Taxes: Selling/gifting appreciated shares while income is low

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
LinusP
Posts: 53
Joined: Fri May 18, 2018 10:29 am

Taxes: Selling/gifting appreciated shares while income is low

Post by LinusP » Mon Oct 15, 2018 10:59 pm

I'm almost 40. When I was in my 20's, I bought some social/ESG mutual funds in taxable (now PRBLX, PARWX, and PARMX) that weren't available in my 401k-equivalent. Since the expense ratio on these is 0.87-0.99%, I'd like to sell them and buy VTSAX in my taxable account at Vanguard, according to my plan's asset allocation. The coming years are probably a good time to do this, as my spouse has stopped working to stay home with our kids (ages 13 months and 1 month) and we've dropped a tax bracket.

I'm also anticipating a large (for us) tax rebate this year due to the child tax credit and adoption tax credit, and planning my first foray into a donor-advised fund so I can lump donations (and itemize taxes) every 2-3 years. It feels like a lot to plan for, but I've spent a lot of time with Excel 1040 for 2018 and 2019, feel like I've (mostly) wrapped my head around things, and wanted to check for flaws in my thinking.

Some numbers for you:

Basis in funds to sell: $71,257
Current value in funds to sell: $94,522
Resulting unrealized gains (all long-term): $23,265
Adjusted gross income in 2018, not including capital gains from any sale of mutual funds: ~$109,200
Non-refundable credits in 2018: $10,934
Adjusted gross income in 2019, not including capital gains from any sale of mutual funds: ~$61,200

So for 2018 taxes, it seems like we'll aim to take enough income (earned, interest, or dividends/capital gains) to max out our credits. With the standard deduction and squarely in the 22% bracket, I think that means we should sell enough to generate ~$4300 in capital gains this year.

With our income dropping further in 2019, next year seems like the year to itemize, gift appreciated shares to a donor-advised fund, and sell the remaining mutual fund shares - all keeping under $77,200 in taxable income (form 1040, line 43) so all capital gains are taxed at 0%.

We live in California. I haven't done as much number crunching with the state taxes, but we're not planning to leave the state anytime soon and I guess I'm inclined to just pay the 6-8% in state tax for the simplification benefit.

Questions:

1. What do I sell first? PRBLX and PARWX are essentially large-caps that have appreciated ~50%; PARMX is a mid-cap that's appreciated only 23%. PRBLX is an equity income fund and hence distributes a lot of dividends and capital gains; does it make more sense to sell this before the capital gains distribution (~19 Nov), or prioritize selling PARMX because it's riskier than VTSAX and could have further to drop if the market corrects before I sell? Presumably I should leave some of the shares that have appreciated the most for gifting to the donor-advised fund next year.

2. When do I sell and then buy? As far as I can tell, all three funds usually distribute capital gains ~19 Nov and dividends on ~26 Dec, and VTSAX/VTIAX distributes dividends ~18 Dec. Would it be a bad idea to stay out of the market from, say 18 Nov to 19 Dec to avoid "buying the distributions"?

3. I also have ~$4k in recent unrealized losses in VTCLX (which I should also convert to VTSAX at some point). But it doesn't make sense to realize those losses (tax loss harvest) this year when I should have room to tax gain harvest (if things rebound) in 2019/2020, right?

Sorry if this post is all over the place - as I said, it's a lot to think through.

LinusP
Posts: 53
Joined: Fri May 18, 2018 10:29 am

Re: Taxes: Selling/gifting appreciated shares while income is low

Post by LinusP » Tue Oct 16, 2018 4:01 pm

This dropped (like a stone!) off the first page of threads - maybe because I posted late Pacific Time. Does anyone have input, other things I should be considering, etc.?

megabad
Posts: 660
Joined: Fri Jun 01, 2018 4:00 pm

Re: Taxes: Selling/gifting appreciated shares while income is low

Post by megabad » Tue Oct 16, 2018 6:34 pm

LinusP wrote:
Mon Oct 15, 2018 10:59 pm
I'm almost 40. When I was in my 20's, I bought some social/ESG mutual funds in taxable (now PRBLX, PARWX, and PARMX) that weren't available in my 401k-equivalent. Since the expense ratio on these is 0.87-0.99%, I'd like to sell them and buy VTSAX in my taxable account at Vanguard, according to my plan's asset allocation. The coming years are probably a good time to do this, as my spouse has stopped working to stay home with our kids (ages 13 months and 1 month) and we've dropped a tax bracket.

