Liquidating a 10-bagger

[USGrant1962]

My very last individual stock is Lowes, which I bought 20 years ago at an average price of $7.85 per share, so my position is 90% capital gains and 10% principal . 2018 will be my first full year of ER, and will be my first draw on my portfolio, so I'm trying to decide the best tax-efficient withdrawal strategy from my taxable accounts. I think selling Lowes is it - it alone will essentially fund my year's spending requirements.

My taxable accounts look like:
11% Lowes with 90% CGs
54% Large Cap Vanguard MFs with 50% CGs (PRIMECAP and Tax Managed Cap Appreciation)
21% Tilt Vanguard MFs with ~17% CGs (Emerging Markets and Small Value)
14% I-bonds (emergency fund)

Other background and considerations:

• Short to medium term I intend to sell off the large cap MFs, taking advantage of the 50% return of principal to lower AGI/MAGI to qualify for ACA subsidies and headspace for Roth conversions.
• But, for 2018 I'm staying on COBRA, it is a better plan and cheaper than unsubsidized ACA, so I have a window for a high MAGI next year.
• I plan to sell early next year, hopefully most all of it will be in the 0% CG bracket, if I sell this year it will all be in the 15% bracket (and may cause some other unpleasant tax phase-outs).
• I don't have any losing positions in my taxable accounts, so no offsetting capital losses (used those up last year).
• I might get some consulting work next year that could push some of the CGs to 15% bracket (and also affect ACA subsidies), but I can't complain too much about more money.
• My AA is 55/45, and I'm planning age-in-equities from there (that's a whole 'nother discussion). About 75% of my portfolio is in tax advantaged accounts, so I can rebalance there as needed to offset taxable stock sales.

This is all a change from where I was a month ago, planning to sell some of the 50% CG MFs (maybe even this year) and try for ACA subsidy. But the potential for consulting income and quality of the COBRA plan (though expensive) changed that.

My question is, am I missing anything that should impact this decision?

 

[Scrapr]

Nothing to add to help. Just an observation into my mind. When you are saying MF I am thinking about something other than mutual funds

Too much time around construction guys

 

[urn2bfree]

If you plan to do any charitable giving, giving them shares of Lowe's instead of money would be advantageous to you.

 

[USGrant1962]

Nothing to add to help. Just an observation into my mind. When you are saying MF I am thinking about something other than mutual funds

Too much time around construction guys

Ha! 33 years here in the construction industry. Didn't catch that cause those guys only talk, not write...

 

[ERD50]

Just be careful to not so sell much that those gains put you above the 15% bracket. Though the gains aren't taxable up that point, they do count as income for determining your tax bracket (I think they get zeroed out after the taxable income line).

-ERD50

 

[RunningBum]

Just be careful to not so sell much that those gains put you above the 15% bracket. Though the gains aren't taxable up that point, they do count as income for determining your tax bracket (I think they get zeroed out after the taxable income line).

-ERD50

That sounds pretty misleading. The first sentence is correct. But CGs don't count in determining your tax bracket. They cannot push regular income into jumping out of 15% into being taxed at 25%, which is what it sounds like you are saying.

What it is, when income + Qdivs +LTCGs exceed a certain number, which today happens to be the top of the 15% bracket (bottom of 25% bracket), any Qdivs and LTCGs over that get taxed at 15%. In the new tax proposal, I'm pretty sure that barrier is actually different from the top of the new 12% bracket (bottom of 25% bracket). So adding CGs really has nothing to do with the brackets themselves, it's that number at which when combined with the other income, they start being taxed.

I have no idea what you mean about that comment about them getting zeroed out after the taxable income line.

 

[Winemaker]

Another thing is to capture capital gains under the 15% bracket. You can immediately repurchase any security to lock in a gain at the 15% level, then start the process all over again. You may end up with a losing position with the new position, but you were still up over the long term, which you may use to offset later. Also, if the second purchase continues to increase, the latest gain would be less painful on future tax returns.

 

[ERD50]

That sounds pretty misleading. The first sentence is correct. But CGs don't count in determining your tax bracket. They cannot push regular income into jumping out of 15% into being taxed at 25%, which is what it sounds like you are saying.

What it is, when income + Qdivs +LTCGs exceed a certain number, which today happens to be the top of the 15% bracket (bottom of 25% bracket), any Qdivs and LTCGs over that get taxed at 15%. In the new tax proposal, I'm pretty sure that barrier is actually different from the top of the new 12% bracket (bottom of 25% bracket). So adding CGs really has nothing to do with the brackets themselves, it's that number at which when combined with the other income, they start being taxed.

