Selling stocks and minimizing taxes

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lmg1126
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Selling stocks and minimizing taxes

Post by lmg1126 »

My husband and I have several individual stocks in separate accounts. We've had them for 10+ years, many purchased through ESPPs. We would like to sell all of the individual stocks and consolidate the accounts, then reinvest the ~$150K in a basic three fund portfolio.

To minimize taxes, does it matter if we sell them all at once (within a tax year) or should we sell them over time?

I appreciate any help or advice.
livesoft
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Re: Selling stocks and minimizing taxes

Post by livesoft »

It may or not may matter.

If your income is usually $10,000 a year, then adding $120K income in a single year will be a bit different than adding $30,000 a year for the next 5 years.

However, if your income is usually $1,000,000 a year, then adding $120K income in a single year will be no different than adding $30,000 a year for the next 5 years.

You can also contribute the stocks to your charities such as a your donor-advised fund and not have to pay any taxes on that gift. Indeed, you will get a tax deduction.
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Topic Author
lmg1126
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Re: Selling stocks and minimizing taxes

Post by lmg1126 »

Thank you, that is helpful.

Our income is ~$200K per year.
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dodecahedron
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Re: Selling stocks and minimizing taxes

Post by dodecahedron »

If your income is around $200K per year, you will most likely want to spread the gains across multiple years. There are discontinuous things that happen to your taxes on a MFJ return once income hits $250K, especially if it is investment income.

Here is a link to my favorite free application (NBER TaxSim), which will let you see what happens if you spread the amounts across multiple years instead of taking it all in one big hit in a single year. There could be a lot of interaction effects (depending on your deductions, number of dependents, etc.)
Last edited by dodecahedron on Tue Aug 12, 2014 4:42 pm, edited 1 time in total.
livesoft
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Re: Selling stocks and minimizing taxes

Post by livesoft »

I'd would donate some to charity in both 2014 and 2015. I would sell some in 2014 and 2015. I might extend that to 2016 and 2017, but without more details I can't be sure.

So get out your copy of TurboTax and run the numbers for yourself.

A family with income of ~$200,000, may only have $100,000 of taxable income. See, e.g., http://www.bogleheads.org/forum/viewtopic.php?t=79510
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lmg1126
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Re: Selling stocks and minimizing taxes

Post by lmg1126 »

Thank you both, that sends me in the right direction.

While we have been investing, we are beginners with respect to investing using the methods I've read about in my Bogleheads guide. I've wanted to sell these stocks for awhile and reinvest them in funds, but I found it overwhelming to figure out what to sell and when. I will plug everything into a program and see what it tells me.

Indeed, our taxable income is more like $120K or so...we have four kids under 18 and a mortgage, etc.

Thank you again, I appreciate the help.
Last edited by lmg1126 on Tue Aug 12, 2014 6:00 pm, edited 1 time in total.
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Peter Foley
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Re: Selling stocks and minimizing taxes

Post by Peter Foley »

lmg

Welcome to the forum.

A few thoughts regarding how to minimize taxes.

First, have you ever heard of a donor advised fund? If you give regularly to some charities, you could gift appreciated shares of stock rather than cash. A donor advised fund is an easy way to do so. You donate the stock to the DAF and then tell the DAF where to donated the funds. Vanguard, Fidelity and Schwab all have DAFs. You could donate the shares with the greatest gains.

Second, do you have gains in everything? There may be some stocks that have not appreciated much over the past decade. These could be sold with little tax liability. If you have stocks with losses, those losses could offset some of the gains from the sale of other stocks. Some shares of a stock that you purchased 15 years ago may have gains while the shares purchased 10 years ago might not.

You can also spread out the sales as has been suggested. To make the most of any of these suggestions you first have to figure out what the cost bases of your shares are. Doing more than calculating the average cost basis may be to your advantage.
bkslainte
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Re: Selling stocks and minimizing taxes

Post by bkslainte »

You should also determine your cost basis for the stocks to get a true idea of your losses/gains. The cost basis is the price which you paid for the stock. If the stock has gone down in value, then you can offset these losses against any gains you have on other ESPP purchases.
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lmg1126
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Re: Selling stocks and minimizing taxes

Post by lmg1126 »

Peter Foley wrote:
First, have you ever heard of a donor advised fund?

Second, do you have gains in everything?
Thank you for the great information and the welcome! I have not heard of a donor advised fund. With the exception of the money in my husband's 401k we haven't invested in funds at all, and the fund choices through his plan are pretty limited. I am really a beginner. :D

There are gains for each stock overall, but I would have to look at the cost basis for each purchase to see if some were losses. I'm sure there were. This is why I held off selling them for so long...I knew it would be complicated.

Again, I appreciate the help!
wx27
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Re: Selling stocks and minimizing taxes

Post by wx27 »

Also make sure you know if your ESPPs are tax-qualified or not. This has an impact on how you determine your cost basis.
Here's a decent article covering the different types of ESPPs.
https://communications.fidelity.com/sps ... ticle.html

I used to have a DSPP (almost like an ESPP) that was non-qualified, so the difference between the purchase price and the market price was included as ordinary income on my W2 that year, I paid taxes on that amount, and my cost basis started at the market value of the stock instead of the purchase price.

