investment Income Tax (NIIT)
- Additional 3.8% Tax: If the couple’s modified adjusted gross income exceeds $250,000 (for married filing jointly), an additional 3.8% NIIT may apply to net investment income, including capital gains.
3. New York State Tax Implications
a. Taxation of Capital Gains
- Inclusion in NYAGI: Capital gains (both short- and long-term) are included in New York adjusted gross income (NYAGI) and taxed at ordinary income rates for New York State purposes.
- No Preferential Rate: New York does not provide a preferential rate for long-term capital gains; all capital gains are taxed as ordinary income.
b. Tax Rates
- Progressive Rates: New York State income tax rates are progressive, ranging from 4% to 10.9% depending on income level.
- New York City Residents: If the couple resides in New York City, additional city income tax (ranging from about 3% to 3.876%) applies to NYAGI, including capital gains.
c. Allocation and Reporting
- Joint Ownership: If the account is jointly owned, each spouse generally reports half the income unless ownership is otherwise specified.
- Part-Year or Nonresidents: If the couple changed residency during the year, capital gains must be allocated to the period of New York residency. Gains accrued before a change in residency are generally taxable to New York if the right to the income was fixed during the residency period.
4. Other Considerations
a. Losses
- Offsetting Gains: Capital losses realized in the account can offset capital gains. If losses exceed gains, up to $3,000 ($1,500 if married filing separately) can be deducted against ordinary income, with the remainder carried forward to future years.
b. Recordkeeping
- Documentation: Maintain records of purchase and sale dates, cost basis, and proceeds for all securities sold to substantiate capital gain or loss calculations.
c. Estimated Tax Payments
- Withholding: There is generally no tax withholding on brokerage account sales, so the couple may need to make estimated tax payments to avoid underpayment penalties.
5. Summary of Steps for the Client
- Determine the Source of Funds: Identify which securities or assets will be sold to fund the $60,000 withdrawal.
- Calculate Capital Gains or Losses: For each sale, determine the holding period and calculate the gain or loss.
- Apply Federal and State Tax Rates: Use the applicable federal long-term or short-term capital gains rates and New York State ordinary income rates.
- Consider Additional Taxes: Assess whether the NIIT applies.
- Plan for Estimated Taxes: Make estimated payments if necessary to avoid penalties.
- Maintain Records: Keep detailed records for tax reporting and potential audits.
6. Example Calculation (Hypothetical)
If the couple sells securities with a total cost basis of $40,000 to fund a $60,000 withdrawal, the realized capital gain is $20,000. If these are long-term gains and the couple’s total taxable income is below $600,050, the federal tax on the gain would be at the 15% rate ($3,000). New York State would tax the $20,000 at the couple’s marginal state rate, and New York City tax would also apply if they are city residents.
Conclusion: The tax impact of a $60,000 withdrawal from a non-retirement brokerage account for a married couple in New York depends on the capital gains realized from the sale of investments, the holding period of those investments, and the couple’s overall income. Both federal and state taxes apply, with New York taxing all capital gains as ordinary income. Proper planning and recordkeeping are essential to ensure compliance and minimize tax liability.
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