How to sell winners (a good problem to have!?) and not be mad about the tax

[Retireby45ish]

I hold large index funds for the most part. However, I did buy some AAPL and TSLA (and GOOG) a few years back. something like 2-3% of my portfolio. Luckily these have performed well in 2020...yet the problem is that I'm overweight them in my portfolio because of their growth. I'd like to sell them out but I don't want to pay the 20% LTCG tax on them. The alternative is to hold them for 4-5 more years until I'm in a 0% bracket. So now I'm torn...pay the tax or take the uncertainty of having these stocks make up ~17% of all my assets. When I started I wasn't concerned about having such a small amt riding on these little names. But I'm surprised now how big they've grown.

I'm happy to hold AAPL...I think that has long term stability/growth/etc. That makes up 13% alone. TSLA at 4% is either going to double again or go to 0 in that time. I guess I'm also fine with GOOG as a business. Did I just answer my question?

I hate having to pay the tax man on earnings from my investments...

[Whisper66]

Quote:

Originally Posted by Retireby45ish Did I just answer my question?...

Yes. For what little it’s worth, that’s what I would do. Keep companies that have strong financials, sell off those with poor financials but have had a great run up and be thankful you took part in the run up.

[Retireby45ish]

Thanks for the reply.

Here is one thing I just thought about. And this is more of a thought exercise...

Can I gift this stock to my parents, who I trust 100%, and who won’t ever touch it, thus never paying taxes on the gains? Or if they did sell they would be in a smaller bracket?

Maybe a few years from now they gift me some cash back?? Or maybe they gift the cash to my spouse even?

Or else I get the shares back in a stepped up basis upon their death (obviously this is riskier, but they have plenty of money to get them through their later years and health insurance, etc.)?

[Dash man]

I have a similar problem with a larger number of stocks with large capital gains. I took the hit on Boeing this year before the big fall and got rid of it at $310. But I still have large gains in MSFT, HD, SBUX, AAPL and others. I’ll have to hold on to them since I’m trying to do Roth conversions for the next few years. A good problem to have though.

[OldShooter]

Be careful. IMO the tax tail should never wag the investment strategy dog.

[RetireBy90]

I learned a few years ago, better to have a profit and pay taxes than not have profit. Learned it with Pan Am.
I think you are focused on the tax that would be due not how much you can keep of your gain.
One option available is to donate the shares to a charity. We use Fidelity and set up a charitable trust, very easy, and moved some shares to the trust. We got a deduction and it will cover our regular giving for about 4-5 years.

[Retireby45ish]

Quote:

Originally Posted by RetireBy90 I learned a few years ago, better to have a profit and pay taxes than not have profit. Learned it with Pan Am. I think you are focused on the tax that would be due not how much you can keep of your gain. One option available is to donate the shares to a charity. We use Fidelity and set up a charitable trust, very easy, and moved some shares to the trust. We got a deduction and it will cover our regular giving for about 4-5 years.

I’m focused on the tax due since I view it as losing 20% of my gain vs keeping all of it in a few years. Or crafting a way to avoid paying it.

Here is an article I just found that went along with my post #3 above.

https://www.bbh.com/en-us/insights/s...-and-dad-30972

[RetireBy90]

Quote:

Originally Posted by Retireby45ish I’m focused on the tax due since I view it as losing 20% of my gain vs keeping all of it in a few years. Or crafting a way to avoid paying it. Here is an article I just found that went along with my post #3 above. https://www.bbh.com/en-us/insights/s...-and-dad-30972

Interesting idea. Not covered in the article, do parents receive a stepped up basis?

[Retireby45ish]

Quote:

Originally Posted by RetireBy90 Interesting idea. Not covered in the article, do parents receive a stepped up basis?

They don’t. But upon their death it goes back to the child (or anyone) at the stepped up basis.

[RobbieB]

I don't know why people are afraid of taxes. Taxes make the world go round. Having to pay tax means you are doing well.

Long term cap gains get a favorable rate anyway.

Do what you think best now and pay the taxes later.

[CyclingInvestor]

Quote:

Originally Posted by RobbieB I don't know why people are afraid of taxes. Taxes make the world go round. Having to pay tax means you are doing well. Long term cap gains get a favorable rate anyway. Do what you think best now and pay the taxes later.

+1

I used to try to keep taxes low too. I later decided that if my worst problem was making so much money on investments that I had to pay a lot in taxes, I had nothing to worry / complain about.

[Fermion]

I pretty much stopped letting the tax wag the tail. I was trying to pay little tax in retirement but then realized that if I could make big money, then even after big tax I had more left to spend.

[pacergal]

Quote:

Originally Posted by RobbieB I don't know why people are afraid of taxes. Taxes make the world go round. Having to pay tax means you are doing well. Long term cap gains get a favorable rate anyway. Do what you think best now and pay the taxes later.

