Capital gains

[Jay]

I have almost $1mil in stock in my brokerage account which I received over the past 20 years from my employer. It is in a regular account. As I am thinking of retiring in the next two years, what will be my tax consequencies (long term gain) and do I have any choices to limit tax?

 

[Berkshire_Bull]

If the employer is stable, I would sell the stock slowly over a period of time. If it pays a dividend, you're all the better. Otherwise, you're probably just going to have to belly up and pay the long term capital gains tax. At least tax rates are lower right now than in the past.

 

[cute fuzzy bunny]

Depends on how confident you are with the companies stability and chances of its current stock price holding or appreciating.

If its a tech rocket, in a shaky business, or the stock is really expensive compared with fundamentals, you might want to sell a good sized chunk of it, take the tax hit and diversify. Otherwise from a purely tax perspective, you could wait until your taxable income is low or non-existent, and sell bits of it at a lower rate.

If you can sell at the lower of the two long term capital gains rates now, then waiting wont help.

Parents can also gift up to $22k (I believe) worth of stock annually to each of their kids, who can then sell it at their tax rate...usually 5%. So if the kids need a car or some college tuition or help buying a house...theres your ticket to shave the tax burden a little.

I've heard a lot of smart people say that tax implications shouldnt change your investing decisions. I agree with that up to a point.

My old company gave me huge lumps of stock every year. I sold every share within a month or so of receiving the shares and ate the tax hit, diversifying. I was an idiot for 7 years running, listening to people tell me how they still had every single share the company gave them...which kept doubling every year. Then the stock fell 80% and by following the same strategy I went from being an idiot to being a genius. I ER'ed. The people who kept all their stock will be working for another 20-30 years.

I'm a little bummed out at having paid a million or so in taxes on those gains. What I couldnt do with THAT money. Keeping a lot of what I had and still having it is better though...

 

[brewer12345]

Jay, it depends on your total situation. What is your total net worth? What would it mean to you if the employer stock got cut in half tomorrow? Would you not really notice the difference in your lifestyle, or would it be a disaster?

If the employer stock is more than 25% of you assets, I would start selling it off ASAP. If you really want to hold on to it, I would probably hedge at least part of it with put options.

You probably want to model the tax implications of selling off the stock by doing a "pretend" tax return. I would imagine that you would be eligible for LT cap gains treatment (20% of gain) plus whatever state taxes you would pay. However, filling out a tax return including some stock sales would help you determine whether this might cause you problems with AMT.

 

[retire@40]

You probably want to model the tax implications of selling off the stock by doing a "pretend" tax return.  I would imagine that you would be eligible for LT cap gains treatment (20% of gain) plus whatever state taxes you would pay.

Why would LT cap gains tax be 20%?

 

[brewer12345]

Sorry, I am off in lala land today. Of course cap gains taxes max out at 15% of gain, plus state taxes.

 

[Helen]

Parents can also gift up to $22k (I believe) worth of stock annually to each of their kids, who can then sell it at their tax rate...usually 5%.  So if the kids need a car or some college tuition or help buying a house...theres your ticket to shave the tax burden a little.

I think the kids can sell it at 0%. It seems to me the cost basis is the share price of the stock on the day the stock is transferred to the new owner. If the stock is sold at the same price there is no capital gains.

-helen

 

[KB]

I have been gifted stock a few times and when I sold it I used the cost basis of the gifter.

 

[Cut-Throat]

I have been gifted stock a few times and when I sold it I used the cost basis of the gifter.  

Then, I think you may have screwed yourself and paid too much tax.

I researched this a few years ago, and it seemed like one of the few breaks that the IRS gave the Taxpayer. As I understood it, the cost basis was reset at the day of the transfer of the gift.

 

[malakito]

Nope. Tax basis is the lower of gifter's basis or FMV as of the day of the transfer. Note that the gifter's basis is usually lower. Holding period is the same as the gifter (i.e., usually long term).

The basis is stepped up at death, however.

malakito.

 

[Cut-Throat]

The basis is stepped up at death, however.

Yes, my mistake! - This is what I was thinking! If the stock was inherited, then the basis is stepped up.

 

[Craig]

'Course, dying is a bit extreme for tax planning ...

 

[cute fuzzy bunny]

Depends on how much tax is involved...

And who has to die...

 

[BUM]

Going thru the same thing now! FIL gave wife his house 5 years ago. Last year he died. House going up for sale in April. Calculating the basis of a 50 year old house is tough.I would rather use FMV in 2000. If I can. Most of this is estimates since the FIL left little in the way of receipts for improvments.

All in all, a nice problem to have.


BUM

 

[BUM]

Going thru the same thing now! FIL gave wife his house 5 years ago. Last year he died. House going up for sale in April. Calculating the basis of a 50 year old house is tough.I would rather use FMV in 2000. If I can. Most of this is estimates since the FIL left little in the way of receipts for improvments.

All in all, a nice problem to have.


OOPs... Read FIL gave MY wife his house 5 years ago...


BUM

 

[JOhn Galt]

Slightly off topic, but..................one of the things I expected to be worrying about in ER was income taxes.
Lately it's been a complete non-issue both at the corporate and personal level. I can foresee a time when
it will rear its ugly head again, but for the present, no
problems. ER for me has been one surprise after
another................kind of like life its own self

JG