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Income tax vs gain tax strategy question
Old 11-21-2013, 12:07 PM   #1
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Income tax vs gain tax strategy question

We are looking at about $45k in gains tax in 2014 unless we either A) cost that out over several years and hold positions we would rather sell now or B) rip the bandaid off and pony up and pay it to divest. In looking at a way to do B) without the $45K hit....

If in 2014 we contributed to a 457 to get $91,000 salary down to (barely) under the $72,500 couple 15% tax bracket (though that salary is one earner, one of us wouldn't earn anything in 2014 but we should I think still be able to file jointly), wouldn't that drastically reduce the $45K in gains tax? Or will selling off that much gains change the income level such that we bump up in tax rates anyway?

We don't want to let the tax tail wag the dog, but I also don't want one of us to work in 2014 and earn $40K just to turn around and pay $45K in gains tax if one of us could earn 0 and we can drastically reduce the $45K tax liability.
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Old 11-21-2013, 12:13 PM   #2
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One way: you can donate appreciated assets to charity and pay no cap gains tax but still take a deduction for the full value.
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Old 11-21-2013, 02:39 PM   #3
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We are looking at about $45k in gains tax in 2014 unless we either A) cost that out over several years and hold positions we would rather sell now or B) rip the bandaid off and pony up and pay it to divest. In looking at a way to do B) without the $45K hit....

If in 2014 we contributed to a 457 to get $91,000 salary down to (barely) under the $72,500 couple 15% tax bracket (though that salary is one earner, one of us wouldn't earn anything in 2014 but we should I think still be able to file jointly), wouldn't that drastically reduce the $45K in gains tax? Or will selling off that much gains change the income level such that we bump up in tax rates anyway?

We don't want to let the tax tail wag the dog, but I also don't want one of us to work in 2014 and earn $40K just to turn around and pay $45K in gains tax if one of us could earn 0 and we can drastically reduce the $45K tax liability.
The federal tax brackets are adjusted every year for inflation. The IRS recently announced the tax brackets for 2014. For a married couple filing jointly, the top of the 15% bracket will be $73,800. In addition you have to take into consideration exemptions and deductions. The personal exemption will be $3,950 in 2014 and the standard deduction will be $12,400. I don't know your tax situation, but assuming that you take two personal exemptions and the standard deduction, you will be in the 15% tax bracket as long as your MAGI is no larger than $73,800 + 2 * $3,950 + $12,400 = $94,100.

On the income side, you anticipate $91,000 in wages, which you can reduce by $17,500 by maxing out your 401k contributions. (If you will be 50 or older in 2014, the maximum is $23,000. You don't say whether you are eligible for the age 50 catch-up contributions.)

So you can get your taxable income down to at least $91,000 - $17,500 = $73,500 by maxing out 401k contributions. This would allow you to realize $94,100 - $73,500 = $20,600 in capital gains and still remain in the 15% bracket, which means paying no federal taxes on $20,600 of capital gains, assuming that it is all long term capital gains.

I would say it's definitely worth your while to contribute the maximum to your 401k in a year like 2014, when you anticipate realizing a large amount of capital gains.


IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More - Forbes
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Old 11-21-2013, 03:07 PM   #4
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Lets say you do nothing. In 2014 if you MFJ you would have $91,000 of earnings less $12,400 standard deduction less $7,900 of personal exemptions for TI of $70,700 compared to the $73,800 top of the 15% tax bracket, so that would give you only $3,100 of room for tax free capital gains.

So if you make either 401k contributions or HSA contributions or itemized deductions in excess of the standard deduction or other items that reduce your TI for each $1 you get an additional $1 in tax free LTCG.

As always, YMMV.
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Old 11-21-2013, 03:19 PM   #5
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Spreading sales over this year and 2014 shouldn't have you holding things too long. You want to consider very carefully if you can stay in the 0% cap gains rate while doing this.

Can you sell anything taxable with a loss to balance out the gains a bit?
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Old 11-21-2013, 03:24 PM   #6
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... This would allow you to realize $94,100 - $73,500 = $20,600 in capital gains and still remain in the 15% bracket, which means paying no federal taxes on $20,600 of capital gains, assuming that it is all long term capital gains. I would say it's definitely worth your while to contribute the maximum to your 401k in a year like 2014, when you anticipate realizing a large amount of capital gains. IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More - Forbes
First, thank you so very much for a very informative and easy to understand post. I really appreciate it.