At your income level, capital gains will be taxed at 15% at the federal level, and if your total MAGI is over 250k, you'll get hit with the additional net investment income tax of 3.8% on the investment income in excess of that threshold. Note that this particular rule is triggered by MAGI (before deductions/exemptions) and not determined from your taxable income. Depending on your actual unrealized capital gains in the ESPP stocks, you may want to only realize enough capital gains in one year so that your MAGI stays below the 250k threshold.

This is all concerning federal taxes since I don't know which state you reside in.
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lmg1126
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Re: Selling stocks and minimizing taxes

Post by lmg1126 »

Thank you, everyone. Very useful information.

Being a newbie poster, I wasn't sure how many details to give, but maybe an example would be useful.

My husband and I both worked at Intel from 1993-1996, and participated in the ESPP during that time. Our cost basis for the stock we bought during that time period was $10,800 and today it's worth $53,000. But again, I'm not sure without digging into the paperwork which purchases were losses and which were gains.

Similarly, I just sold our Motorola stock we bought between 1996-2001. There were a lot of losses for the individual purchases, but overall the $2800 we spent is now worth about $19,000.

Based on the advice I've read here, I think we might just stick with that sale for this year and sell off another chunk next year.

Thanks everyone!
bkslainte
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Re: Selling stocks and minimizing taxes

Post by bkslainte »

Does the current value include any reinvested dividends? If you have not done anything with the ESPP and were reinvesting the dividends, then your cost basis might be higher because you continued to reinvest the dividends.
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lmg1126
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Re: Selling stocks and minimizing taxes

Post by lmg1126 »

bkslainte wrote:Does the current value include any reinvested dividends? If you have not done anything with the ESPP and were reinvesting the dividends, then your cost basis might be higher because you continued to reinvest the dividends.
Yes, all dividends were reinvested.
Bob's not my name
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Re: Selling stocks and minimizing taxes

Post by Bob's not my name »

lmg1126 wrote:we have four kids under 18
Your tax rate on long term capital gains is likely at least 25%. Here are some elements of your marginal tax rate on LTCG:
  • 15% nominal federal tax rate for MFJ with taxable income about $74,000 to about $400,000
  • 5% due to phaseout of the child tax credit for AGI $110,000 - $190,000 (AGI is at the bottom of page 1 of your 1040)
  • 6.5% Wisconsin tax (I didn't investigate this), deductible against federal so I rounded to 5%
  • If you wait until you have one or more kids in college*, and if you are eligible for financial aid (e.g., at one of the top tier schools that give grant aid even to upper middle class families), there's a de facto financial aid phaseout tax of 47% of your net after federal taxes
  • And you could hit a phaseout for an education credit, which adds 10-50%, depending on which credit and the number of kids in college. The American Opportunity Tax Credit creates the highest marginal rates but it is supposed to sunset in 2017. Maybe they'll come up with an equally silly replacement.
  • If your gains put you into the AMT your LTCG rate is about 21% instead of 15%
  • If your gains put your AGI above $250,000 there's the 3.8% Affordable Care Act tax.
  • If your AGI goes above $300,000 (seems unlikely) you'll be in the American Taxpayer Relief Act phaseouts, which add 7% for your family.
I'd estimate your AGI at about $160,000, assuming you're maxing two 401k's. That would mean the first $30,000 of gains would be taxed at about 25% and then your rate would go down to 20% (assuming no kids in college), but maybe you'd start to hit the AMT so it wouldn't make much difference.

*More precisely, if you waited until a financial aid base year, the first of which would be the calendar year straddling your eldest's junior and senior years of high school.
Bob's not my name
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Re: Selling stocks and minimizing taxes

Post by Bob's not my name »

Oh yeah, and you could gift some stocks to your four kids via UTMAs and have them sell in increments over the years at 0% tax, provided you stay under the $2,000 kiddie tax limit, which remember includes not just the gains but also any dividends thrown off by the stock during the year. You might not find the paperwork attractive but this would allow you to sell, say, $16,000 of stock a year realizing $8,000 of gains and thereby avoid $2,000 of tax per year.
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grabiner
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Re: Selling stocks and minimizing taxes

Post by grabiner »

Bob's not my name wrote:Oh yeah, and you could gift some stocks to your four kids via UTMAs and have them sell in increments over the years at 0% tax, provided you stay under the $2,000 kiddie tax limit, which remember includes not just the gains but also any dividends thrown off by the stock during the year. You might not find the paperwork attractive but this would allow you to sell, say, $16,000 of stock a year realizing $8,000 of gains and thereby avoid $2,000 of tax per year.
And even if you go over the kiddie tax limit, gains are taxed at the parents' rate, but they do not count for other phase-outs; $1000 of capital gains above the kiddie tax limit will lead to $150 in tax paid by the child, but will not cost you $50 of child tax credit.

However, don't do this if you will be eligible for college financial aid. Children's assets and income are counted much more heavily for financial aid purposes.
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Bob's not my name
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Re: Selling stocks and minimizing taxes

Post by Bob's not my name »

Both good points, but also remember the base year system of financial aid. You can use UTMA funds for the benefit of the child before college, mooting the issue. Also, you may be ineligible for aid with only one kid in college but eligible with two. That means as long as the first kid has depleted his UTMA before the first base year of eligibility (that is, the base year for the first academic year with two kids in college, viz., the calendar year straddling the second kid's junior and senior high school years) you won't be punished for saving for college ... or, rather, you won't be punished for the first kid's UTMA, but you'll still be punished plenty. My kids all had UTMAs and it made not a whit of difference to our financial aid -- that is, we still got $40,000 of aid for an academic year in which we had two in college.
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