I'm also anticipating a large (for us) tax rebate this year due to the child tax credit and adoption tax credit, and planning my first foray into a donor-advised fund so I can lump donations (and itemize taxes) every 2-3 years. It feels like a lot to plan for, but I've spent a lot of time with Excel 1040 for 2018 and 2019, feel like I've (mostly) wrapped my head around things, and wanted to check for flaws in my thinking.
This is typically the exact opposite way that I plan so I can't advise, but my situation is obviously different and only you know all your numbers. I typically itemize when my income is higher and the standard deduction means less to me but my deductible expenses have gone up. I typically donate to charity when my marginal bracket is high, not low. For the average person, it takes a large amount of deductions before Schedule A makes sense (post Tax Cut).

Some numbers for you:

Basis in funds to sell: $71,257
Current value in funds to sell: $94,522
Resulting unrealized gains (all long-term): $23,265
Adjusted gross income in 2018, not including capital gains from any sale of mutual funds: ~$109,200
You are pretty close to 12%, can you reduce any further this year (ie. upping 401k, IRA, 529, HSA contributions)? $7k is pretty close and it looks like you have $4k in losses so you would only need a $3k reduction this year.
Non-refundable credits in 2018: $10,934
Adjusted gross income in 2019, not including capital gains from any sale of mutual funds: ~$61,200
Make sure you claim Savers Credit in 2018.

So for 2018 taxes, it seems like we'll aim to take enough income (earned, interest, or dividends/capital gains) to max out our credits. With the standard deduction and squarely in the 22% bracket, I think that means we should sell enough to generate ~$4300 in capital gains this year.

With our income dropping further in 2019, next year seems like the year to itemize, gift appreciated shares to a donor-advised fund, and sell the remaining mutual fund shares - all keeping under $77,200 in taxable income (form 1040, line 43) so all capital gains are taxed at 0%.

We live in California. I haven't done as much number crunching with the state taxes, but we're not planning to leave the state anytime soon and I guess I'm inclined to just pay the 6-8% in state tax for the simplification benefit.
Not sure how CA handles losses so can't advise there.

Questions:

1. What do I sell first? PRBLX and PARWX are essentially large-caps that have appreciated ~50%; PARMX is a mid-cap that's appreciated only 23%. PRBLX is an equity income fund and hence distributes a lot of dividends and capital gains; does it make more sense to sell this before the capital gains distribution (~19 Nov), or prioritize selling PARMX because it's riskier than VTSAX and could have further to drop if the market corrects before I sell? Presumably I should leave some of the shares that have appreciated the most for gifting to the donor-advised fund next year.
Well I am unable to predict the future so I can't give great advice. Honestly, it looks like you have enough room next year to realize all the gains, so I would just do everything at once for simplicity sake. Gifting appreciating shares doesn't matter for you right? You are planning on paying zero tax.

2. When do I sell and then buy? As far as I can tell, all three funds usually distribute capital gains ~19 Nov and dividends on ~26 Dec, and VTSAX/VTIAX distributes dividends ~18 Dec. Would it be a bad idea to stay out of the market from, say 18 Nov to 19 Dec to avoid "buying the distributions"?
So I would personally probably sell just prior to the distributions and buy right after VG distributions. The difference will be very minimal though and there is risk to being out of the market.

3. I also have ~$4k in recent unrealized losses in VTCLX (which I should also convert to VTSAX at some point). But it doesn't make sense to realize those losses (tax loss harvest) this year when I should have room to tax gain harvest (if things rebound) in 2019/2020, right?
See above. It may make sense to do this in 2018 (when you are in a higher tax bracket) if you can deduct against your income.

Sorry if this post is all over the place - as I said, it's a lot to think through.

LinusP
Posts: 53
Joined: Fri May 18, 2018 10:29 am

Re: Taxes: Selling/gifting appreciated shares while income is low

Post by LinusP » Tue Oct 16, 2018 11:38 pm

megabad wrote:
Tue Oct 16, 2018 6:34 pm
LinusP wrote:
Mon Oct 15, 2018 10:59 pm
Presumably I should leave some of the shares that have appreciated the most for gifting to the donor-advised fund next year.
Gifting appreciating shares doesn't matter for you right? You are planning on paying zero tax.
Since you put it that way...you're absolutely right. That simplifies things a fair bit - thanks!
megabad wrote:
Tue Oct 16, 2018 6:34 pm
LinusP wrote:
Mon Oct 15, 2018 10:59 pm
Adjusted gross income in 2018, not including capital gains from any sale of mutual funds: ~$109,200
You are pretty close to 12%, can you reduce any further this year (ie. upping 401k, IRA, 529, HSA contributions)? $7k is pretty close and it looks like you have $4k in losses so you would only need a $3k reduction this year.
I could reduce my income, and hence my tax, yes, but there would be no effect on my tax refund, because most of the credit amounts are non-refundable. So it feels a bit paradoxical, but I might as well incur capital gains to push my tax high enough to get the max on those non-refundable credits - if I'm understanding it right.