We will definitely be maxing out to the allowed $23K contributions in 2014, and yes, these are long term (all over a year, actually most are over several years) gains. It is hard to know when to take the gains and pay gains tax, and when to hold. We have 350K of long term gains and of course can capture some of that with taking some offsetting losses to counterbalance, but will still be left with the choice of paying tax on a large amount of long term gains or holding it, hope the value holds, and counterbalancing with future losses to minimize the tax hit.
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Old 11-21-2013, 03:28 PM   #7
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Spreading sales over this year and 2014 shouldn't have you holding things too long. You want to consider very carefully if you can stay in the 0% cap gains rate while doing this. Can you sell anything taxable with a loss to balance out the gains a bit?
Thanks all for the rep,it's so far.

Yes we can balance vs some losses, but we are still looking at $250,000-ish in gains after that. Balancing that large amount vs losses over the upcoming years of course runs the risk of those gains disappearing if the holdings lose value in the meantime.
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Old 11-21-2013, 04:09 PM   #8
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First, thank you so very much for a very informative and easy to understand post. I really appreciate it.

We will definitely be maxing out to the allowed $23K contributions in 2014, and yes, these are long term (all over a year, actually most are over several years) gains. It is hard to know when to take the gains and pay gains tax, and when to hold. We have 350K of long term gains and of course can capture some of that with taking some offsetting losses to counterbalance, but will still be left with the choice of paying tax on a large amount of long term gains or holding it, hope the value holds, and counterbalancing with future losses to minimize the tax hit.
Wow, when you said you were looking at $45k in capital gains tax in 2014, you weren't kidding. $350k in capital gains, if realized entirely in one tax year, would probably push you into the 35% tax bracket and subject you to the phase-out of your personal exemptions. I believe some of your gain will also be subject to the new 3.8% Medicaid surcharge. From a strictly tax point of view, it would be better to split realization of your gains over two tax years, although as you say nobody can predict if the stock market will stay high during a longer holding periold.

Do you have any plans for this money after you sell? If you're just going to reinvest it anyway, I would probably sell over the course of multiple years. If you're planning on sitting in cash in hopes of avoiding the next down turn, well that's market timing and, as we all know, has risks of its own.
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Old 11-21-2013, 04:34 PM   #9
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Do you have any plans for this money after you sell? If you're just going to reinvest it anyway, I would probably sell over the course of multiple years. If you're planning on sitting in cash in hopes of avoiding the next down turn, well that's market timing and, as we all know, has risks of its own.
The plan for the cash was to reinvest in higher growth potential than the stagnate mountains that we have. Spreading out over multiple years is the likely course. On one hand fortunate enough to have the gains, on the other, that tax liability is painful.
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Old 11-21-2013, 07:13 PM   #10
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$350k in LTCG! That sounds like a nice problem to have to me!

LTCG rates are 0% up to top of 15% bracket and top out at 15% as long as your total income is less than $450k (for a couple). So at worst you would pay a little over $52.5k on the gains, but as karluk observes if you have ordinary income as well it would push that income into a high tax bracket.
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Old 11-21-2013, 07:33 PM   #11
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$350k in LTCG! That sounds like a nice problem to have to me!
Actually, I rather prefer having my massive carryover capital losses. That means my current portfolio value hasn't relied on tremendous portfolio growth to grow the stash, and that as soon as I give up on trying my borderline-unmanagable portfolio, I'll be able to enjoy market return growth and actual capital gains!
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Old 11-21-2013, 08:14 PM   #12
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$350k in LTCG! That sounds like a nice problem to have to me!

LTCG rates are 0% up to top of 15% bracket and top out at 15% as long as your total income is less than $450k (for a couple). So at worst you would pay a little over $52.5k on the gains, but as karluk observes if you have ordinary income as well it would push that income into a high tax bracket.
I admit I've never done income taxes on such elevated income, but I don't think OP's earned income will be taxed at the 35% rate. The tax hits that I'm aware of are limited to the phase-out of personal exemptions in this income range, along with the Medicaid surcharge of 3.8%, which increases the tax rate on some of the capital gains from 15% to 18.8%. So the differences are small enough that OP could consider realizing the entire gain in one year without incurring punitive taxes, at least in comparison to spreading it out over two years.

