How to pay off margin and not get killed on taxes

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MAVerlous
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How to pay off margin and not get killed on taxes

Post by MAVerlous » Fri Feb 02, 2018 7:57 pm

I have a margin that is at 50% of my investments at a discount brokers. I am disabled and on SSI disability and Medicare. I need to sell investments to pay off my margin and then live off of the money left in my account. How can I do this? And, how can I do this without paying a lot in capital gains since much of the investments were bought for me many years ago by my parents? Thank you.

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WoodSpinner
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Re: How to pay off margin and not get killed on taxes

Post by WoodSpinner » Fri Feb 02, 2018 8:58 pm

OP,

Can you provide some more info?

Amounts? Current income? Tax bracket? State Tax? Filing status?

We need this info to help analyze tax plan..

WoodSpinner

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whodidntante
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Re: How to pay off margin and not get killed on taxes

Post by whodidntante » Fri Feb 02, 2018 9:11 pm

You would be able to dump a lot of it at a 15% long term capital gains rate or maybe a small amount at 0%. Does 15% LTCG constitute getting killed on taxes?

MAVerlous
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Re: How to pay off margin and not get killed on taxes

Post by MAVerlous » Sat Feb 03, 2018 10:59 am

Approximately $300,000.00 in investments. $150,000.00 margin.
I make approximately $14,000.00 annually from SSI disability. Any income from investments pays interest on margin.
Yes, 15% seems like a lot to me, since I have not had to pay taxes in years. I am a Florida resident, so no state tax. I am 53 yrs old.

Do I sell $150,000. of investments all at once to pay off the margin or in smaller lump sums? I am actually in dire straights at this time and in need of cash to live off of(food, mortgage, etc.). So I may have to sell off the lump sum very soon, but just wanted to know what was actually best. Thank you.

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FiveK
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Re: How to pay off margin and not get killed on taxes

Post by FiveK » Sat Feb 03, 2018 1:23 pm

What would your long and short term capital gains be if you sold it all now? Other taxable income?

The SSI is non-taxable. If you have no other taxable income, you could incur ~$50K of long term capital gains and pay $0 tax.

TheAncientOne
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Re: How to pay off margin and not get killed on taxes

Post by TheAncientOne » Sat Feb 03, 2018 1:32 pm

So you have only $150K in investments after margin debt. Sell it all now. Margin debt is a foolish thing to have if you're well off. It's absolutely insane to have it in your situation. Your tax situation will probably be minor if you inherited it and received a stepped up basis upon the death of your parent.

Sell it all now. All the comments about tax strategy are irrelevant compared to the foolish game you don't realize you're playing.

KeepinItPositive
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Re: How to pay off margin and not get killed on taxes

Post by KeepinItPositive » Sat Feb 03, 2018 1:32 pm

Op,

I'm sorry that you are in a tough situation. What is monthly shortfall? Do you have other assets available.

You could be wiped out if the market takes a nasty downturn because of the leverage. That is not a risk I'd be willing to take.

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Pajamas
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Re: How to pay off margin and not get killed on taxes

Post by Pajamas » Sat Feb 03, 2018 1:40 pm

TheAncientOne wrote:
Sat Feb 03, 2018 1:32 pm
So you have only $150K in investments after margin debt. Sell it all now. Margin debt is a foolish thing to have if you're well off. It's absolutely insane to have it in your situation. Your tax situation will probably be minor if you inherited it and received a stepped up basis upon the death of your parent.

Sell it all now. All the comments about tax strategy are irrelevant compared to the foolish game you don't realize you're playing.
You are telling her to act hastily and without consideration of the consequences using absolute statements that are not true and then you tell her that [is]he[/i] is playing a foolish game and doesn't realize it? :oops:

She said her parents died "many years ago" and you have no idea what her tax situation would be because she hasn't provided enough information. :oops:

[Edited for gender.]
Last edited by Pajamas on Sun Feb 04, 2018 3:28 pm, edited 2 times in total.

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Pajamas
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Re: How to pay off margin and not get killed on taxes

Post by Pajamas » Sat Feb 03, 2018 1:44 pm

WoodSpinner wrote:
Fri Feb 02, 2018 8:58 pm
OP,

Can you provide some more info?

