Capital gains question

[statsguy]

My brother has income of about $4000 a year. He has an investment which, of he sells. will result in a $100,000 capital gain. Will he owe taxes on the gain? I think not because his income is so small.

Thanks
Stats

[sscritic]

A capital gain is income. Take a Schedule D and put in 100,000 of capital gain. Where does it go on your 1040? That is income. Then go to the Schedule D Tax Worksheet in the Schedule D instructions.

Complete this worksheet only if line 18 or line 19 of Schedule D is more than zero. Otherwise, complete the Qualified Dividends and Capital Gain Tax Worksheet in the Instructions for Form 1040, line 44 (or in the Instructions for Form 1040NR, line 42) to figure your tax.

The tax will be greater than zero. If you have tax software for yourself, make a fake return for him.

[pshonore]

You think $104000 is a small income? (Income for tax purposes includes investment income like interest, dividends, cap gains, etc and several other items of "income". His taxable income will be approx $95000 and his total bill should be around $9000 to use a round number. (Assuming he is single). Use a tax calculator to get a more accurate figure. And he will probably owe state tax as well assuming his state has an income tax.

[statsguy]

Thanks for the quick reply. I had a foggy brain this morning. I was thinking his capital gain would be treated as qualified dividends. I know that does not make sense.

Danke mein freund
Stats

[pshonore]

Actually long term cap gains are treated the same as QDs. Those falling in the 15% bracket and lower are generally not taxed. The excess is taxed at 15% unless you're over 400K (450K MFJ status)

[hicabob]

Perhaps spread the sale over a couple years if possible to save on taxes?

[statsguy]

Actually long term cap gains are treated the same as QDs. Those falling in the 15% bracket and lower are generally not taxed. The excess is taxed at 15% unless you're over 400K (450K MFJ status)

Here is the actual situation. He will have income of about $4000 this year (this is all from cashing an I-bond). He invested $200K from a taxable account into a variable annuity offered by an insurance company 10 years ago. Now the 10-year holding period has ended and he has about $300k. His plan is to sell all of it... and so he will have a $100,000 long-term capital gain. Not sure if the variable annuity structure changes the tax situation of the long-term capital gain.

Now I was thinking that the $4,000 is his income and the $100,000 long-term capital gain would get preferential tax treatment and be taxed at the 0% rate (well some at zero and some at 15%). Normally, since we support him, we claim him as a dependent. In any event, his filing status will be individual.

I will put this through Turbo tax and see what happens, but before I do that I thought it might be a simple question and answer.

I am wondering if this money being in a variable annuity will change the $100K from long-term gain to something else.

As others have suggested, my recommendation to him is (at the least to) take half this year and half next year... but he is very risk averse. He has spent the last decade watching the daily value of this investment change and he is ready to be done with it. The annuity is invested about 50% bonds and 50% equity.

Thanks again
Stats

PS "thanks" to the software for changing my original phrasing to "foggy brain" for political correctness.

[harrylime]

Distributions from variable annuities do not qualify for capital gains treatment. Earnings in the account are considered to be withdrawn first and are treated as ordinary income.

[MN Finance]

Maybe it goes without saying, but he can 1035 the annuity to a no-load version at VG or another place and not realize any income but have whatever the desirable outcome is that you seek (I assume getting out of the high cost annuity and/or changing the investments.) If he's in a low cost product the annuity is not a terrible vehicle if it's forever money. If he'll eventually be using it for withdrawals, then he may want to exit the annuity structure. I would take annual distributions to the extent that he stays in lower brackets (15%) or less. It will take a couple years to pull out the 100k gain, then at the end he can pull out the return of principal which is tax free (at that point)

[MBMiner]

... and so he will have a $100,000 long-term capital gain.

Unfortunately, that will be ordinary income, not capital gain.
Bruce