Capital Gains Tax question.

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WilliamRice
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Joined: Fri Nov 13, 2009 10:20 am

Capital Gains Tax question.

Post by WilliamRice »

Many years ago I purchased 39 shares of Apple @ 149. Since then the stock has obviously increased in value significantly. I keep reading about changes in the new year on the capital gains taxes going up. My wife and I make good incomes - me @ 65k and her @ 50k. We don't own a house, no car, and the only debt we have is her student loans - 24k.

I have been sitting on the stock for no reason other than the fact that analyst continue to say that it's will go up to 800-900. I have no other basis for this, I bought the stock stupidly at the time but luckily for me it has worked out. I keep trying to read through the tax codes and what I will have to pay on it but I feel like I keep getting different stories and suggestions about the new year, new policies, etc.

I was hoping that someone could provide some clarity and advice / similar stories or anything. I appreciate the time regardless - thanks!

William
DSInvestor
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Re: Capital Gains Tax question.

Post by DSInvestor »

Your 39 shares were bought many years ago so it would be long term. Assuming there were no stock splits along the way and no reinvested dividends, you'd still have 39 shares today. AAPL is trading at $553.

Your cost basis would be 39 x 149 = 5811
You sell 39 shares for $553. Gross Proceeds = 39 x 553 = $21,567
Long Term Capital Gain = 21,567 - 5811 = $15,756

For 2012, Long Term Capital gains rates are 0% for the amount that falls in 15% bracket or lower, 15% for 25% bracket or higher.
If the entire LT gain falls in the 25% bracket or higher, the capital gains tax would be 15% of 15,756 = 2363. This is fed tax. State taxes may apply as well. If your tax situation is such that some of the gain falls in the 15% bracket or lower, the tax cost to realize that gain will be lower.

This is if you realize the gain this year. The current preferential tax rates for Long Term Capital Gains are scheduled to expire at the end of 2012. If the current rates sunset, higher tax rates will apply in 2013.

I suggest running your tax situation through the free Taxcaster 2012 tax calculator. Enter your base information without the capital gain to see your base Fed Tax. Then add the LT capital gain to see the new Fed Tax. The difference in the two Fed tax numbers will be the Fed tax cost to realize that capital gain.

Link to Taxcaster: http://turbotax.intuit.com/tax-tools/ca ... taxcaster/

Unfortunately, taxcaster doesn't have a place to enter traditional 401k contributions. When entering your wages in the "Your income" section, subtract the amount of your Trad401k contributions from your gross salary. If you both make substantial contributions to Traditional 401k and itemize deductions, some of the capital gain will fall in the 15% bracket to make some of the gain taxable at 0%.

Here's a wikipedia page showing capital gains tax rates. There is a table there that shows the rates that apply now, and the rates for 2013 if the current rates are not extended.
http://en.wikipedia.org/wiki/Capital_ga ... ted_States
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YDNAL
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Re: Capital Gains Tax question.

Post by YDNAL »

WilliamRice wrote:Many years ago I purchased 39 shares of Apple @ 149. Since then the stock has obviously increased in value significantly. I keep reading about changes in the new year on the capital gains taxes going up. My wife and I make good incomes - me @ 65k and her @ 50k. We don't own a house, no car, and the only debt we have is her student loans - 24k.
William,

Favorable capital gain tax rates are scheduled to expire on 12/31/2012. Your decision to sell anything should certainly consider taxes, but also should be based on your overall plan, goals, and investments to reach the goals. Now, is owning an individual Stock part of such plan?
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
JW-Retired
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Joined: Sun Dec 16, 2007 12:25 pm

Re: Capital Gains Tax question.

Post by JW-Retired »

WilliamRice wrote:Many years ago I purchased 39 shares of Apple @ 149. Since then the stock has obviously increased in value significantly. I keep reading about changes in the new year on the capital gains taxes going up. My wife and I make good incomes - me @ 65k and her @ 50k. We don't own a house, no car, and the only debt we have is her student loans - 24k.