Amounts? Current income? Tax bracket? State Tax? Filing status?

We need this info to help analyze tax plan..

WoodSpinner
MAVerlous, you need to provide this ^^^ information at a minimum for anyone to help you make the right decisions. It might even be best to get face-to-face assistance from a professional tax accountant.

If you have any benefits that are based on income, they could be affected by your capital gains. You may be able to take capital gains over a few years and pay little in taxes on it but you might have a large tax bill if you just sell everything at once.

It may help enormously to pick and choose what you sell and when based on the income it throws off vs. the accumulated capital gains. For instance, you may have a holding with relatively low capital gains that provides relatively low income and you might sell that before you sell a holding with high dividends and high capital gains.

You are right to address your margin balance now as interest rates are expected to continue rising and eat into your total return.

Spirit Rider
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Re: How to pay off margin and not get killed on taxes

Post by Spirit Rider » Sat Feb 03, 2018 2:10 pm

If the investments were bought many years ago. How could the margin possibly be at 50% with this bull market.

It is not a question of if. but when some reversion to the mean occurs. I would immediately sell off 1/2 down to $150,000. With safe harbors you will not have to pay the taxes until next April. Then I would sell what would be necessary grossed up to pay the taxes.

MAVerlous
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Re: How to pay off margin and not get killed on taxes

Post by MAVerlous » Sat Feb 03, 2018 6:33 pm

I only make $14,000. A year from SSI disability tax free since FL has no state tax. I have paid $0 taxes for many many years. Only when I sold stock years ago and had capital gains did I pay the 15% taxes. My account now is with a discount broker Charles Schwab.
Any income/dividends from stocks that make up the $3000,000.(of all stocks) goes to may margin interest. Those are my only investments and only income. The stocks were given to me by my parents in my childhood. Mom is dead, dad is still living. The only other income is 1IRA with Fidelity. I am single, female & have 5 years left to pay off the mortgage on my condo. I don’t know what other info I can give to help, sorry. Thank you for the advice. I really appreciate it. I am a complete novice when it comes to investing.

MrGreen
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Re: How to pay off margin and not get killed on taxes

Post by MrGreen » Sat Feb 03, 2018 8:07 pm

MAVerlous wrote:
Sat Feb 03, 2018 6:33 pm
I only make $14,000. A year from SSI disability tax free since FL has no state tax. I have paid $0 taxes for many many years. Only when I sold stock years ago and had capital gains did I pay the 15% taxes. My account now is with a discount broker Charles Schwab.
Any income/dividends from stocks that make up the $3000,000.(of all stocks) goes to may margin interest. Those are my only investments and only income. The stocks were given to me by my parents in my childhood. Mom is dead, dad is still living. The only other income is 1IRA with Fidelity. I am single, female & have 5 years left to pay off the mortgage on my condo. I don’t know what other info I can give to help, sorry. Thank you for the advice. I really appreciate it. I am a complete novice when it comes to investing.
MAVerlous, are your Schwab investments in stock or in ETF's/Mutual Funds?

Do any of your stocks have losses? For example, if one stock has a $10,000 loss and another stock has a $10,000 gain you could sell them and they would offset each other.

Did you have an advisor or friend that got you in this situation? Has something changed? Have you really had $150,000.00 margin debt for many years?

Also, double checking...you are on Medicare or Medicaid?

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WoodSpinner
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Re: How to pay off margin and not get killed on taxes

Post by WoodSpinner » Sat Feb 03, 2018 8:24 pm

MAVerlous wrote:
Sat Feb 03, 2018 6:33 pm
I only make $14,000. A year from SSI disability tax free since FL has no state tax. I have paid $0 taxes for many many years. Only when I sold stock years ago and had capital gains did I pay the 15% taxes. My account now is with a discount broker Charles Schwab.
Any income/dividends from stocks that make up the $3000,000.(of all stocks) goes to may margin interest. Those are my only investments and only income. The stocks were given to me by my parents in my childhood. Mom is dead, dad is still living. The only other income is 1IRA with Fidelity. I am single, female & have 5 years left to pay off the mortgage on my condo. I don’t know what other info I can give to help, sorry. Thank you for the advice. I really appreciate it. I am a complete novice when it comes to investing.
I am wondering if we are on the same page in terms of definitions.