I have no idea what you mean about that comment about them getting zeroed out after the taxable income line.

I'll need to plug some numbers in a tax program to validate what I wrote, maybe some of that is misleading/wrong, but I think the main point is valid - if you sell too much, and create too much LTCG, the gains will be taxed at 15% rather than zero.

I thought it also pushed up other income as well, but I'll check on that later.

So you are saying that if top of the 15% bracket was $75,000, and you had $50K LTCG and another $60K income, that none of that $60K income would be taxed above 15%? I was thinking that $35K ($60K+$50K-$75K) would be in the 25% bracket.

-ERD50

 

[USGrant1962]

Just be careful to not so sell much that those gains put you above the 15% bracket. Though the gains aren't taxable up that point, they do count as income for determining your tax bracket (I think they get zeroed out after the taxable income line).

-ERD50

To you and RunningBum - on my to do list is to better understand the interactions of high CGs with ordinary income in the tax code. While working the CGs were always minor compared to W-2 income, so they were what they were.

 

[pb4uski]

I'll need to plug some numbers in a tax program to validate what I wrote, maybe some of that is misleading/wrong, but I think the main point is valid - if you sell too much, and create too much LTCG, the gains will be taxed at 15% rather than zero.

I thought it also pushed up other income as well, but I'll check on that later.

So you are saying that if top of the 15% bracket was $75,000, and you had $50K LTCG and another $60K income, that none of that $60K income would be taxed above 15%? I was thinking that $35K ($60K+$50K-$75K) would be in the 25% bracket.

-ERD50

No.

If the top of the 15% tax bracket was $75k and you had $50k LTCG and $60k of ordinary income, the $60k of ordinary income would be taxed as if you had no other income... then the first $15k of LTCG would be at 0% (up to a total income of $75k) and the remaining $35k of LTCG would be at 15%.

I'm assuming that deductions and exemptions are already applied in the $60k for simplicity.

 

[RunningBum]

I'll need to plug some numbers in a tax program to validate what I wrote, maybe some of that is misleading/wrong, but I think the main point is valid - if you sell too much, and create too much LTCG, the gains will be taxed at 15% rather than zero.

I thought it also pushed up other income as well, but I'll check on that later.

So you are saying that if top of the 15% bracket was $75,000, and you had $50K LTCG and another $60K income, that none of that $60K income would be taxed above 15%? I was thinking that $35K ($60K+$50K-$75K) would be in the 25% bracket.

-ERD50

Assuming we are ignoring deductions and exemptions for simplicity.

None of that 60K would be taxed above 15%. 15K of the CGs would be at 0%, and 35K would be taxed at 15%.

 

[RunningBum]

To you and RunningBum - on my to do list is to better understand the interactions of high CGs with ordinary income in the tax code. While working the CGs were always minor compared to W-2 income, so they were what they were.

What I did to understand it was to run different scenarios through Turbo Tax, and look at how it affected the Qualified Dividends and Capital Gains Worksheet, which is what you actually use to calculate taxes when you have divs and CGs. Warning, it's confusing, because it's pretty busy and some people do better with a graphic I've seen, but can't put my hands on right now. Maybe someone else can find it and show it.

 

[pb4uski]

Here ya go.

https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/

 

[RunningBum]

Right. As the green regular income box grows, it pushes more of the yellow LTCGs and QDivs box into being taxed at 15%. Once the green box fills and overflows the 15% bracket, all LTCGs and QDivs are taxed at 15% (or higher if you get way up there in income).

 

[ERD50]

OK, so I plugged it a tax estimator:

www.hrblock.com/tax-calculator/

For MFJ, top of 15% bracket is $96,700 ($75,900 Taxable Income after subtract $12,700 Standard Deduction and $8,100 Pers Exempt). "Income " below is regular earned income type.

$96,700 Income = $10,453 taxes (FYI - a 10.81% effective rate)

Add $10K of income and the added $10K is taxed at the 25% marginal rate as expected.

With $96,700 Income and an added $10K LTCG, the added $10K is taxed at the 15% LTCG rate. OK.


$96.7K of LTCG with $0 income is taxed at 0% and $0.

Add $10K of income and the $10K delta is taxed at 15% marginal rate (so it's 'really' $10K of the LTCG being taxed, even though the increase was from 'income').