I have been sitting on the stock for no reason other than the fact that analyst continue to say that it's will go up to 800-900. I have no other basis for this, I bought the stock stupidly at the time but luckily for me it has worked out. I keep trying to read through the tax codes and what I will have to pay on it but I feel like I keep getting different stories and suggestions about the new year, new policies, etc.

I was hoping that someone could provide some clarity and advice / similar stories or anything. I appreciate the time regardless - thanks!
William
If you make good incomes, as you said, then you will pay 15% tax on the gains (plus any state tax) if you sell this year. Goes up to 20% federal cap gains tax next year. If you live in CA they tax cap gains as ordinary income so selling in 2012 would probably mean a 25.3% total fed+state tax on the gain. Other states have lower cap gains tax rates.

I think your choice is between selling now and paying the tax, or keeping the stock and passing to heirs with a stepped up basis when you die. I would sell before the rate goes up unless you are an old guy like me. A single stock holding, even Apple, is high risk.
JW
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Bob's not my name
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Re: Capital Gains Tax question.

Post by Bob's not my name »

Essential information from your prior posts:

You are Massachusetts taxpayers. MA taxes short terms gains at 12% or something crazy like that, but long term gains at 5.3%.
You have one child.
Your student loans are at a very high rate, 6.5%. $24,000 x 6.5% = $1,500 interest each year, deductible.

Here's a guess at your tax situation:

$130,000 gross income including $15,000 capital gain on stock
- $4,000 pre-tax health, dental, and disability insurance premiums withheld from your pay (guess based on national median)
- $2,500 FSA contributions (guessed based on size of family and age of child)
- $34,000 401k contributions (maximum for 2012, enabled by stock sale)
- $1,500 student loan interest deduction
--------------------
$88,000 Adjusted Gross Income
- $11,900 standard deduction
- $11,400 personal exemptions
---------------------
$64,700 taxable income --> that's in the 15% bracket with $6,000 of head room

So: your long term capital gain will be taxed 0% by the federal government and 5.3% by MA if you use 401k contributions to keep your taxable income (including the stock sale) under $70,700. So plan carefully and you can sell it all for hardly any tax bill.

Option: gift some of the shares to a UTMA for your child. Your child can realize $1,900 of capital gains each year without paying any federal tax (and probably no MA tax, but I didn't look into that). This option appears unnecessary to me, since it looks like you can pay hardly any tax on the sale yourself.

Advice: use the proceeds to (1) increase your 401k contributions as necessary to stay under $70,700 taxable income and (2) pay off some of that very expensive debt.
Carl53
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Re: Capital Gains Tax question.

Post by Carl53 »

Bob's not my name wrote:Essential information from your prior posts:

You are Massachusetts taxpayers. MA taxes short terms gains at 12% or something crazy like that, but long term gains at 5.3%.
You have one child.
Your student loans are at a very high rate, 6.5%. $24,000 x 6.5% = $1,500 interest each year, deductible.

Here's a guess at your tax situation:

$130,000 gross income including $15,000 capital gain on stock
- $4,000 pre-tax health, dental, and disability insurance premiums withheld from your pay (guess based on national median)
- $2,500 FSA contributions (guessed based on size of family and age of child)
- $34,000 401k contributions (maximum for 2012, enabled by stock sale)
- $1,500 student loan interest deduction
--------------------
$88,000 Adjusted Gross Income
- $11,900 standard deduction
- $11,400 personal exemptions
---------------------
$64,700 taxable income --> that's in the 15% bracket with $6,000 of head room

So: your long term capital gain will be taxed 0% by the federal government and 5.3% by MA if you use 401k contributions to keep your taxable income (including the stock sale) under $70,700. So plan carefully and you can sell it all for hardly any tax bill.

Option: gift some of the shares to a UTMA for your child. Your child can realize $1,900 of capital gains each year without paying any federal tax (and probably no MA tax, but I didn't look into that). This option appears unnecessary to me, since it looks like you can pay hardly any tax on the sale yourself.