Can you take a look and let us know if we are talking about the same thing?

WoodSpinner :?:

Spirit Rider
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Re: How to pay off margin and not get killed on taxes

Post by Spirit Rider » Sun Feb 04, 2018 12:31 am

Good thought WoodSpinner.

I was trying to fathom how the OP could end up with a 50% margin. I asked the OP, but it has not been answered.

I now wonder if maybe the OP is using the wrong terminology and what they are referring to is a 50% basis. This would significantly change the situation.

bberris
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Re: How to pay off margin and not get killed on taxes

Post by bberris » Sun Feb 04, 2018 9:26 am

MrGreen wrote:
Sat Feb 03, 2018 8:07 pm
...

Did you have an advisor or friend that got you in this situation? Has something changed? Have you really had $150,000.00 margin debt for many years?

....
Does that matter? She has decided to get out of this situation. My guess is that she simply withdrew cash for living expenses over many years.

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BL
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Re: How to pay off margin and not get killed on taxes

Post by BL » Sun Feb 04, 2018 11:13 am

It sounds like you need to get all the information possible for disabled low-income folks in your state. This could mean housing, SNAP (food stamps or whatever it is called now), Food Shelf, Medicaid, possibly SSI (for low-income SSDI), financial counseling, etc. Your county social services might be able to direct you. I don't know what you may already have, and what your circumstances are, but you need to find out what is available when you sell down your investments. You would have 150,000 (less after taxes) or less if you sell to survive. What will you do when you run out of money?

As for taxes, I could be wrong, but here goes:
1. The standard deduction of 12,000 would pretty much off-set taxes on 85% of SSDI if you have extra income.
2. Capital gains below the top of 12% tax bracket (38,700) should be at 0%. If basis is 0, then you might be able to sell 38+k/year funds/stocks at no tax and quite a lot additional at 15% tax.

(Not sure how/if margin interest plays into the 1040 tax calculations, maybe if high enough to itemize.)
Above that would be 15% CG tax. Very high numbers might have a few extra %, and have other consequences.
Are there benefits tied to your tax return numbers? (SSI, Medicaid, etc.)

Did you use the margin loan to buy more funds? Since they are calling them, it sounds like you must have lost money, so there should be a capital LOSS. Or did you use the margin money to live on? It is hard to imagine getting 50% margin, so help us out here. I know lots of folks with credit card debt; sounds a bit like that, except you still have funds to cover your debt. What is the interest rate on your margin? Stocks have done well in recent past, but if they start falling, you will not be in a good place. Did this week's losses prompt the margin call?

MAVerlous
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Re: How to pay off margin and not get killed on taxes

Post by MAVerlous » Sun Feb 04, 2018 2:07 pm

Thanks on the tax info! How do I calculate my losses? I have not bought or traded anything in about 8 years. Would the lossses be cumulative for all the years in the past if I have not claimed them before? I had no advisor as they did not want my business(or lack of.). There has not been a margin call. I have to have money to live off of & ran out of funds after selling investments from another investment company. Yes, I have a margin account, as per the definition. It is currently at $304,000. With margin balance at $151,000. Interest is at 7.32%. I am on Medicare since I have too much in investments to qualify for Medicaid or Florida state aid. You have to have under $11,000. All my investments other than a small IRA are in stocks only, such as Exxon and Proctor & Gamble. As for income in the future I have started an etsy shop selling hand crafted pet collars. Starting is slow, much competition, but I am marketing on social media & going to try and sell some to local pet stores. Hoping to make additional money to help pay living expenses over my SSDI income of about $1,100. Monthly. Definitely not making enough yet by any means. I can make up to $1,000. monthly as additional income and still retain my disability income. I appreciate all the help. There is sooo much tax info out there, it’s hard to determine what is truly relevant. Is there particular articles you would recommend I read to help with the tax situation &/or anyth8ng else you may feel is related and would help? Thank you.

KeepinItPositive
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Re: How to pay off margin and not get killed on taxes

Post by KeepinItPositive » Sun Feb 04, 2018 3:12 pm

What are your total monthly expenses at this point?

