Investment Coordination for High Net Worth Individuals in Austin

Yes, in the tax sense of that phrase, and the boundary around it matters enough to state before anything else. The Reed Corporation is a CPA and tax firm. We are not a registered investment adviser, and we do not sell securities or manage portfolios. We do not provide investment management services in the advisory sense, which means no recommendation about what to buy or when to sell ever comes out of this office. Your money stays with your own licensed advisor and your own custodian, and the choice of holdings stays there too. What we do is the tax side of the same activity. As we use the phrase, investment coordination for high net worth clients in Austin means the tax consequences of what your advisor does are known before they happen and reported correctly afterward.

In practice that is four pieces of work. We track cost basis across accounts so the gain that gets reported is the real gain. We reconcile what brokers told the IRS against what the return says. We plan around the Net Investment Income Tax computed on Form 8960. And we handle the tax planning around retirement accounts, where the rules in Publication 590-A and Publication 590-B decide what a contribution or a distribution actually costs. None of that requires us to hold a security or to have an opinion about the market. All of it requires us to know what happened inside the account.

The division of labor is clean. Your advisor decides allocation and picks holdings. We tell you and your advisor what a proposed sale does to this year return, what the basis is, and whether a different tax lot produces a better answer. If your advisor proposes harvesting losses in December, we say how much of that loss you can actually use this year, since Schedule D only allows 3,000 dollars of net capital loss against ordinary income in a year, with the remainder carried forward. That is a tax fact, not investment advice. The advisor still makes the call and the client still decides.

Worked example. A client advisor wants to sell a position carrying a 400,000 dollars long term gain in November to rebalance. Our part is arithmetic. At a 20 percent long term capital gain rate that is 80,000 dollars of federal tax, plus 3.8 percent Net Investment Income Tax on the same gain, another 15,200 dollars. Total 95,200 dollars. If the same position is sold in two pieces across December and January, the second 200,000 dollars of gain moves into the following tax year and the estimated payment moves with it. Whether that is a good idea is the advisor judgment and the client decision. Our job is that nobody learns the number for the first time in April.

The common mistake is assuming the CPA and the advisor talk to each other by default. They usually do not, and the client is the only person who sees both sides. The second mistake is treating the broker gain and loss report as the final word on basis, which it frequently is not. Clients who want their advisor and their tax strategy team on the same page before the next rebalance can request a consultation and we will set up that call together. The individual return then reports what was already planned rather than discovering it. After a couple of years that order of operations becomes permanent, which is the whole aim.

With a schedule and a standing agenda, because ad hoc works until the year it does not. We talk to the advisor early in the year to understand what the next twelve months are likely to look like. We talk again in the third quarter, before the December rush, to compare realized gains against the projection. Then we talk in December to finalize. Between those we answer questions as they arrive. The client is on every call or copied on every note. We never take instructions from an advisor about a client account, and we never give any. In practice, investment coordination for high net worth clients in Austin is a three party conversation with the client in the middle, which is the only arrangement that holds up when one side holds the assets and the other side has to report them.

The third quarter conversation is the one that earns its keep. By September we know roughly what the operating income looks like and what has already been realized in the portfolio. That tells us the projected marginal rate, and the projected rate tells the client whether an additional gain this year is taxed at 15 percent or at 23.8 percent once the Net Investment Income Tax on Form 8960 is added on top. It also tells us whether the estimated payments on Form 1040-ES still make sense or need to change. The safe harbor rules in Publication 505 matter a great deal here, because one large late year gain can turn a comfortable safe harbor into an underpayment.

Retirement accounts get their own thread. A backdoor Roth conversion has a year end deadline. A solo 401(k) contribution for a consulting entity follows the plan document and the entity return date. A required distribution reported on Form 1099-R has a hard date with a penalty behind it. None of those deadlines is April 15. We track them because the advisor is watching the account rather than the return, and the client is watching neither.

Worked example. In September the projection shows taxable income of 890,000 dollars before any portfolio activity. The advisor mentions an intention to realize 300,000 dollars of long term gain in the fourth quarter. That gain is taxed at 20 percent, which is 60,000 dollars, plus 11,400 dollars of Net Investment Income Tax. Existing estimates were built on a 700,000 dollars projection and are now roughly 71,000 dollars short. Rather than take a penalty computed on Form 2210, we raise the fourth quarter payment or adjust withholding, since withholding counts as paid evenly across the year no matter when it actually happens. That one September call is worth more than the rest of the coordination combined.