Advice: use the proceeds to (1) increase your 401k contributions as necessary to stay under $70,700 taxable income and (2) pay off some of that very expensive debt.
My guess is that living in MA with current expenses and incomes is that the OP and spouse are not very close to maxing out their 401ks for this year. Unfortunately that means there will be insufficient time to boost those contributions enough to get as low as Bob suggests. It is likely that you could go online and update your 401k contributions to as much as 85% of earnings. If the changes took effect in time for your December paychecks you will have $4600 withheld from your check and $3540 from your spouse's in December. If you have been each contributing say 10% you would have contributed nearly $11k through November. The December boost would get your combined total to about $19k. Still enough under Bob's scenario to at least make only some of your CG taxable at the higher 15% rate. In any case selling this year would be my recommendation.
Bob's not my name
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Re: Capital Gains Tax question.

Post by Bob's not my name »

Good point. Deductible traditional IRAs are also an option. Although your AGI will make you only partly eligible, you can wait until tax time in early 2013 to figure out the optimal 2012 TIRA contributions to keep your 2012 taxable income under $70,700. Unfortunately, MA taxes TIRA contributions, but you would still be getting your stock gains taxed at 0% federal and part of the proceeds transferred into tax-advantaged space.
ljay
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Joined: Sun Oct 07, 2012 9:32 am

Re: Capital Gains Tax question.

Post by ljay »

The 15% long-term rate will become 20% on January 1 unless there is a change implemented by Washington. If you make more than $250,000 AGI (couple) in 2013 that gain is subject to another 3.8% "health care tax" or whatever you want to call it.

I don't understand why many are rushing to sell in 2012 for a 5% change in the long-term tax rate. If you like your holdings, incurring a tax now versus deferral doesn't make sense to me.

Dividends jump to ordinary income rates on January 1 so that is a rate to watch closely.
JW-Retired
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Re: Capital Gains Tax question.

Post by JW-Retired »

ljay wrote: I don't understand why many are rushing to sell in 2012 for a 5% change in the long-term tax rate. If you like your holdings, incurring a tax now versus deferral doesn't make sense to me.
OP holds just this one individual stock. Apple or not, this is as undiversified as it gets. Unless Apple amounts to less than 5% of his total investments, he should sell it soon and waiting past the end of the year will just cost an extra 5%.

I recall a couple of stocks I owned and was very fond of that went to next-to-nothing. No more purchasing individual stocks for me.
JW
Retired at Last
Bob's not my name
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Re: Capital Gains Tax question.

Post by Bob's not my name »

ljay wrote:The 15% long-term rate will become 20% on January 1 unless there is a change implemented by Washington.

I don't understand why many are rushing to sell in 2012 for a 5% change in the long-term tax rate. If you like your holdings, incurring a tax now versus deferral doesn't make sense to me.
As discussed, OP probably has at least some window for 0% capital gains rate, which is not the lowest tax rate you can have, but zero is pretty low. Whether the window is large enough to dispose of all or most of the stock (including the option of gifting some to the child) is the question.
livesoft
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Re: Capital Gains Tax question.

Post by livesoft »

There is a 5-year long-term rate of 18%. So it's really gonna be a 3% increase for folks with AGI under $250K.
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Bob's not my name
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Re: Capital Gains Tax question.

Post by Bob's not my name »

livesoft wrote:There is a 5-year long-term rate of 18%. So it's really gonna be a 3% increase for folks with AGI under $250K.
An 8% increase for folks below the 25% tax bracket (0% --> 8%).

And for folks under $250,000 AGI who are in the AMT (I think this is roughly AGI $150,000 - $250,000) the rate is currently 21.5% -- what does it go up to next year under current law?
Last edited by Bob's not my name on Sun Nov 11, 2012 9:32 am, edited 1 time in total.
YDNAL
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Re: Capital Gains Tax question.

Post by YDNAL »

WilliamRice wrote:Many years ago I purchased 39 shares of Apple @ 149.....

I have been sitting on the stock for no reason other than the fact that analyst continue to say that it's will go up to 800-900.
William,

When you hint of "tax question" be prepared for all the stuff that follows.
  • I'm not saying this is bad, just saying that your primary question should be whether or not you want to keep APPL - despite analysts' projection of $800-$900 per share.
  • If the answer is NO, then selling now is likely best for you in order to take advantage of favorable current capital gain tax rates - scheduled to expire 12/31/2012 - and to use this money to diversify your holdings.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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