NotWhoYouThink
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Re: How to pay off margin and not get killed on taxes

Post by NotWhoYouThink » Sun Feb 04, 2018 3:29 pm

Sounds like maybe you have been withdrawing cash from the account little by little without selling stocks, is that how you got such a large margin balance? That's a pretty high interest rate.

If that's what you are doing, the first action is to stop doing it. The next action is to figure out, very soon, how to pay off the margin loans. This is a very dangerous situation, a market drop could wipe you out.

michaeljc70
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Re: How to pay off margin and not get killed on taxes

Post by michaeljc70 » Sun Feb 04, 2018 3:45 pm

NotWhoYouThink wrote:
Sun Feb 04, 2018 3:29 pm
Sounds like maybe you have been withdrawing cash from the account little by little without selling stocks, is that how you got such a large margin balance? That's a pretty high interest rate.

If that's what you are doing, the first action is to stop doing it. The next action is to figure out, very soon, how to pay off the margin loans. This is a very dangerous situation, a market drop could wipe you out.
That is what I thought too.

I would sell up to whatever would be tax free this year as that is a no brainer. The rest gets trickier. If you wait and space this out over X years to get it all tax free, the market may drop at some point and you are paying margin interest in the mean time. Given your income and need for cash and the margin debt, I would probably sell it all now or sell 1/2 (of what is needed to pay the margin debt) now and 1/2 next January.

If you have $150k left after paying the debt, I would think about selling at least part of that too as stocks seems to be pretty risky if you have shorter term cash needs.

Though this may be complicated for the average person, this may be a case where buying a put option may make sense to save on the taxes and allow the stocks to be sold over a few years without big downside risk.

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FrugalInvestor
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Re: How to pay off margin and not get killed on taxes

Post by FrugalInvestor » Sun Feb 04, 2018 3:51 pm

MAVerlous, if that's you in your profile picture I'd take it down. You're revealing personal financial information here and you don't know who might be lurking, it's the internet after all. Just my two cents.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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Pajamas
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Re: How to pay off margin and not get killed on taxes

Post by Pajamas » Sun Feb 04, 2018 3:55 pm

MAVerlous wrote:
Sun Feb 04, 2018 2:07 pm
Thanks on the tax info! How do I calculate my losses? I have not bought or traded anything in about 8 years. Would the lossses be cumulative for all the years in the past if I have not claimed them before? I had no advisor as they did not want my business(or lack of.). There has not been a margin call. I have to have money to live off of & ran out of funds after selling investments from another investment company. Yes, I have a margin account, as per the definition. It is currently at $304,000. With margin balance at $151,000. Interest is at 7.32%. I am on Medicare since I have too much in investments to qualify for Medicaid or Florida state aid. You have to have under $11,000. All my investments other than a small IRA are in stocks only, such as Exxon and Proctor & Gamble. As for income in the future I have started an etsy shop selling hand crafted pet collars. Starting is slow, much competition, but I am marketing on social media & going to try and sell some to local pet stores. Hoping to make additional money to help pay living expenses over my SSDI income of about $1,100. Monthly. Definitely not making enough yet by any means. I can make up to $1,000. monthly as additional income and still retain my disability income. I appreciate all the help. There is sooo much tax info out there, it’s hard to determine what is truly relevant. Is there particular articles you would recommend I read to help with the tax situation &/or anyth8ng else you may feel is related and would help? Thank you.
Sounds like all your holdings would be most likely to have unrealized long-term capital gains although some may have unrealized capital losses.

Right now you are paying over $11,000 annually in margin interest. Margin rates have been rising and are likely to do so in the future.

One option to consider is that there are other brokerage firms that offer a much lower margin interest rate (around 3 or 3.25%) such as Interactive Brokers, Muriel Siebert, and Investrade. However, transferring your account to another firm would not solve the underlying problem and you would likely be better off eliminating the margin balance and interest, as is your intention.

