Best way to plan for $620K long term capital gains?

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wantrepreneur
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Best way to plan for $620K long term capital gains?

Post by wantrepreneur » Fri Jul 05, 2019 8:49 am

I am a semi FIRE individual - quit my full time job last year and now consult with the same company for 4-5 days a month. I have vested stock in that company that I need to sell to bring down their share significantly within my portfolio. It's currently at 15% of total net worth. The total capital gains is around $620K - all of it long term. My current income is $160K a year - $65K of that is from dividends from 4 Vanguard funds, and $95K is from consulting gig with my previous employer. My wife isn't working at the moment, so that's all of the income more or less. The consulting income might go away next year if I or the company stop seeing the value. I may not supplement that income with anything else. With those facts, the key question I have been trying to figure out is the best way to sell company stock to pay the least amount of taxes. The sooner I sell, the better I feel. However, that's not very tax efficient. I am perfectly happy to take the one time hit and sell it all but haven't been able to pull the trigger.

Any advice? Suggestions or previous experiences that people care to share?

Thanks everyone!

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WWJBDo
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Re: Best way to plan for $620K long term capital gains?

Post by WWJBDo » Fri Jul 05, 2019 9:01 am

If you don't already have one, now may be a good time to get an accountant.
They probably cannot save you any money on taxes, but then again, maybe they can.

I had a similar event a few years back. The first thing I did was write checks equal to the tax on that windfall to the IRS and the State income tax board as soon as I cashed the check. I felt better knowing that I didn't have a big bill next year and with interest rates so low, I preferred to forego the small interest income for the knowledge that my taxes were covered even if my investments went down. I did receive a good rebate on my taxes for that year, which was also nice. I put it in treasuries and dollar cost averaged into stocks and bonds over a predetermined period of time. That's a risk adverse approach and I totally would do again.
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stan1
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Re: Best way to plan for $620K long term capital gains?

Post by stan1 » Fri Jul 05, 2019 9:13 am

Look into a donor advised fund for at least part of it. Use specific lot identification to move out the securities with the lowest cost basis.

Do any of the lots have losses or minimal long term gains? Sell now and watch to see if there are more opportunities to sell at near zero gains. If there's another 20% drop in the market like late December 2018 that's an opportunity to sell with lower gains and buy something more diversified.

Are you going to move to a different state? Consider capital gains tax rates before and after you move.

Otherwise if I'd decided I wanted to liquidate it I would probably do 1/2 in 2019 and 1/2 in 2020 just to be done with it. You could also take the perspective that once its below 10% of your net worth its not a major contributor and let it ride longer. You'd have to assess the company and what single stock risks might exist. You could do 1/3 to a DAF, sell 1/6 in 2019, sell 1/6 in 2020, and keep the remaining 1/3 for the time being. There's no right or wrong answer.
Last edited by stan1 on Fri Jul 05, 2019 9:17 am, edited 2 times in total.

terran
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Re: Best way to plan for $620K long term capital gains?

Post by terran » Fri Jul 05, 2019 9:15 am

If you stop working you'll have $24,400 standard deduction + $78,750 in the 0% capital gains tax bracket - $65k dividends = $38,150 capital gains you can realize without paying taxes. At that rate it would take you a very long time to realize all the gains.

Instead, I would target staying within the 15% capital gains bracket which tops out at $488,850, which means you can realize $24,400 + $488,850 - $160,000 = $353,250 while working, or $24,400 + 353,250 - $65,000 = $448,250 if not working ($38150 of which would be tax free for a savings of $5,722.50). Either way you could realize all the gains over two tax years.