Given the above, I guess I could go ahead and exchange the VTCLX for VTSAX soon-ish, and use the realized loss to offset the additional gains from selling even more of those non-Vanguard funds this year. Which would mean less in capital gains in 2019...
megabad wrote:
Tue Oct 16, 2018 6:34 pm
LinusP wrote:
Mon Oct 15, 2018 10:59 pm
Adjusted gross income in 2019, not including capital gains from any sale of mutual funds: ~$61,200
Make sure you claim Savers Credit in 2018.
You mean 2019, right? The $61,200 amount above assumes we'd be making pre-tax contributions to our 401k-equivalent, and if I'm doing the calculation right, we'd get $2950 back from the credit.

My 401k-equivalent also allows Roth 401k contributions, so the idea of paying the ~12% tax and letting it grow tax-free for ~20 years is appealing, especially because I find it unlikely that we'll be in a 12% or lower tax bracket in retirement. But 12% of $18.5k is $2220, for a difference of $5170 compared to making pre-tax contributions to get the credit. I guess my gut says that the $5170 this year is worth more than the tax-free growth, especially since it'll probably go to VTSAX in taxable anyway, where I should be tax gain harvesting for a while. I may need to ponder that more.

Thanks for your response - I appreciate the help in thinking this through.

megabad
Posts: 660
Joined: Fri Jun 01, 2018 4:00 pm

Re: Taxes: Selling/gifting appreciated shares while income is low

Post by megabad » Thu Oct 18, 2018 1:54 pm

LinusP wrote:
Tue Oct 16, 2018 11:38 pm
LinusP wrote:
Tue Oct 16, 2018 11:38 pm
megabad wrote:
Tue Oct 16, 2018 6:34 pm
Adjusted gross income in 2018, not including capital gains from any sale of mutual funds: ~$109,200
You are pretty close to 12%, can you reduce any further this year (ie. upping 401k, IRA, 529, HSA contributions)? $7k is pretty close and it looks like you have $4k in losses so you would only need a $3k reduction this year.
I could reduce my income, and hence my tax, yes, but there would be no effect on my tax refund, because most of the credit amounts are non-refundable. So it feels a bit paradoxical, but I might as well incur capital gains to push my tax high enough to get the max on those non-refundable credits - if I'm understanding it right.
Oops. I admittedly didnt run a tax worksheet for you. I think you are right in theory (I didnt look at the numbers). Since your tax rate is zero (with credits), my comment is not relevant. It seems like you could realize a very large amount of your cap gains this year and still pay zero. I didnt run the sheet, but maybe over $10k in gains.
LinusP wrote:
Tue Oct 16, 2018 11:38 pm
Given the above, I guess I could go ahead and exchange the VTCLX for VTSAX soon-ish, and use the realized loss to offset the additional gains from selling even more of those non-Vanguard funds this year. Which would mean less in capital gains in 2019...
I'm not sure I get this last part since it doesn't seem like you are getting benefit from the loss (0% tax). If you have more than one year of low AGI and positive tax you could take the loss in 2019 (deduct from income assuming you have nonzero tax due) and push the gains out to a later date, but I don't know how low your AGI will stay or how the market will perform so that is a risk.
LinusP wrote:
Tue Oct 16, 2018 11:38 pm
megabad wrote:
Tue Oct 16, 2018 6:34 pm
LinusP wrote:
Mon Oct 15, 2018 10:59 pm
Adjusted gross income in 2019, not including capital gains from any sale of mutual funds: ~$61,200
Make sure you claim Savers Credit in 2018.
You mean 2019, right? The $61,200 amount above assumes we'd be making pre-tax contributions to our 401k-equivalent, and if I'm doing the calculation right, we'd get $2950 back from the credit.
Oops again, must have been weak coffee that day. 2019. 2950 sounds right to me (2xIRAs, 1x401k).
LinusP wrote:
Tue Oct 16, 2018 11:38 pm
My 401k-equivalent also allows Roth 401k contributions, so the idea of paying the ~12% tax and letting it grow tax-free for ~20 years is appealing, especially because I find it unlikely that we'll be in a 12% or lower tax bracket in retirement. But 12% of $18.5k is $2220, for a difference of $5170 compared to making pre-tax contributions to get the credit. I guess my gut says that the $5170 this year is worth more than the tax-free growth, especially since it'll probably go to VTSAX in taxable anyway, where I should be tax gain harvesting for a while. I may need to ponder that more.
If you think your tax bracket will go to 22% in retirement, than the savers credit (10%) would make the Roth vs Pretax savings the same (assuming current tax law). If the taxes are the same, I would personally lean toward Roth since you will not have RMDs. However, I would not sacrifice the 0% on cap gains (you might make some Roth and some Traditional contributions).

