120K capital gains- what should i do?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
novice111
Posts: 17
Joined: Mon Jun 03, 2019 12:45 am

120K capital gains- what should i do?

Post by novice111 » Sun Nov 10, 2019 7:59 pm

In short: was separated last year, and had my savings in Ameriprise.
Now ditched Ameriprise and am on road to reconciliation w spouse.

This year we have 121 k in LTCG from sale of EPSP
This will push us into 32% tax bracket
How to find more pre-tax space this year?


ages: 35 and 36
2 kids- ages 3 yrs and 3 mo
State: AZ
AA: 80/20
EF ~6 mo in Money market funds

debts: Mortgage 174 K @3.15% until 2020 (arm loan)- this is rented out , cashflow slightly positive.
Worth about
2 cars paid off
Currently renting @1400/month

His W2 income-$140k pretax including bonuses
My 1099 income ~100k pretax currently part time

HIs 401k w employer ~120 k in Target date funds - will have option for Megabackdoor Roth starting next year
Her solo 401k ~80k BND/VTI- has option for Megabackdoor Roth

His Roth- 18 k target date
My Roth ~ about 18 K VTI

HSA : started contributing last year ~10 k VTI

My taxable ~100 k not invested yet-in Money market

total expenses including preschool for 3 yr old and daycare for 3 mo = 70k/year

For 2019 i can file as head of household MF singly or MFJointly

Questions :

1. Spouse gets EPSPs and RSUs from work
This year he sold company stock for 121K in long term capital gains
=164 K total

What’s the best way to minimize taxes on this? - is it taxed as capital gains or normal income or both?
This is likely to up our tax bracket this year depending on how taxes are calculated.
Should we fund a 529 this year to help lower the state tax bracket? Will i be able to utilize employER portion of solo-401k to further reduce federal taxes sufficiently?


OR

Should we use the funds to pay off mortgage @3.15% until 2020, or invest it?

3. Should i file 2019 taxes MFJ or MFS head of household?
Should i file MFJ and deduct my >6 months of expenses maintaining a different residence as business office expenses. i
i do use my home office for telehealth and paperwork extensively.

i filed MF singly last year. my accountant says the IRS ‘doesn’t like MFsingly filers’

He suggested that i pay my kids $3k each for ‘modeling’ and put that money in a taxable / Roth? account and invest it for college expenses, and take the 6k deduction against my taxable income.
i would think the IRS would frown more on this than MFS filers but apparently not, according to him.
He says everybody does this.
What do BHs think?

4. i’m an independent contractor physician that incorporated as an S -corp on advice of a colleague.
From what i’ve been reading, and Spirit Rider’s posts here -it looks like this may have been a bad move.

My accountant seems to concur but since i don’t have a good grasp on this , he just ends up confusing me on the issue.

(Since i have a 3 month old and a 3yr old, the past few years has seen me working part-time.
i make ~100,000k /year pre-tax and am at about 90k this year so far.
Next year i will have a W2job + small amount of contracting income on the side. (since i wanted to cover myself for health insurance in case of divorce)
i traveled a lot to find these jobs so i will have lots of deductible business expenses but probably not over standard deduction.
My income for the next 3 years is likely to be sub 100k. Once kids are in school, it will pick up.)

Am i worse off as an S-corp? What should i do now?

Re: The solo401k i don’t really understand how sole-prop vs S corp work-
it seems in s corp , i route a smaller amount as salary to myself that pays Medicare, SS and payroll taxes and i contribute to the 401k from that amount - this is the employEE portion.
i’m then allowed profit-sharing (30%?) of s-corp profits (is this correct?) - i can contribute from this to 401k as employER portion.
how would sole-prop work differently?

5. Spouse's company will start offering mega backdoor roth starting next year held at fidelity.
i also have ability to use MBR in my solo-401k held at fidelity.
In the future assuming we’re able to max out pre-tax space ,HSAs and backdoor roth (we’ve been doing all except the backdoor roth which i learned about just this year), should we contribute to mbr in his company managed a/c or my self managed 401k?
i’m guessing it’s better off in the 401k we administer?

i appreciate all input.
Thanks again to this wonderful forum.

