There has been quite a bit of discussion about “inversion” deals lately. A U.S. company merges with a similar foreign one and then moves some of its income abroad to reduce its tax burden.
For shareholders these mergers could result in unexpected capital-gains taxes. Because the foreign firm is technically acquiring the U.S. company, these deals are taxable.
The replacement of new shares for the old ones in the U.S. company is a taxable exchange. Current capital gains tax rates vary between zero and almost 24 percent depending on yearly income.
The Wall Street Journal provides an example of an investor who buys company shares for $10. When the company “sells” itself, the inversion merger increases the value to $40 a share. The investor receives shares in the new company but owes taxes on the differential between the original cost and the price at the merger or $30 per share.
Those who are investing in company shares over the long term to fund retirement could be hit especially hard. Some may even have to sell shares to pay the capital gains tax owed.
Three tax planning strategies may help investors holding stock in firms considering an inversion deal.
First, offset possible gains with losses. It might be time to sell an underperforming stock or underwater property and use the losses to offset any gain.
Second, gift the stock to a friend or relative who is in need of help. The person who receives the stock will likely be in a lower capital-gains bracket and pay a lower tax rate. Taxpayers can gift up to $14,000 ($28,000 for a married couple) each year.
Third, give the stock to a charitable cause. The tax code allows a deduction for appreciated publicly traded stock.
Timing is very important and some of these strategies must occur prior to a completed inversion deal. For that reason, it is important to speak with a tax attorney.
Source: The Wall Street Journal, "An 'Inversion' Deal Could Raise Your Taxes," August 1, 2014.