You can sell some of your holdings to eliminate the margin balance but it is impossible for anyone to tell you how to go about doing so in the best manner to optimize your holdings (how much of which holdings to sell and when) without more information, including the number of shares with current cost basis and current yield, and other information about your tax situation such as income. You might be able to sell some of your holdings each year without paying any additional taxes from capital gains or reporting income so high that it affects your disability and perhaps additional holdings if you are willing to pay 15% tax on the capital gains.

It is going to take a thorough review to untangle this situation without making a mistake. I think that given the complexity of the situation you would best be served by going to a professional tax accountant or certified financial advisor who charges by the hour to help you. In any case, you need to find someone competent and trustworthy who will look at the total picture including the income limits for your disability income and also be very careful about someone trying to sell you anything or guide your future investing.

I don't know if an advisor at a firm like Schwab or Vanguard can provide this level of assistance but maybe others here can say and comment on the best way to go about finding someone to get that assistance.

Over the long run you would probably be better off in index funds rather than holding individual stocks and that is something to consider, too.

You might also want to remove your photo from your profile to preserve as much of your privacy online as possible.

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whodidntante
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Re: How to pay off margin and not get killed on taxes

Post by whodidntante » Sun Feb 04, 2018 5:58 pm

Bogleheads do not generally keep most of our net worth in a basket of single stocks due to single stock risk. Formerly great companies can melt down without warning, and if any one company ends up being a big percentage of your wealth, you are taking uncompensated and unnecessary risk, and a risk that you can't afford. The most recent example of a big company melting down is GE.

We prefer to own a broadly diversified portfolio of stocks and bonds using low cost passive funds.

I suggest you take a step back and ask for a broader review of your financial situation. I think there is more to the situation than paying back 150k in margin debt and selling investment in a tax efficient way. Fundamentally you have an income problem and it's going to be tough. But I also think you should consider restructuring your investments to get away from single stock risk. People here can advise you on how to proceed with that.

MrGreen
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Re: How to pay off margin and not get killed on taxes

Post by MrGreen » Sun Feb 04, 2018 7:43 pm

MAVerlous wrote:
Sun Feb 04, 2018 2:07 pm
Thanks on the tax info! How do I calculate my losses?
If you have online access to your Schwab account, one of the views of your investments will say "Unrealized Gain/Loss."
You should see columns that says "Cost Basis" and "Gain/Loss"
Cost Basis should be what you paid for the stock. Gain/Loss should be the gain or loss if you sold the stock today. It will be more complicated if the stock was not purchased all at one time.

https://www.schwab.com/resource-center/ ... cost-basis

You are getting good advice here. I'm concerned a stock market downturn might be devastatingly bad for you (Google "Margin Call"). You want to find some plan to get that margin loan down to $0 and be invested in index funds, not individual stocks.

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Tyler Aspect
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Re: How to pay off margin and not get killed on taxes

Post by Tyler Aspect » Sun Feb 04, 2018 11:15 pm

Your situation is likely to be very simple. Paying 15% capital gains tax at some portion of your gains will probably be better than the 7.12% interest of the $150k margin loan. Since your investments are also extremely non-diversified, I do see a three year plan to sell off all your individual stocks. First year to pay off the margin loan; second year to start buying a diversified Schwab portfolio; the third year to complete the stock sale.

Since you are already withdrawing from your portfolio, you are practically in a situation similar to retirement - typically 50% stock / 50% bond.

Example Schwab portfolio

40% US stock - SCHB - Schwab U S Broad Market ETF
10% international stock - SCHF - Schwab International Equity ETF
50% US bond - SCHZ - Schwab US Aggregate Bond ETF

You should sell some additional stock or ETF in the future to keep 6 months of expense in cash, so you do not get into debt again. These cash can be held in a high interest savings account so you can earn competitive rate.

After you pay off your margin loan you need to turn off margin so you don't get into debt in the same way again.
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inbox788
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Re: How to pay off margin and not get killed on taxes

Post by inbox788 » Sun Feb 04, 2018 11:46 pm

When you're lost, the first thing to do is figure out where you are or what direction to take. There are 2 problems I see being identified here. The first is your budget/income, which may be better addressed in a separate thread. The second problem is the Schwab account where you are paying margin that you came to ask about here. It would be very helpful, if not essential, to understand the current situation and how it got there. The market has gone up the last 8 years, so it seems very unlikely that you were using margin 8 years ago, and even if you were, the gains would have likely covered it all, so I think the couple of folks that suspect cash being drawn out of the account are likely correct.