The common mistake is telling the CPA about a large sale after it settles. Once the trade is done the options are gone and all that remains is paying for it. The second mistake is the opposite, asking the CPA whether to make the trade at all. That is not our call and we will not make it. What we will do is put a real number on it before the decision gets made. Our tax strategy team runs the projection, and the bookkeeping team keeps the entity income current so the projection has something solid to stand on. After the first full year the September call takes twenty minutes, because nothing in it is a surprise anymore.

Because basis travels badly. A broker reports basis on a 1099-B for covered securities it has held since the purchase date. Once a position moves between custodians, arrives by inheritance, comes out of an option exercise, or was bought before the covered security rules applied, the broker may report basis as unknown or report a number that is really just the transfer value. The taxpayer then signs a return that adopts whatever the broker said, and the broker never claimed to be right in the first place. Cost basis work inside investment coordination for high net worth clients in Austin means rebuilding the number from the actual purchase history and then reporting it correctly on Form 8949 with the adjustment codes that explain the difference.

The mechanics are not mysterious. Form 8949 has a column for the proceeds, a column for the basis the broker reported, and then a column for an adjustment with a code that explains it. That is the mechanism for saying the broker reported 40,000 dollars, the real basis is 95,000 dollars, and here is the correction. The totals carry to Schedule D. Publication 550 covers how basis works for investment property, and Publication 551 covers basis generally, including inherited property that takes a step up to date of death value. Inherited positions are the single most common place we find a five or six figure error sitting quietly on a return.

Wash sales are the other place it breaks. If a loss position is sold and a substantially identical position is bought within thirty days on either side of that sale, the loss is disallowed and added to the basis of the replacement. A single broker will usually catch this inside one account. No broker catches it across two custodians, or between a taxable account and an IRA, where the loss is disallowed permanently rather than merely deferred. A household with a taxable account at one firm and an advisor rebalancing an IRA at another can generate wash sales that no statement anywhere reports.

Worked example. A client inherits a stock position from a parent. The parent basis was 60,000 dollars. Date of death value was 340,000 dollars. The client sells for 355,000 dollars. The broker, having received the position by transfer, reports basis as unknown. If the return is prepared straight from the 1099-B as issued, the gain looks like 355,000 dollars, taxed at 20 percent plus 3.8 percent Net Investment Income Tax on Form 8960, roughly 84,500 dollars. The real gain is 15,000 dollars and the real tax is about 3,600 dollars. The difference is 80,900 dollars, and it exists only because a column was blank and somebody filled it with a zero.

The common mistake is trusting the broker realized gain report because it arrives looking official. It is a starting point and nothing more, and the adjustment columns on Form 8949 exist precisely because the broker number is so often incomplete. The second mistake is throwing away the estate appraisal or the option exercise confirmation, which is the only proof of the number we are about to report. Our bookkeeping team keeps a basis schedule alongside the account, and the individual return team reconciles it against the broker file every year. Once that schedule exists, every future sale becomes a lookup instead of an investigation.

It is a 3.8 percent federal tax on the smaller of net investment income or the amount by which modified adjusted gross income exceeds a threshold. Those thresholds are not indexed for inflation, which means more households cross them every year without changing a thing about how they live. Net investment income takes in interest, dividends, capital gains, rents, royalties, and passive business income. It leaves out wages, self employment income, and distributions from qualified retirement plans. The computation lives on Form 8960 and it sits on top of the regular tax reported on Form 1040. For a household with a large portfolio it is a real line, not a rounding item.

The planning around it is mostly about character and timing rather than avoidance. Income that is not investment income is not subject to it. Reasonable compensation from an S corporation is wages, so it falls outside the 3.8 percent, though it carries payroll tax instead, which is its own trade. Income from a business the client materially participates in is generally not passive and therefore generally not investment income, which makes participation records worth keeping contemporaneously. Publication 925 sets out the passive activity rules, and a rental that rises to the level of a trade or business with real participation can fall outside this tax where a passive rental does not.