LinusP
Posts: 53
Joined: Fri May 18, 2018 10:29 am

Re: Taxes: Selling/gifting appreciated shares while income is low

Post by LinusP » Thu Oct 18, 2018 4:38 pm

megabad wrote:
Thu Oct 18, 2018 1:54 pm
Oops. I admittedly didnt run a tax worksheet for you. I think you are right in theory (I didnt look at the numbers). Since your tax rate is zero (with credits), my comment is not relevant. It seems like you could realize a very large amount of your cap gains this year and still pay zero. I didnt run the sheet, but maybe over $10k in gains.
We've got more income this year than we'll have next year, because my wife worked a couple of months earlier in the year and has collected some unemployment since then. Plus some dividends and capital gains thrown off by those taxable mutual funds, etc. - so I'm getting pretty confident about those numbers.
megabad wrote:
Thu Oct 18, 2018 1:54 pm
LinusP wrote:
Tue Oct 16, 2018 11:38 pm
Given the above, I guess I could go ahead and exchange the VTCLX for VTSAX soon-ish, and use the realized loss to offset the additional gains from selling even more of those non-Vanguard funds this year. Which would mean less in capital gains in 2019...
I'm not sure I get this last part since it doesn't seem like you are getting benefit from the loss (0% tax). If you have more than one year of low AGI and positive tax you could take the loss in 2019 (deduct from income assuming you have nonzero tax due) and push the gains out to a later date, but I don't know how low your AGI will stay or how the market will perform so that is a risk.
Good point that realizing the loss isn't exactly saving us anything. I guess my thought is it just allows us to take the gains (and get out of those funds) sooner. We're hoping my wife will stay home at least five years, so we should be able to tax gain harvest pretty much everything up until the time she starts working again.
megabad wrote:
Thu Oct 18, 2018 1:54 pm
LinusP wrote:
Tue Oct 16, 2018 11:38 pm
My 401k-equivalent also allows Roth 401k contributions, so the idea of paying the ~12% tax and letting it grow tax-free for ~20 years is appealing, especially because I find it unlikely that we'll be in a 12% or lower tax bracket in retirement. But 12% of $18.5k is $2220, for a difference of $5170 compared to making pre-tax contributions to get the credit. I guess my gut says that the $5170 this year is worth more than the tax-free growth, especially since it'll probably go to VTSAX in taxable anyway, where I should be tax gain harvesting for a while. I may need to ponder that more.
If you think your tax bracket will go to 22% in retirement, than the savers credit (10%) would make the Roth vs Pretax savings the same (assuming current tax law). If the taxes are the same, I would personally lean toward Roth since you will not have RMDs. However, I would not sacrifice the 0% on cap gains (you might make some Roth and some Traditional contributions).
We do intend to make charitable donations every year, so I could also do a bit of a tick-tock - in odd years, making Roth contributions and taking the standard deduction, in even years, making enough Traditional contributions to get what we can out of the saver's credit, gifting appreciated shares to a donor-advised fund, and itemizing. Sort of a "best of both worlds" scenario?

