The decisions made by some publicly traded U.S. companies to reduce corporate taxes could impact your personal return.
For example, certain mergers between U.S. and foreign companies can result in capital gains when you own stock in a U.S. company. That’s because these transactions, which are sometimes called inversions, can be considered sales under current tax rules.
The inversion part — when a U.S. company becomes the subsidiary of the foreign company — means the U.S. company issues replacement shares. Typically, you receive new shares equal to your former holdings, but little or no cash. As a shareholder you’re required to recognize a gain on the exchange of stock even though your ownership remains the same.
The gain is the amount by which the value of the stock on the inversion date exceeds your basis. Losses are generally not recognized.
The capital gain rate is based on your tax bracket. For 2014, capital gain rates range from zero to 20%. When your adjusted gross income is more than $200,000 ($250,000 when you’re married filing a joint return), the 3.8% net investment surtax may also apply.
Be aware that inversions can affect the amount of capital gain reported to you by mutual funds you own, if companies in the fund’s portfolio choose to invert during 2014.
Though not all mergers will create taxable income, keeping an eye on your portfolio can prevent tax bill shock when you file your 2014 federal income tax return.
Please give us a call to discuss your options.