Of course, once you stop working you may decide to do some Roth conversions in the lower brackets which would eat up some of your capital gains bracket space, but could still be worthwhile. This would depend on how much you have in tax deferred and how long you have before other income streams like a pension or social security start. I would probably at least fill up the standard deduction because tax deferred to Roth conversions at 0% are better than capital gains at 0%. Here are the 2019 income (or traditional to Roth conversion) and capital gains tax brackets: https://taxfoundation.org/2019-tax-brackets

Health insurance is the other thing to consider both in terms of ACA subsidies (you may not be eligible anyway) and IRMAA, which, as I understand it, can increase your medicare premiums if your income is over a certain level in the the few years before you start medicare. Here's some info on that: https://medicare.com/about-medicare/wha ... t-b-irmaa/

Coburn
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Re: Best way to plan for $620K long term capital gains?

Post by Coburn » Fri Jul 05, 2019 9:21 am

I concur with WWJBDo...you should be meeting w/your accountant to discuss strategies. If you don't have one or are dissatisfied with him, easy enough to find another.

But Uncle Sam always gets his cut. Ignore at your own peril. :D

dbr
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Re: Best way to plan for $620K long term capital gains?

Post by dbr » Fri Jul 05, 2019 9:22 am

I agree an accountant might help you devise a plan to best liquidate this holding over a few years depending on future income and many other factors. The devil is in the details.

Here are the systematic issues I can think of:

1. Analyze the structure of your income and tax brackets over the next few years. There may or may not be something to offer here.
2. Lay out the lot by lot tax cost of selling the various lots you own. Get rid of the asset at the lowest cost lots.
3. Consider as mentioned that making gifts from this asset may allow someone else to sell the asset at less or no tax cost, especially for the highest tax cost lots.
4. Consider that holding the asset for heirs allows tax free passing of the asset due to basis step-up.
5. While owning a single stock asset is not advised, 15% is a marginally large fraction to hold. It is an option to just keep the position. Most people probably agree the risk is not worth the tax cost, but you can think about it, especially if you get rid of some of it in 1.-3.
6. Recognize that you have taken a pretty good income and the good news is that at worst you have to pay tax on it. Sell the stock, pay the tax, and move on. You are already at LT gains.

PS You don't mention how much the basis is on this holding. If you liquidate everything you are recovering that wealth at no new tax. It might be a mistake to focus only on the capital gain.

FoolMeOnce
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Re: Best way to plan for $620K long term capital gains?

Post by FoolMeOnce » Fri Jul 05, 2019 9:36 am

terran wrote:
Fri Jul 05, 2019 9:15 am
If you stop working you'll have $24,400 standard deduction + $78,750 in the 0% capital gains tax bracket - $65k dividends = $38,150 capital gains you can realize without paying taxes. At that rate it would take you a very long time to realize all the gains.

Instead, I would target staying within the 15% capital gains bracket which tops out at $488,850, which means you can realize $24,400 + $488,850 - $160,000 = $353,250 while working, or $24,400 + 353,250 - $65,000 = $448,250 if not working ($38150 of which would be tax free for a savings of $5,722.50). Either way you could realize all the gains over two tax years.

Of course, once you stop working you may decide to do some Roth conversions in the lower brackets which would eat up some of your capital gains bracket space, but could still be worthwhile. This would depend on how much you have in tax deferred and how long you have before other income streams like a pension or social security start. I would probably at least fill up the standard deduction because tax deferred to Roth conversions at 0% are better than capital gains at 0%. Here are the 2019 income (or traditional to Roth conversion) and capital gains tax brackets: https://taxfoundation.org/2019-tax-brackets

Health insurance is the other thing to consider both in terms of ACA subsidies (you may not be eligible anyway) and IRMAA, which, as I understand it, can increase your medicare premiums if your income is over a certain level in the the few years before you start medicare. Here's some info on that: https://medicare.com/about-medicare/wha ... t-b-irmaa/
Don't forget the NIIT which adds another 3.8% cap gains tax once you hit $250k.

terran
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Re: Best way to plan for $620K long term capital gains?