It's just that it's so tempting to spread the pain out over as many years as possible and take maximum advantage of the 0% capital gains tax bracket. I wonder just how awful OP's current investments really are. They can't have done too badly over the years, or they wouldn't have generated $350k in capital gains.
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Old 11-21-2013, 09:08 PM   #13
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$350k in LTCG! That sounds like a nice problem to have to me!

LTCG rates are 0% up to top of 15% bracket and top out at 15% as long as your total income is less than $450k (for a couple). So at worst you would pay a little over $52.5k on the gains, but as karluk observes if you have ordinary income as well it would push that income into a high tax bracket.
I don't think this will push ordinary income into a higher tax bracket per se - at least not the ordinary income brackets.

What it will do is:
  1. Probably means most of the ordinary income is taxed at the AMT 26% rate.
  2. The Net Investment Income tax (Medicare surtax) of 3.8% will be tacked on for capital gains income above the total AGI threshold of $250K.
  3. Itemized deductions will be reduced 3% for AGI over the $300K threshold. This, however, does not impact taking the full standard deduction.
  4. Personal exemptions will be reduced - this might be reduced to zero once you reach AGI of $422K.
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Old 11-21-2013, 09:38 PM   #14
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I don't think this will push ordinary income into a higher tax bracket per se - at least not the ordinary income brackets.

What it will do is:
  1. Probably means most of the ordinary income is taxed at the AMT 26% rate.
  2. The Net Investment Income tax (Medicare surtax) of 3.8% will be tacked on for capital gains income above the total AGI threshold of $250K.
  3. Itemized deductions will be reduced 3% for AGI over the $300K threshold. This, however, does not impact taking the full standard deduction.
  4. Personal exemptions will be reduced - this might be reduced to zero once you reach AGI of $422K.
I don't think AMT will come into play at all. Capital gains are not subject to AMT, and OP's earned income is way below the threshold that would trigger AMT.
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Old 11-21-2013, 09:52 PM   #15
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I think the best way is for the OP to do a pro forma 2014 tax return with no LTCG and then add in significant LTCG (start at $350k and work down form there) and see how the total tax changes.

Or vice versa, include the LTCG but exclude your income and then add the income and see how the tax changes.
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Old 11-21-2013, 10:01 PM   #16
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$350k in LTCG! That sounds like a nice problem to have to me!

LTCG rates are 0% up to top of 15% bracket and top out at 15% as long as your total income is less than $450k (for a couple). So at worst you would pay a little over $52.5k on the gains, but as karluk observes if you have ordinary income as well it would push that income into a high tax bracket.
I think the first thing you don't want to hit is $250k AGI (for a couple), which nets you an extra 3.8% Medicare (I think) surcharge on the minimum of AGI over the limit or investment gains. Might as well make that your target while selling, unless you want to go slower. I'd be very reluctant to go higher and pay an extra 3.8%.
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Old 11-21-2013, 11:05 PM   #17
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Unless one is an insider and knows that a bomb is going to hit the company, it almost never pays to cash in gains just because they are there, and then pay the resulting taxes. Something that might happen because of real or imagined bubbles is just that- a big might. I have taken gains regularly almost every year, but not precipitously. One just cannot be sure enough to act on these feelings.

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Old 11-22-2013, 12:12 AM   #18
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I don't think AMT will come into play at all. Capital gains are not subject to AMT, and OP's earned income is way below the threshold that would trigger AMT.
probably best to do a tax calculation as pb4uski suggests. Although everything you pointed out is true, AMT could possibly come into play because the AMT exemption is reduced by income (including CG) and at some point might lead to AMT.
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Old 11-22-2013, 07:15 AM   #19
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IMO at that level of income there are a number of moving parts (AMT, phase-outs, surtaxes, etc) that make it hard to generalize so the best way to assess the situation is to do some pro forma tax calculations for several scenarios.
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Old 11-22-2013, 09:22 AM   #20
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IMO at that level of income there are a number of moving parts (AMT, phase-outs, surtaxes, etc) that make it hard to generalize so the best way to assess the situation is to do some pro forma tax calculations for several scenarios.
Is Turbo-Tax being shipped yet? I do my estimations with a spreadsheet which is complicated and I think accurate, but I am eager to do a Turbo Tax run through before year end.
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