Author Topic: Selling VTSAX to pay for school. How much could I lose to taxes?  (Read 461 times)

InfiniteAdams

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Selling VTSAX to pay for school. How much could I lose to taxes?
« on: September 14, 2018, 03:51:29 PM »
Just looking for some advice on something I've had limited success in figuring out on my own.

-I am a full-time college student who just started an intense, accelerated academic program that will have me graduated and working within a year.
-I can't work until then.
-Have $X0,000 that Amazing Parents started saving for me when I was small. This will be used to pay my tuition for this year without going into debt.
-This money spent most of its life (25-30ish years) slowly accruing in some super-safe (slow grow, minimal volatility) mutual funds. A year or so ago, I moved the money to Vanguard and turned it into VTSAX. This was before I decided on using it for college, and my plan was to have it aggressively invested for decades. I'm aware of the folly of NOT using it for that, and blowing it all on tuition this year instead, but the degree will pay for itself many times over very quickly once I have it and I consider the investment worth it.

Question I have is: What are the tax implications of selling that much VTSAX, and how can they be minimized? I've tried to wrap my head around tax lot IDs, and order of selling, and I've tried to find paperwork from the money's early days when it was first being purchased, but it was over 20 years ago and they can't be found. I don't know what order the funds were bought in, or almost any of the relevant information one would need to get an idea of what the taxes would be for selling them, or how they should be sold to minimize any potential taxes. (I barely understand the implications of turning them into VTSAX a year ago, but even my vague understanding was enough to assure myself that it probably wouldn't be anything terribly catastrophic. In this case I don't feel comfortable being that casual about it.)

I know the answer to this question could mostly be, "It depends on (information I don't have)." but even a ballpark idea would be helpful. Any information that could help broaden my understanding would be appreciated.

Thank you!  :D

Update:
Looking at Vanguard, I discovered I only THOUGHT I had purchased VTSAX last year. Apparently it was March of THIS year, and I'm afraid I did indeed buy them, instead of exchange them, or at least that's how it's reported in the transaction history. And I'll need to sell them this year, so it seems I'll have to pay the STCG tax.

Which leads me to a next question: Lets say, for example, I'm in the 12% tax bracket for 2018. Will I lose 12% of the value of the entire account if I sell it all, or will I just lose 12% of the value of the short term gains? I assume its the gains alone that are being taxed, and not the entire value of the account, but I'm not sure.
« Last Edit: September 15, 2018, 08:28:41 PM by InfiniteAdams »

beekayworld

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Re: Selling VTSAX to pay for school. How much could I lose to taxes?
« Reply #1 on: September 14, 2018, 05:27:28 PM »
On Vanguard's website, click "cost basis" and it shows the unrealized capital gains or losses.  When you sell, the default is first-in/first-out so it will sell the oldest shares first unless you pick some other method.

Don't sell shares you've owned less than a year as you will incur STCG tax which is the same rate as your income tax.

That takes care of the Vanguard Total Stock Market leg of your issue.

When you "moved money" over to Vanguard, you sold the mutual funds? If so, you already incurred  the LTCG and paid the tax on your April tax return.  Or did you exchange funds? I haven't exchanged, but would expect Vanguard has the information under "realized capital gains" for 2017.

Long term capital gains tax will depend on your income. This year, if you make less than $38,600 you pay 0% in LTCG tax.  $38,601 to $425,800 you pay 15%. Include dividends in your income.

So the best strategy is get  your income way down before selling the shares.  If you will have more than 38.6k in income for 2018, and less in 2019, then you should wait until January to sell the shares and then pay zero LTCG taxes on them.

If you have to sell some this calendar year and your income looks like it will be too high for zero percent LTCG tax, do you have anything that has had capital losses? Those can offset the gains.

Good luck!
« Last Edit: September 14, 2018, 05:35:03 PM by beekayworld »

MDM

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Re: Selling VTSAX to pay for school. How much could I lose to taxes?
« Reply #2 on: September 14, 2018, 06:26:14 PM »
Question I have is: What are the tax implications of selling that much VTSAX, and how can they be minimized?
Have you ever filed your own income taxes?  If so, how did you fill the forms (e.g., by hand, or free fillable forms, or TurboTax/TaxAct/H&R Block/etc.)?  In particular, how did you do this for 2017 taxes?

InfiniteAdams

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Re: Selling VTSAX to pay for school. How much could I lose to taxes?
« Reply #3 on: September 15, 2018, 08:25:01 PM »
Looking at Vanguard, I discovered I only THOUGHT I had purchased VTSAX last year. Apparently it was March of THIS year, and I'm afraid I did indeed buy them, instead of exchange them, or at least that's how it's reported in the transaction history. And I'll need to sell them this year, so it seems I'll have to pay the STCG tax.

Which leads me to a next question: Lets say, for example, I'm in the 12% tax bracket for 2018. Will I lose 12% of the value of the entire account if I sell it all, or will I just lose 12% of the value of the short term gains? I assume its the gains alone that are being taxed, and not the entire value of the account, but I'm not sure.

beekayworld

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Re: Selling VTSAX to pay for school. How much could I lose to taxes?
« Reply #4 on: September 15, 2018, 08:31:59 PM »
You are correct, it's the gains that are taxed.

... at least that's how it's reported in the transaction history. And I'll need to sell them this year, so it seems I'll have to pay the STCG tax.

Next to the "transactions" button is "cost basis". Click that to find out FOR SURE what Vanguard is saying your cost basis is.

BTW, did you look into the old brokerage transactions on the original mutual funds? Whatever brokerage that was at should have had the cost basis (i.e. what the original purchase price was) and then subtracted that from the sale price to get your capital gains which is the difference.  You sold those in March, correct? So you have LTCG for 2018 from those and STCG for the VSTMX you sell.
« Last Edit: September 15, 2018, 08:39:54 PM by beekayworld »

Mr. Metal Mustache

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Re: Selling VTSAX to pay for school. How much could I lose to taxes?
« Reply #5 on: September 15, 2018, 09:23:24 PM »
I get that taking on debt sucks but wouldn't it still be more advantageous to take a student loan for this year? Let VTSAX ride it out until you can retire... Or until you can cash it out for LTCG? Would you qualify for a federal student loan, stafford or perkins? usually they range 3.5- 7%. And the interest is an above the line deduction up to $2500.

Imma

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Re: Selling VTSAX to pay for school. How much could I lose to taxes?
« Reply #6 on: September 16, 2018, 07:01:59 AM »
I get that taking on debt sucks but wouldn't it still be more advantageous to take a student loan for this year? Let VTSAX ride it out until you can retire... Or until you can cash it out for LTCG? Would you qualify for a federal student loan, stafford or perkins? usually they range 3.5- 7%. And the interest is an above the line deduction up to $2500.

I'm not in the US so I can't help you with the tax implications, but this was my first thought as well.  I went back to grad school this month and for me the cheapest way of paying for it was indeed through student loans. I hate it, because I got my undergrad with a loan of less than 5k, but getting another loan would be much cheaper than selling any kind of investments or spending my emergency fund.

AccidentalMiser

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Re: Selling VTSAX to pay for school. How much could I lose to taxes?
« Reply #7 on: September 16, 2018, 07:17:27 AM »
At a minimum, I would take a loan for the short-term until the VTSAX becomes eligible for LTGC treatment next March.  If you wish, you can pay it off then.

Take the knowledge you've gotten here and talk to an accountant who does taxes.  It'll take her five minutes to listen to your quandary and tell you what to do from a tax perspective. 

Best of luck to you!!  Congrats for being wise enough to ask good question.