Post by terran » Fri Jul 05, 2019 11:25 am

FoolMeOnce wrote:
Fri Jul 05, 2019 9:36 am
terran wrote:
Fri Jul 05, 2019 9:15 am
If you stop working you'll have $24,400 standard deduction + $78,750 in the 0% capital gains tax bracket - $65k dividends = $38,150 capital gains you can realize without paying taxes. At that rate it would take you a very long time to realize all the gains.

Instead, I would target staying within the 15% capital gains bracket which tops out at $488,850, which means you can realize $24,400 + $488,850 - $160,000 = $353,250 while working, or $24,400 + 353,250 - $65,000 = $448,250 if not working ($38150 of which would be tax free for a savings of $5,722.50). Either way you could realize all the gains over two tax years.

Of course, once you stop working you may decide to do some Roth conversions in the lower brackets which would eat up some of your capital gains bracket space, but could still be worthwhile. This would depend on how much you have in tax deferred and how long you have before other income streams like a pension or social security start. I would probably at least fill up the standard deduction because tax deferred to Roth conversions at 0% are better than capital gains at 0%. Here are the 2019 income (or traditional to Roth conversion) and capital gains tax brackets: https://taxfoundation.org/2019-tax-brackets

Health insurance is the other thing to consider both in terms of ACA subsidies (you may not be eligible anyway) and IRMAA, which, as I understand it, can increase your medicare premiums if your income is over a certain level in the the few years before you start medicare. Here's some info on that: https://medicare.com/about-medicare/wha ... t-b-irmaa/
Don't forget the NIIT which adds another 3.8% cap gains tax once you hit $250k.
I did forget because I didn't know about that, so thanks for pointing it out!

In that case, assuming the NIIT limit is based on taxable income, the OP would need to keep realized capital gains under $24,400 + $250,000 - $160,000 = $114,400 while employed or $24,400 + $250,000 - $65000 = 209,400 if not employed to avoid that extra tax. Since that would take 3 - 6 years depending on employment status to get out of the employer stock I'm honestly not sure what I'd do. I guess it comes down to a decision about how badly one wants to get out of a concentrated position and if paying a little extra is worth it in that case.

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Re: Best way to plan for $620K long term capital gains?

Post by livesoft » Fri Jul 05, 2019 11:29 am

One is going to have to check any advice of the accountant no matter what anyways. So I would get out my tax prep software and run some scenarios for selling shares. It is pretty easy to do, so there is no excuse for not going into this with eyes wide open.
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MotoTrojan
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Re: Best way to plan for $620K long term capital gains?

Post by MotoTrojan » Fri Jul 05, 2019 11:33 am

For me if I were nervous I’d use this comparison to help me evaluate how much to sell yesterday: Compare the post tax value of this investment once sold to the pretax value that it would’ve been at had it instead been in the S&P500. If it’s higher, especially significantly, I’d be inclined to cash out the majority as the regret of a decline would be larger than the greed to further beat the market.

b42
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Re: Best way to plan for $620K long term capital gains?

Post by b42 » Fri Jul 05, 2019 11:39 am

Do you tend to give a certain amount to charity every year? You could check to see if they would accept a gift of appreciated stock and you could keep the cash you normally donate, plus you get the tax benefit.

bradpevans
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Re: Best way to plan for $620K long term capital gains?

Post by bradpevans » Fri Jul 05, 2019 1:21 pm

the "single equity exposure risk" says get out immediately. (I'm not suggesting that)

I would build out an Excel file that lets you consider different scenarios:
a) sell all now
b) sell all in a few years (when other income is less)
c) sell 20%/year over five year (and other variations on that theme)

You may be able to set an "exit strategy" at the brokerage house ("sell if stock DROPS to $60/share")
True, the stock might close at 62 and open at 40 under some "horrible news" situation but its avenue to consider.

Selling all now essentially guarantees the worst tax situation so hard to fall in love with that idea

Chicago60
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Re: Best way to plan for $620K long term capital gains?

Post by Chicago60 » Fri Jul 05, 2019 4:44 pm

I'd consider something that hardly ever gets considered here: talk to a really smart stockbroker. You might be able to protect your downside risk of the equity with options/collars (I am not sure if that is the right terminology, even) so that you can sell portions of the equity in multiple year increments and reduce the overall tax burden while protecting the downside of the equity you continue to hold---at a cost for the option.

viewer0
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Re: Best way to plan for $620K long term capital gains?

Post by viewer0 » Fri Jul 05, 2019 5:35 pm

Chicago60 wrote:
Fri Jul 05, 2019 4:44 pm
You might be able to protect your downside risk of the equity with options/collars (I am not sure if that is the right terminology, even) so that you can sell portions of the equity in multiple year increments and reduce the overall tax burden while protecting the downside of the equity you continue to hold---at a cost for the option.
The problem with that approach is the stocks will sell if it gets below a certain level, and you end up with CG anyway. So, better sell everything now when the market is high. I learnt it the hard way. Lost a lost which would have covered all my taxes if I sold at the peak. So, I would take a one time hit now.

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Re: Best way to plan for $620K long term capital gains?

Post by grabiner » Fri Jul 05, 2019 8:41 pm

Whatever you sell should be sold sooner rather than later. If you wait to sell, the stock price is more likely to rise than to fall, and if it rises, that increases your capital gain. Meanwhile, if it falls, you will reduce your capital gain when you sell, but if you sell now and switch to something else that also fell, you can take the capital loss.

One exception would be to make use of lower tax brackets. Given the size of the gain, it will take years to get rid of it at a 15% tax rate (adjusted gross income under $250K to avoid the Net Investment Income Tax), but you could sell to the top of the 18.8% tax rate (taxable income up to $488,850 for married filing jointly) this year and next, avoiding a 23.8% tax bracket.

Note that if you contribute some of the stock to charity, the deduction increases the amount you can sell within a tax bracket. (Deductions for sales of appreciated property are limited to 30% of adjusted gross income per year, so this isn't going to solve the whole problem, but if you donate $210K, you get a $210K itemized deduction and can have a total income over $700K without hitting the 23.8% rate.)
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Xrayman69
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Re: Best way to plan for $620K long term capital gains?

Post by Xrayman69 » Fri Jul 05, 2019 9:28 pm

Staged selling to get you down to a comfortable percentage. You don’t have to sell it all to go to 0%.

You need or want to sell enough to make it an appropriate percentage of your overall diverse portfolio. Paying capital gains is a good problem to have. I would take paying capital gains 100% of the time compared to having the “opportunity “ to do TLH.

20% reduction per year until comfortable. In addition of the 620K What percentage is actually capital gains vs basis and therefore the capital gains my not seem quite as bad.

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wantrepreneur
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Re: Best way to plan for $620K long term capital gains?

Post by wantrepreneur » Fri Jul 12, 2019 1:45 am

Thanks everyone for your help - appreciate both the consistency and diversity of suggestions. I do have an accountant, and will talk to her as well. I wasn't expecting the consulting income when I made the decision to retire extremely early at 37 last year and was planning to sell the company stock over 3 years. It seems I should stick to that plan, and not over optimize for reducing taxes because it won't be a big difference anyways.

For those who have asked, the cost basis is $158K. Thanks again everyone.

bltn
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Re: Best way to plan for $620K long term capital gains?

Post by bltn » Fri Jul 12, 2019 5:43 am

I would sell enough each year to push the yearly income to the top of the 15% capital gains limit.
You re going to have to pay these capital gain taxes anyway. Might as well start selling right away.
I would get rid of all of it, and switch the money to index funds. Oh yeah, this is Bogleheads.

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Nate79
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Re: Best way to plan for $620K long term capital gains?

Post by Nate79 » Fri Jul 12, 2019 5:52 am

Single stock risk probably is more than thr minor tax rate differences of selling all now vs later. Maybe sell 50% this year and the rest next year.

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