MrBeaver
Posts: 238
Joined: Tue Nov 14, 2017 4:45 pm

Re: Taxes: Selling/gifting appreciated shares while income is low

Post by MrBeaver » Thu Oct 18, 2018 5:18 pm

LinusP wrote:
Mon Oct 15, 2018 10:59 pm
3. I also have ~$4k in recent unrealized losses in VTCLX (which I should also convert to VTSAX at some point). But it doesn't make sense to realize those losses (tax loss harvest) this year when I should have room to tax gain harvest (if things rebound) in 2019/2020, right?
LinusP wrote:
Thu Oct 18, 2018 4:38 pm
megabad wrote:
Thu Oct 18, 2018 1:54 pm
LinusP wrote:
Tue Oct 16, 2018 11:38 pm
Given the above, I guess I could go ahead and exchange the VTCLX for VTSAX soon-ish, and use the realized loss to offset the additional gains from selling even more of those non-Vanguard funds this year. Which would mean less in capital gains in 2019...
I'm not sure I get this last part since it doesn't seem like you are getting benefit from the loss (0% tax). If you have more than one year of low AGI and positive tax you could take the loss in 2019 (deduct from income assuming you have nonzero tax due) and push the gains out to a later date, but I don't know how low your AGI will stay or how the market will perform so that is a risk.
Good point that realizing the loss isn't exactly saving us anything. I guess my thought is it just allows us to take the gains (and get out of those funds) sooner. We're hoping my wife will stay home at least five years, so we should be able to tax gain harvest pretty much everything up until the time she starts working again.
The optimal answer here depends on whether you will have any long term capital gains in 2019+. If you will have no capital gains, I might wait to take the loss until January when they would offset ordinary income at 12%. But if you will have some LTCG in the future (that are not donated to a DAF), then taking losses in the future is of no value because it offsets gains which you would have paid 0% on. The exception to this is if your realized gains would be over the 77200 0% LTCG rate boundary, in which case it does benefit you again. What you have this year is essentially the latter case, where a capital loss would be saving you something this year, assuming you would still owe enough tax after applying the capital loss to capture the value of the non-refundable credits.

Concerning a DAF, if it makes sense to do that in your situation (see below) then I'd be tempted to realize enough LTCG to capture all 2018 credits and then use the rest in 2018 to fund a DAF up to your desired DAF funding level (providing you have adequate liquidity). Doing this doesn't save you any tax in 2019+ provided that your income actually is 61k per year. Since you can't know the future, donating to a DAF in 2018 locks in the effective zero percent LTCG now so that if your income rises in the future above the 12%/0% LTCG bracket, you will owe less tax than if you had deferred the gains until then.

As to whether a DAF makes sense, I did some computations here that you might find interesting. These assume the standard $100 minimum / 0.5% maximum DAF fee structure at Fidelity/Schwab:
viewtopic.php?f=1&t=258371&p=4120115#p4117585

Finally, check to make sure the 2018 tax credits can't be deferred to future years and if that makes sense. I thought some of the adoption credits could, but I'm likely wrong on that.

LinusP
Posts: 53
Joined: Fri May 18, 2018 10:29 am

Re: Taxes: Selling/gifting appreciated shares while income is low

Post by LinusP » Thu Oct 18, 2018 11:10 pm

MrBeaver wrote:
Thu Oct 18, 2018 5:18 pm
Finally, check to make sure the 2018 tax credits can't be deferred to future years and if that makes sense. I thought some of the adoption credits could, but I'm likely wrong on that.
You're right, unused amounts of the adoption credit can carry forward up to 5 years into the future - if the amount of the credit exceeds the amount of tax owed...which basically isn't possible for me this year. The higher my tax goes, the greater proportion of the child tax credit is non-refundable, and the smaller my refund. So optimal is to incur the maximum tax liability that still gets me the maximum ($2800) refundable child tax credit. Hence, essentially 0% capital gains on some of those mutual fund shares I'd like to sell. And yes, it's looking like some ~$20k of those capital gains will be left for 2019.
MrBeaver wrote:
Thu Oct 18, 2018 5:18 pm
Concerning a DAF, if it makes sense to do that in your situation (see below) then I'd be tempted to realize enough LTCG to capture all 2018 credits and then use the rest in 2018 to fund a DAF up to your desired DAF funding level (providing you have adequate liquidity). Doing this doesn't save you any tax in 2019+ provided that your income actually is 61k per year. Since you can't know the future, donating to a DAF in 2018 locks in the effective zero percent LTCG now so that if your income rises in the future above the 12%/0% LTCG bracket, you will owe less tax than if you had deferred the gains until then.

As to whether a DAF makes sense, I did some computations here that you might find interesting. These assume the standard $100 minimum / 0.5% maximum DAF fee structure at Fidelity/Schwab:
viewtopic.php?f=1&t=258371&p=4120115#p4117585
Nice charts in that other thread! Makes me realize that a donor-advised fund may not make sense for us until my wife goes back to work.

Post Reply