Capital Gains Taxes

[Hopeful]

One area of knowledge that I have always been weak on is taxes. I always do my own taxes with TurboTax. I know it is not the best scenario doing something myself that I have little knowledge of.

My question is related to LT capital gains. I have a portion of our portfolio still in individual stocks. I would like to eventually transition that to my index funds in line with my set AA. Of the approx $400K there would be around $145K that would be LT capital gains.

Would this capital gains increase our marginal tax rate? Would it affect AMT? Would I be better off selling in portions over a number of years?

Currently our AGI is around 185K a year, and we have avoided AMT.

I should probably bite the bullet and consult a tax advisor. I know I can run the numbers in Turbotax, but without understanding how it comes up with the results it is hard to base decisions on it.

I don't know why taxes are so difficult for me to wrap my head around. Any advice would be appreciated.

 

[Fermion]

remember to watch out for the ACA investment tax too.

 

[Animorph]

"Would this capital gains increase our marginal tax rate? Would it affect AMT? Would I be better off selling in portions over a number of years?
"

Most likely yes to all of the above, I would guess. You need to try out one of the tax calculators that are linked to by others. TurboTax has one. However, it wouldn't be too hard to plug test numbers into your last year's TurboTax. You need to watch out for possible deduction and exemption rollbacks, AMT, and Roth IRA contribution limits. I suspect the AMT might be the worst problem, if you've already given up on the Roth contributions. I think the rollbacks don't hit until 300K for joint filing, but some stuff does hit at 250k.

All of that will come clear if you run your numbers through a calculator/TurboTax. To get your marginal tax rates, calculate taxes as expected and then with $10k less income or $10k less CG's. You want to make sure to stay at 15% LTCG taxes and probably 25% regular income taxes.

 

[kaneohe]

Normally LTCG can be thought of as a bar on income sitting on top of another bar of ordinary income. In the tax calculation, usually that LTCG bar is removed to calculate the tax on ordinary income and then the LTCG tax is calculated separately. To a first approximation,then, the LTCG normally doesn't affect the taxation of the ordinary income.

However the ordinary income and LTCG can affect the bracket (s) that the LTCG sits in and therefore the taxation of the LTCG.......that is whether the LTCG is taxed at 0% (in the 15% and lower brackets) or 15% or higher(in the 25% and higher brackets) . You also have to worry this yr about the 3.8% medicare surtax Questions and Answers on the Net Investment Income Tax
if you get above MAGI of 250K (MFJ) .

The AMT exemption can by decreased by higher incomes.......see the exemption wksht on p.9 here http://www.irs.gov/pub/irs-pdf/i6251.pdf
so that AMT can be increased by higher LTCG.

Because of all the interactions and because this is really a numbers question
(even tho concepts are involved), your best bet is to do what ifs w/ tax software or calculators. Unfortunately since some of the tax changes are new this yr, you might not be able to have those incorprated until later this yr. When large lump sums are involved, it is almost always better to think about taking several smaller lumps over time rather than a single one.

 

[Hopeful]

Wow, I wasn't even aware of the ACA investment tax. Will have to do some reading on that.

As to the Roths, we have already converted all of our tIRAs to Roths. Then the last couple years we make tIRA contributions, and then covert a couple months later to our ROTHs.

Obviously I am going to have to spend more time with some of the tax calculators, but as already pointed out may be tough given the changes that are yet to happen. Why couldn't this be easier!!

 

[rbmrtn]

At 185K for AGI, You are already in the 33% bracket. The next income bracket starts at $398K, 2013 Tax Rate Schedules: Marginal Ordinary Income Tax Rates for 2013 Stay below that with LTG and the rate stays the same

You'll pay more tax because your AGI will increase but that is about it. May need to look at AMT.

 

[walkinwood]

It you have money in only a small number of stocks, that risk may be more important than the tax rate increase.

 

[Hopeful]

At first glance it seems that I will want to keep my AGI below the $250k range to avoid the ACA tax.

Most of the positions are less than 2% of portfolio. The largest is Apple at 5%. Not quite ready to give up on Apple yet though.

 

[GoodWishes]

Hopeful, we are in a simialr situation. We have about 10 stocks all with large capital gain, one of them is Apple. We would like to sell some to simplify our portfolio and lower risk. We estimated the taxes and decided not to do it.

Our state treats LTCG tax same as income tax. We are in a higher tax bracket than you. State and federal taxes are estimated to be ~38% for LTCG for us plus maybe some affect on our income/AMT taxes.

We plan to retire in a couple years and it would be huge tax savings to sell when we retire. In the mean time, we will have to live with the risk and the complicated portfolio.

Here is a very simple estimate for federal LTCG tax only, not state and none of the other possible affects, assuming married filing jointly
$185k income - income tax
$145k LTCG - federal LTCG tax: $65k at 15%, $80k at 18.8%

 

[Hopeful]

Good wishes, Thanks for the breakdown. I may just sell some of them this year and try to stay under the $250K threshold.

Our two largest holdings are Mastercard and Apple, neither of which I am ready to part with right now anyway. I already sold and paid taxes on the Mastercard last year in anticipation of the possibility of capital gains rates increasing. I bought it right back so it is still short term right now anyway. It just keeps going up though.

I will have to plug some numbers into the online calculators to get a grasp on the AMT though. We have never had to pay it before, and it is very hard for me to make sense of.

 

[kaneohe]

here's a sample from the HR Block tax calculator using 2012 rules:
Free 2012 Tax Estimator & Tax Return Calculator - H&R Block®

The amount you owe is: $61075

Taxable Income + $310500
Taxes and nonrefundable credits -$61075
Regular tax$55869
Alternative minimum tax (AMT)$5206
You will owe$61075

It doesn't include the 3.8% on the $80K. It does show you are in AMT range
so taking smaller lumps will probably help you there.

You might also want to check the HR Block results w/ Taxcaster (google for it)

 

[Hopeful]

here's a sample from the HR Block tax calculator using 2012 rules:
Free 2012 Tax Estimator & Tax Return Calculator - H&R Block®

You might also want to check the HR Block results w/ Taxcaster (google for it)

Thanks for the link to the calculators. I had not used that one before. I will look at it closer over the next couple days.

 

[jebmke]

If you normally make cash donations to charities each year you can try this strategy. Take 10-15 years of your normal charity donations and donate an equivalent value of the appreciated shares to a donor advised fund. Then use that fund to make charity donations each year. You take the full deduction the year you make the donation of appreciated securities. I have done that a couple of times with some legacy stock holdings during years when my tax rate spiked.