Austin matters here in the arithmetic rather than in the rule. The tax is federal, so it applies the same in Texas as anywhere else in the country. What differs is the total bill. A New York or California family pays this 3.8 percent and then pays a state tax on the very same capital gain at ordinary rates on top of it. An Austin family pays the federal layer and stops there, because Texas has no state personal income tax. An entity may still file a franchise report with the Texas Comptroller. Which is why investment coordination for high net worth clients in Austin usually finds its savings in federal timing, since there is no state layer left to shift around.

Worked example. A married couple has modified adjusted gross income of 620,000 dollars, of which 210,000 dollars is net investment income from dividends and gains. The threshold on a joint return is 250,000 dollars, so the excess is 370,000 dollars. The tax applies to the smaller of those two figures, which is the 210,000 dollars of investment income, at 3.8 percent. That is 7,980 dollars. If the couple realizes another 150,000 dollars of gain, net investment income rises to 360,000 dollars and the tax rises to 13,680 dollars, an extra 5,700 dollars sitting on top of the capital gain tax itself. Dividends reported on Form 1099-DIV and interest on Form 1099-INT feed that same line.

The common mistake is thinking of the long term capital gain rate as 20 percent when the real federal number is 23.8 percent for anyone above the threshold. Decisions get made against a figure that is wrong by nearly four points. The second mistake is assuming a rental automatically escapes the tax because it is a business. Passive rental income is investment income for this purpose unless real participation exists and is documented. Our tax strategy team models the 8960 line inside the same projection that drives the estimates, and the individual return team files it. As portfolios grow while the thresholds stay put, this line only gets larger, which is why we model it every single year rather than every few.

The absence of a state income tax changes the math, and it changes it in a direction people tend to misread. Texas does not tax personal income, so a capital gain realized by an Austin resident carries a federal cost and no state cost. In a state that taxes gains as ordinary income, the identical sale can cost several points more. That is a real advantage and worth having. What it is not is a reason to stop thinking about timing. Because there is no state layer to plan around, the entire planning question is federal, and federal planning comes down to which year the income lands in and what character it carries. The result is that investment coordination for high net worth clients in Austin concentrates on the calendar, on basis, on retirement account sequencing, and on the Net Investment Income Tax computed on Form 8960.

Residency is the part that trips up new arrivals. Moving to Austin from a state that taxes income does not end that state interest in the year of the move, and it does not end it for income sourced there afterward. A partnership interest generating income from operations elsewhere can still create a filing obligation in that other state long after the client has become a Texan. We are not going to pretend the move solved everything. What the move does solve is the tax on portfolio income going forward, which for a household with a large brokerage account is usually the biggest line on the page.

At the entity level the state still shows up. An LLC or a corporation holding investments may fall under the Texas franchise tax administered by the Texas Comptroller, and a passive entity election exists for entities whose income is largely passive. Whether an entity qualifies depends on the income mix, and the income mix comes out of the books. This is a small item next to the federal picture. It is also one where a missed report generates a notice for a family that owed nothing at all, which is an annoying way to meet a state agency.

Worked example. A client sells a position for a 1,000,000 dollars long term gain. Federal capital gain tax at 20 percent is 200,000 dollars. The Net Investment Income Tax adds 38,000 dollars. Total 238,000 dollars. Had the same client still been a New York City resident, a state and city layer would apply to the same gain at ordinary rates, and the combined cost would be meaningfully higher than 238,000 dollars. The Austin number is the whole number. That also means the estimated payment on Form 1040-ES is the only payment to get right, and getting it wrong produces one penalty on Form 2210 rather than two.

The common mistake is treating a Texas move as a permanent answer to every state question, when the former state may still test the year of the move and still tax income sourced within its borders. The second mistake is letting the absence of a state tax become a reason to stop planning, since the federal layer alone at 23.8 percent on portfolio income is larger than the entire tax bill most people ever faced before. Our tax strategy team works the whole federal picture, and the bookkeeping team keeps the entity records the franchise report depends on. As the portfolio grows the federal question only gets bigger, and planning it in September will beat reacting to it in April every year running.