I see the numbers, it's still a little tricky for me to consolidate each scenario into words, but I think the key is that if you have regular income at the top of the 15% bracket, added LTCG do not "push" the income into the 25% bracket, it is the LTCG which get "pushed" from 0% to 15% bracket. Whew, did I get that expressed correctly?

-ERD50

 

[RunningBum]

Yes, I think you've got it.


Note that if you had 1/2 regular income and 1/2 LTCG (out of 96.7K), and added $10K of income, you should see a 30% increase in tax. That's because you're taxed 15% on that extra $10K of income, plus you've pushed $10K of LTCGs into being taxed at 15%.

 

[pb4uski]

Exactly.

 

[ERD50]

Yes, I think you've got it.


Note that if you had 1/2 regular income and 1/2 LTCG (out of 96.7K), and added $10K of income, you should see a 30% increase in tax. That's because you're taxed 15% on that extra $10K of income, plus you've pushed $10K of LTCGs into being taxed at 15%.

Thanks, and yes, I actually did see that 30% rate when I was playing different scenarios. I think there might be a bigger push for tax reform if the average person understood just how wacky taxes are, but people don't "see" this stuff. Just plug in numbers, or pay someone, and it spits out a number. But once you make something complex, and then add complexities on top, it all becomes geometrically complex - like figuring t-IRA versus ROTH, ROTH conversions, 0% LTCG, etc, etc.

-ERD50

 

[audreyh1]

I thought it also pushed up other income as well, but I'll check on that later.

So you are saying that if top of the 15% bracket was $75,000, and you had $50K LTCG and another $60K income, that none of that $60K income would be taxed above 15%? I was thinking that $35K ($60K+$50K-$75K) would be in the 25% bracket.

-ERD50

No. Ordinary income and long term capital gains are split apart and taxed separately except for the threshold on 0% cap gains. In your example (ignoring deductions, exemptions etc. and current tax brackets which are a bit higher), $60K of the ordinary income is taxed at 15%, $15K of capital gains is taxed at 0%, $35K of cap gains is taxed at 15%.

 

[pb4uski]

No. Ordinary income and long term capital gains are split apart and taxed separately except for the threshold on 0% cap gains. In your example (ignoring deductions, exemptions etc. and current tax brackets which are a bit higher), $60K of the ordinary income is taxed at 15%, $15K of capital gains is taxed at 0%, $35K of cap gains is taxed at 15%.

I'll add one refinement... the first $18,550 of ordinary income would be taxed at 10% and then the remainder at 15%.

 

[USGrant1962]

Here ya go.

https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/

Great link. I'm a big Kitces fan, and didn't think of searching his site for this specific issue. The first waterfall graphic (the one above) is my default situation for the next 10 years or so, and the second is what I'm looking at if I get some reasonable consulting income. I have not spent a ton of time contemplating the 0% capital gains rate, but am doing so now.

I'll download 2017 tax software shortly and run some scenarios.

Thanks for all the input so far. As I said, understanding the interactions of high CGs versus ordinary income is new to me.

I'm really interested in the idea of capital gains harvesting. I'm quite familiar with capital loss harvesting, but harvesting gains (now that I'll have no W-2 income to mess it up!) is new to me.

So now I'm wondering about harvesting gains versus Roth conversions. There was one question in the Kitces comments, but Michael didn't answer.

Discuss.

 

[audreyh1]

I'll add one refinement... the first $18,550 of ordinary income would be taxed at 10% and then the remainder at 15%.

Oh sure - the example didn't have the exact brackets either.

 

[pb4uski]

Oh sure - the example didn't have the exact brackets either.

I know... I just didn't want someone reading it to think that the tax on ordinary income met of deductions and exemptions would be a straight 15%.

 

[kaneohe]

https://www.bogleheads.org/forum/viewtopic.php?t=86849

I like the chart by tfb on 12/11/11 that shows these concepts. To me it is more intuitive than the kitces picture and illustrates all the ideas discussed here:
LTCG/QDIV stacked on top of the ordinary income; deductions/exemptions carved out of the bottom of the stack (ordinary income); the start of taxable income (blue line) ;the 10% ordinary income bracket next; then the 15% bracket on ordinary income; the top of the 15% bracket as the demarcation line below which LTCG/QDIV is tax as 0% and above which they are taxed at 15%T.

sorry you had to search thru that thread...........don't recall how to just post that chart by itself.

 

[audreyh1]

here is that Bogleheads chart: