Should I take capital gains payout? Unnecessary Tax hit?

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ZoomiesRUS
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Should I take capital gains payout? Unnecessary Tax hit?

Post by ZoomiesRUS »

I am in a fortunate position that my company took on some investment, leading to an unexpected payout for some profit sharing arrangements.
There is a question of having to take some of the gains immediately or potentially after 2-3 years (or never). Here are the specifics:
  • I live in California, USA and Married Filing Jointly - age 45yrs, spouse 40yrs (non working)
  • Gross (pre-tax) Salary Income projected for this year (excluding the payout event) - $275,000 Guaranteed (barring job loss - unlikely)
  • About 10K in Qualified Dividends income, no other investment income other than one below.
  • Payout event non-optional - $147,000 (taxed as Long Term Cap gains with zero basis)
  • Payout event OPTIONAL - $150,000 (would also be taxed as LTCG zero basis)


If the Optional Payout is not immediately taken, the vested interest does remain under my ownership but is not liquid until either I quit/am let go OR the company goes public - (at least 2-3yrs away if at all). Any of these events do not guarantee the same level of payout - could be a lot more or less depending on price terms active at that point.
I do not need the money at this point (JUMBO Mortgage/Car/Kids education/Medical expenses) etc and have Emergency Funds about 9-12 months. Everything else is invested in a 3 Fund Portfolio + Playmoney.

Question to the Bogleheads - should I take the Optional Payout?
Are there Tax implications one way or another, (NIIT, AMT, anything else?)
Any other factors to think about? Biden admin tax rules, upcoming tax hikes? Is there a right way to take the payout to minimize taxes?
adestefan
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by adestefan »

Don’t let the tax tail wag the dog.
ZoomiesRUS wrote: Mon May 03, 2021 5:24 pm
If the Optional Payout is not immediately taken, the vested interest does remain under my ownership but is not liquid until either I quit/am let go OR the company goes public - (at least 2-3yrs away if at all). Any of these events do not guarantee the same level of payout - could be a lot more or less depending on price terms active at that point.
This is for you to decide. How do you feel about the company outlook?
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Stinky
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by Stinky »

My take - a bird in the hand is worth two in the bush.

If I have a choice of taking a guaranteed payout now, versus an indeterminate payout at some indeterminate future time, I’ll take the cash now.
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hi_there
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by hi_there »

I think the only reason to not take the payout now is if your tax bracket is going to drop in the next 1-2 years. If you plan to have similar income for 10y+, then that is too long to hold such a volatile position, especially one that is likely strongly correlated to your current job.
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FiveK
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by FiveK »

ZoomiesRUS wrote: Mon May 03, 2021 5:24 pm Are there Tax implications one way or another, (NIIT, AMT, anything else?)
You'll pay 20% instead of 15% on capital gains above ~$241K, given the other numbers.

How that influences your decision is up to you. ;)
Iorek
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by Iorek »

Don’t let the tail (taxes) wag the dog on this decision.
Topic Author
ZoomiesRUS
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by ZoomiesRUS »

Thanks for all the answers folks!
<quote> How do you feel about the company outlook? <quote>
Company is doing good - nothing spectacular but moving along nicely enough to be stable :happy.

Not sure if California taxes or upcoming fed tax hikes might impose somekind of unexpected surcharge/surtax above some magical cap gains number (501K? 400k? )

If I do decide to take the payout - recommend it get put back into the 3 Fund portfolio to keep proportions constant?
Not intending on retiring anytime soon - Living in Cali is hella expensive :(
livesoft
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by livesoft »

The "About 10K in Qualified Dividends income" gives the size of your taxable portfolio. I would consider this pay out a rebalancing move to become more diversified. Maybe put some toward your mortgage, too. Then it's on to the next deal. Good luck!
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ralph124cf
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by ralph124cf »

The Trump tax cuts are SCHEDULED to go away in 2025, but the tax laws can be changed at any time.

I would take the money now.

Ralph
lazynovice
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by lazynovice »

hi_there wrote: Mon May 03, 2021 6:11 pm I think the only reason to not take the payout now is if your tax bracket is going to drop in the next 1-2 years. If you plan to have similar income for 10y+, then that is too long to hold such a volatile position, especially one that is likely strongly correlated to your current job.
+1 I’d take cash, begrudgingly pay the taxes and diversify away the risk of too much riding on one company.
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PowderDay9
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by PowderDay9 »

Do you have kids? The child tax credit starts phasing out at $400k AGI, which you will be right around before the optional payout. If you have kids, add 5% to the LTCG rate you'll pay. It's $40k worth of income (starting at $400k) for each kid that this 5% will apply to.

I'd lean towards taking the money now even if you have to pay 23.8% in federal income taxes plus whatever CA taxes you will owe (15% + 3.8% NIIT + 5% loss of child tax credits).
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ZoomiesRUS
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by ZoomiesRUS »

PowderDay9 wrote: Mon May 03, 2021 10:19 pm Do you have kids? The child tax credit starts phasing out at $400k AGI, which you will be right around before the optional payout. If you have kids, add 5% to the LTCG rate you'll pay. It's $40k worth of income (starting at $400k) for each kid that this 5% will apply to.

I'd lean towards taking the money now even if you have to pay 23.8% in federal income taxes plus whatever CA taxes you will owe (15% + 3.8% NIIT + 5% loss of child tax credits).
Yes 1 Kid - wondering how 400k is the upper phaseout for child tax credits?
I thought it was more like 225k for MFJ
PowderDay9
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by PowderDay9 »

ZoomiesRUS wrote: Mon May 03, 2021 10:45 pm
PowderDay9 wrote: Mon May 03, 2021 10:19 pm Do you have kids? The child tax credit starts phasing out at $400k AGI, which you will be right around before the optional payout. If you have kids, add 5% to the LTCG rate you'll pay. It's $40k worth of income (starting at $400k) for each kid that this 5% will apply to.

I'd lean towards taking the money now even if you have to pay 23.8% in federal income taxes plus whatever CA taxes you will owe (15% + 3.8% NIIT + 5% loss of child tax credits).
Yes 1 Kid - wondering how 400k is the upper phaseout for child tax credits?
I thought it was more like 225k for MFJ
I'm not a qualified tax expert but based on this article below, the original $2k child tax credit per child still starts to phase out at $400k. Only the new expanded credit of $1k (or $1.6k for younger children) phases out at the lower amount starting at $150k. Confusing, isn't it?

https://www.kiplinger.com/taxes/602334/ ... 0or%20more.

So you'll lose the $2k child tax credit between $400k and $440k AGI, then you would hit the 20% LTCG bracket if you get to $501.6k taxable income. This $501.6k number is easier to avoid because it's after the standard deduction (or your itemized deductions), and QBI.
Last edited by PowderDay9 on Mon May 03, 2021 11:22 pm, edited 1 time in total.
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FiveK
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by FiveK »

ZoomiesRUS wrote: Mon May 03, 2021 10:45 pm
PowderDay9 wrote: Mon May 03, 2021 10:19 pm Do you have kids? The child tax credit starts phasing out at $400k AGI, which you will be right around before the optional payout. If you have kids, add 5% to the LTCG rate you'll pay. It's $40k worth of income (starting at $400k) for each kid that this 5% will apply to.

I'd lean towards taking the money now even if you have to pay 23.8% in federal income taxes plus whatever CA taxes you will owe (15% + 3.8% NIIT + 5% loss of child tax credits).
Yes 1 Kid - wondering how 400k is the upper phaseout for child tax credits?
I thought it was more like 225k for MFJ
PowderDay9 is correct for 2021.

See the personal finance toolbox if you have Excel and would like to see the ups and downs of your specific LTCG tax rates, based on your other income and filing situation.
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ZoomiesRUS
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by ZoomiesRUS »

FiveK wrote: Mon May 03, 2021 11:22 pm
ZoomiesRUS wrote: Mon May 03, 2021 10:45 pm
PowderDay9 wrote: Mon May 03, 2021 10:19 pm Do you have kids? The child tax credit starts phasing out at $400k AGI, which you will be right around before the optional payout. If you have kids, add 5% to the LTCG rate you'll pay. It's $40k worth of income (starting at $400k) for each kid that this 5% will apply to.

I'd lean towards taking the money now even if you have to pay 23.8% in federal income taxes plus whatever CA taxes you will owe (15% + 3.8% NIIT + 5% loss of child tax credits).
Yes 1 Kid - wondering how 400k is the upper phaseout for child tax credits?
I thought it was more like 225k for MFJ
PowderDay9 is correct for 2021.

See the personal finance toolbox if you have Excel and would like to see the ups and downs of your specific LTCG tax rates, based on your other income and filing situation.
Thank you PowderDay9 and FiveK - the child tax credits are indeed confusing. I am leaning towards taking the money, (downing a few pegs of blue label) and paying off the brutal tax bill and moving on with the rest of the day. Time to add some of the funds to the playmoney account - been wanting to kick around in the bitcoin space :sharebeer
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Stinky
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by Stinky »

ZoomiesRUS wrote: Tue May 04, 2021 2:34 pm I am leaning towards taking the money, (downing a few pegs of blue label) and paying off the brutal tax bill and moving on with the rest of the day.
I think that's a very good decision.

Look at the bright side - your tax rate is well less than 100%, so you will have some net cash at the end of the day.

And, if I were a betting man, I would take the "over" on future tax rates. Pay your taxes now and call it good.

Best of luck to you.
It's a GREAT day to be alive! - Travis Tritt
Iorek
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by Iorek »

ZoomiesRUS wrote: Tue May 04, 2021 2:34 pm
FiveK wrote: Mon May 03, 2021 11:22 pm
ZoomiesRUS wrote: Mon May 03, 2021 10:45 pm
PowderDay9 wrote: Mon May 03, 2021 10:19 pm Do you have kids? The child tax credit starts phasing out at $400k AGI, which you will be right around before the optional payout. If you have kids, add 5% to the LTCG rate you'll pay. It's $40k worth of income (starting at $400k) for each kid that this 5% will apply to.

I'd lean towards taking the money now even if you have to pay 23.8% in federal income taxes plus whatever CA taxes you will owe (15% + 3.8% NIIT + 5% loss of child tax credits).
Yes 1 Kid - wondering how 400k is the upper phaseout for child tax credits?
I thought it was more like 225k for MFJ
PowderDay9 is correct for 2021.

See the personal finance toolbox if you have Excel and would like to see the ups and downs of your specific LTCG tax rates, based on your other income and filing situation.
Thank you PowderDay9 and FiveK - the child tax credits are indeed confusing. I am leaning towards taking the money, (downing a few pegs of blue label) and paying off the brutal tax bill and moving on with the rest of the day. Time to add some of the funds to the playmoney account - been wanting to kick around in the bitcoin space :sharebeer
I think that’s the right decision but just want note that a tax rate of 20% on a windfall of $300k is not “brutal” by any comparative or historical measure.
Topic Author
ZoomiesRUS
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Re: Should I take capital gains payout? Unnecessary Tax hit?

Post by ZoomiesRUS »

Iorek wrote: Wed May 05, 2021 7:29 am
ZoomiesRUS wrote: Tue May 04, 2021 2:34 pm
FiveK wrote: Mon May 03, 2021 11:22 pm
ZoomiesRUS wrote: Mon May 03, 2021 10:45 pm
PowderDay9 wrote: Mon May 03, 2021 10:19 pm Do you have kids? The child tax credit starts phasing out at $400k AGI, which you will be right around before the optional payout. If you have kids, add 5% to the LTCG rate you'll pay. It's $40k worth of income (starting at $400k) for each kid that this 5% will apply to.

I'd lean towards taking the money now even if you have to pay 23.8% in federal income taxes plus whatever CA taxes you will owe (15% + 3.8% NIIT + 5% loss of child tax credits).
Yes 1 Kid - wondering how 400k is the upper phaseout for child tax credits?
I thought it was more like 225k for MFJ
PowderDay9 is correct for 2021.

See the personal finance toolbox if you have Excel and would like to see the ups and downs of your specific LTCG tax rates, based on your other income and filing situation.
Thank you PowderDay9 and FiveK - the child tax credits are indeed confusing. I am leaning towards taking the money, (downing a few pegs of blue label) and paying off the brutal tax bill and moving on with the rest of the day. Time to add some of the funds to the playmoney account - been wanting to kick around in the bitcoin space :sharebeer
I think that’s the right decision but just want note that a tax rate of 20% on a windfall of $300k is not “brutal” by any comparative or historical measure.
~24% Federal(per math by PowderDay9 above) + ~10% California = 34% Total tax aka 100K :shock: in taxes on 300K in gains is pretty brutal.
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