Could you share with us a snapshot of holdings when you inherited the account 8 years ago, the current snapshot, any sales or withdrawals of cash, and other relevant transactions? If you sold any shares in the last 8 years, there were likely tax reporting and possible taxes due. Who did your taxes these last 8 years? If some more recent returns were done incorrectly, you may need to go back and redo them, with error possibly going either way as to whether you owe or get money back.

Trying to figure out what the potential tax consequences on each of your current holdings depend on a number of things. For any given stock, you need the date of the original purchase and cost ("cost basis"). You may have a "step up basis" when you inherited the stock. If any of the stocks haven't grown much or lost money, your tax consequence is minimal to beneficial. Without accurate information, it's nearly impossible to determine these. If you inherited the stocks 8 years ago, the SP500 is up over 150%, so chances are you've got substantial gains. Even if you were paying 7%+ interest, you benefited from the leverage, but there's no guarantee it will continue, and in fact, many investors think it's going the opposite way, either low returns or negative returns, and if that happens you'll lose an extra 7%+ on top of whatever the market gives us. Worse, margin requirements are based on the difference between your account balance and market value, so the dollars you pay in margin interest could be much more than you've been paying before. When the market drops, more of the margin is being used and you have to pay more interest, so it benefits you to eliminate the amount subject to margin as soon as possible.
Tyler Aspect wrote:
Sun Feb 04, 2018 11:15 pm
Paying 15% capital gains tax at some portion of your gains will probably be better than the 7.12% interest of the $150k margin loan.
...After you pay off your margin loan you need to turn off margin so you don't get into debt in the same way again.
Yes! Even after you pay the 7.12% interest (even if it's year after year after year), you still have to pay 15% (or whatever tax bracket you're in) in taxes on long term capital gains. If it's 15% it's not so bad, and it's only on the gains, not the sale amount. And it's possible you might be able to deduct the 7.12% paid in interest. I'm not sure if there are minimums or disqualifiers for you.

https://turbotax.intuit.com/tax-tips/in ... /L9TeFQAf9

motorcyclesarecool
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Re: How to pay off margin and not get killed on taxes

Post by motorcyclesarecool » Mon Feb 05, 2018 6:57 am

MAVerlous, I’m chiming in to say how proud I am of you. You’ve recognized that there’s an issue and you’re taking action. Change won’t be easy, but it will be good. You’ve already done the hardest part by taking action to begin educating yourself about your situation and ways out of it. Without knowing the whole picture, you have a few things going for you. They include fungible assets, a nearly paid-off home, a side hustle, and you. You have the building blocks you need, it’s more a question of how to put them together in the most optimal manner, and what tools to use. You can do it!

How did you discover Bogleheads?

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Pajamas
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Re: How to pay off margin and not get killed on taxes

Post by Pajamas » Mon Feb 05, 2018 8:04 am

Tyler Aspect wrote:
Sun Feb 04, 2018 11:15 pm
Your situation is likely to be very simple. Paying 15% capital gains tax at some portion of your gains will probably be better than the 7.12% interest of the $150k margin loan.
She said that she can have up to $1,000 a month additional income without losing her disability payments. It's not worth paying 15% tax and losing disability income if it can be avoided through careful planning and timing of sales over multiple years.

MAVerlous
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Re: How to pay off margin and not get killed on taxes

Post by MAVerlous » Mon Feb 05, 2018 8:07 am

I found out about bogleheads on an internet search about margins. I am very glad I did. I want to say a big thank you to all of you for your advice, ideas and support. “Motorcycles are cool” I especially needed to hear your kind words as I sign out of this discussion/post. I will take all your suggests and go forth. It is scarey to make big decisions being unable to work, with health issues that make me unreliable to work, to show up to work, or even work at home. It’s very frustrating since I was a business owner since age 17 and very much an over achiever and workaholic until I became ill. I am very lucky and grateful that my parents gave me investments many years ago. But, I know relying on them is not the answer. I will do the best I can looking, hoping and praying for answers. Thanks to you all.

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