+1
I'll take paying more taxes on having more money, than the opposite.
I feel blessed to have what I have, and I benefit from the things my taxes help pay for.

[Whisper66]

Gifting to parents with them passing it back to you upon death at stepped up basis is a new idea to me. I suppose one could make a dent in your taxes under the gift tax exclusions rules ($15k per gift). You and your wife could give each of your parents up to $15k tax free for total of 4x15 = $60k per year each year you do it. Main risk seems to be relationships going sour during lifetimes and/or wills or trusts being properly written to support the plan. Given typical family feuds and divorce rates in this country, this plan seems pretty risky for the average person. (I've had a few friends whose spouses walked out on them and they never saw it coming). Will be curious to hear if you decide to do this.

[Whisper66]

I liked your thread title. The part ".....and not be mad about the tax" struck home with me. I diligently contributed to my 401k my whole 30+ year career. At retirement it contained >90% of our savings. I calculated the future taxes owned .... it was absolutely huge. I am resigned to optimizing the payments over our lifetime as best I can. With current tax rates so low plus I am retired and pre-social security, I am currently doing large yearly Roth conversions to pay down some of these taxes.

[Retireby45ish]

Quote:

Originally Posted by Whisper66 Gifting to parents with them passing it back to you upon death at stepped up basis is a new idea to me. I suppose one could make a dent in your taxes under the gift tax exclusions rules ($15k per gift). You and your wife could give each of your parents up to $15k tax free for total of 4x15 = $60k per year each year you do it. Main risk seems to be relationships going sour during lifetimes and/or wills or trusts being properly written to support the plan. Given typical family feuds and divorce rates in this country, this plan seems pretty risky for the average person. (I've had a few friends whose spouses walked out on them and they never saw it coming). Will be curious to hear if you decide to do this.

I believe we could give them even more.
I think a lot of people think you can only give a certain amount of gift a year. That isn’t the case. That’s only without filling out paperwork. You can give something like 11.58M of gifts in your lifetime.
So if you had 1M where 90% of that was appreciated (and upon selling your take a 0.2*900k= 180k tax hit you could gift all this stock to an aging relative, and have them write a contract of leaving you this upon death. And you get a stepped up basis and save the full 180k.

Transaction Must occur 1 year before death or doesn’t count.

As you said, family dynamics would be the real risk here...as well as other estate issues and their ability to be on Medicade I suppose.

Just an interesting idea...

Since I plan to be retired for a bunch of years before SS, RMD, etc I plan to instead use the low tax treatment of LTCG at the 0% up to something like 70-80k a year with minimal other income and slowly step up cost basis this way instead...after I max out Roth rollovers for a few years.

[Sunset]

Quote:

Originally Posted by Retireby45ish .... As you said, family dynamics would be the real risk here...as well as other estate issues and their ability to be on Medicaid I suppose. ....

Should they live another decade, and things go well, the appreciated stock could run into State estate taxes, especially if they also have some assets. Plus depending upon the State of OP, there could be an inheritance tax as well.

[SecondCor521]

Quote:

Originally Posted by Retireby45ish I believe we could give them even more. I think a lot of people think you can only give a certain amount of gift a year. That isn’t the case. That’s only without filling out paperwork. You can give something like 11.58M of gifts in your lifetime. So if you had 1M where 90% of that was appreciated (and upon selling your take a 0.2*900k= 180k tax hit you could gift all this stock to an aging relative, and have them write a contract of leaving you this upon death. And you get a stepped up basis and save the full 180k. Transaction Must occur 1 year before death or doesn’t count. As you said, family dynamics would be the real risk here...as well as other estate issues and their ability to be on Medicade I suppose. Just an interesting idea... Since I plan to be retired for a bunch of years before SS, RMD, etc I plan to instead use the low tax treatment of LTCG at the 0% up to something like 70-80k a year with minimal other income and slowly step up cost basis this way instead...after I max out Roth rollovers for a few years.

You can, but that $11.58M (per person) figure is the "unified amount", which means that if you gift more in a given year and fill out the paperwork, whatever amount you exceed the $15K by gets subtracted from that $11.58M when you die. This, of course, isn't a problem as long as your estate ends up being less than that $11.58M per person. But if it's more, then you would pay estate taxes (which IIRC are around 40% currently) on the excess.

Also note that the $11.58M number is the current number. Our government has frequently changed that number up and down in the past, and may do so in the future.

Finally, if you have a contract or even a verbal understanding where they promise to give it back to you after a certain period of time, then that probably starts to look like a loan rather than two gifts to the IRS. If they found out and it were deemed a loan, then you would likely not get the step-up in basis you were hoping for. Since you didn't charge interest on that loan, there may be tax consequences there as well. In the absolute worst case, it could be considered tax evasion.

Note that the 0% tax on LTCG is only at the federal level, and that many states treat the gain as ordinary income and charge state income tax rates on that money.