User avatar
Watty
Posts: 17446
Joined: Wed Oct 10, 2007 3:55 pm

Re: 120K capital gains- what should i do?

Post by Watty » Sun Nov 10, 2019 9:51 pm

novice111 wrote:
Sun Nov 10, 2019 7:59 pm
He suggested that i pay my kids $3k each for ‘modeling’ and put that money in a taxable / Roth? account and invest it for college expenses, and take the 6k deduction against my taxable income.
i would think the IRS would frown more on this than MFS filers but apparently not, according to him.
He says everybody does this.
What do BHs think?
.......

4. i’m an independent contractor physician that incorporated as an S -corp on advice of a colleague.
From what i’ve been reading, and Spirit Rider’s posts here -it looks like this may have been a bad move.

My accountant seems to concur but since i don’t have a good grasp on this , he just ends up confusing me on the issue.
On paying your kids for modeling ask yourself;
1) How many child models have you hired in the last five years?
2) Would you also be hiring a professional photographer?
3) As a wild guess I would think that a child model might cost $100(???) an hour. $3,000 would imply 30 hours of work. It would be hard to justify 60 hours of work for your two kids.
4) If you do have some legitimate business use for photos of a child then you could also get stock photos for a very small amount(Like $25(???) so you would also need to be able to justify not using inexpensive stock photos.

Taking a bogus business expense deduction could not only result in a lot of extra taxes and penalties but some sort of fraud conviction in extreme cases. While you might not go to jail I would think that having a fraud conviction might be a problem with future employer, licensing boards, etc. A fraud conviction would also likely come up in child custody dispute.

Years from now your kids could also run into problems if an invalid Roth contribution is found in an audit and it needs to be reversed with all sorts of large penalties that compound over the years. It is a stretch but it is not impossible that it could cause problems someday if they ever need a security clearance or go into politics.

It is true that some people do this but it would be a red flag for an audit and you better have all the details right.


On your accountant confusing you - you have a lot going on in your life and that might be part of the problem but it would have been good if the accountant could have taken the time to work with you to help you understand the reasons that you might want to change how you are incorporated.



You might want to consider getting a different account but it would be good to do that soon so you would have plenty of time to make any changes before the end of the year.
Last edited by Watty on Sun Nov 10, 2019 9:59 pm, edited 2 times in total.

User avatar
RickBoglehead
Posts: 4581
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: 120K capital gains- what should i do?

Post by RickBoglehead » Sun Nov 10, 2019 9:55 pm

You should get a new accountant after what he suggested.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

ARoseByAnyOtherName
Posts: 251
Joined: Wed Apr 26, 2017 12:03 am

Re: 120K capital gains- what should i do?

Post by ARoseByAnyOtherName » Sun Nov 10, 2019 10:05 pm

If your accountant is suggesting you falsely take a tax deduction you really, really, really need to find a new accountant. Down that road lie sadness.

AlohaJoe
Posts: 4857
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: 120K capital gains- what should i do?

Post by AlohaJoe » Sun Nov 10, 2019 10:47 pm

novice111 wrote:
Sun Nov 10, 2019 7:59 pm
This will push us into 32% tax bracket
I don't understand what you mean by this. Capital gains don't change the marginal rates you pay on your other income. And the capital gain won't be taxed at 32%. Maybe this isn't you but people who say things like "this will push us into the 32% tax bracket" often don't understand how taxes work: the higher rate only applies to marginal income, not all income.

I suggest you actually calculate your taxes with and without this $121,000 of long-term capital gains. What's the actual dollar amount of extra taxes you are paying? Do you have that information already?

sd323232
Posts: 160
Joined: Thu Jun 21, 2018 4:45 pm

Re: 120K capital gains- what should i do?

Post by sd323232 » Sun Nov 10, 2019 11:44 pm

Your long term capital gains will be taxed at 15%. Where does 32% coming from?

Post Reply