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Learning, Sharing, and Teaching => Taxes => Topic started by: EliteZags on December 17, 2019, 12:20:03 PM

Title: basic income tax/stock situation question
Post by: EliteZags on December 17, 2019, 12:20:03 PM
just making sure I have the simple tax rules understood for my 2019 situation, company got bought out last year so took a nice package and good amount of time off, just went back to work a couple months ago and will end up with about $40K income for 2019.
Have a decent amount of company stock (both through ESPP and granted options) that I could sell/exercise at anytime (MDT - currently at all time high), just checking it would be advantageous tax wise for me to sell/exercise enough stock to amount to ~$13k of net gains (a bit complicated to calc since ESPP was at 15% discount-and value has grown 30-50%, and options granted ~60% of current value)
since I can add about $13K to my 2019 income and with the standard deduction still be within the 12% federal tax rate bracket right?

I don't actually need the funds for anything and don't mind holding the stock, just wanting do what makes most sense tax wise here, would send any cashout straight to VTSAX


but actually all the stock has vested and held over a year so does my lowered 2019 income not provide any advantage in any sale/exercise if its considered long term capital gains?
Title: Re: basic income tax/stock situation question
Post by: Odiedog859 on December 17, 2019, 01:26:41 PM
Unless I'm missing something and you can keep the total taxable income (after a standard $12,000 deduction) below $39,375 (single filer) including the net capital gains, you'll pay 0% federal income tax on those gains.  Not sure if your state has an exemption (mine doesn't)  Capital gains are the last thing layered on when calculating taxes of the things you listed.
Title: Re: basic income tax/stock situation question
Post by: MDM on December 17, 2019, 02:09:05 PM
If you have a choice between taking capital gains at 0% tax, or converting some traditional money to Roth at 12%, the conversion may be better in the long run if you expect the 22% bracket to be typical of future years for you.
Title: basic income tax/stock situation question
Post by: TheHardenedInvestor on December 17, 2019, 02:11:08 PM
That sounds about right. If your income with capital gains exceeds $39,375, then youíll pay 15% on the excess instead of 12% income tax rate. So donít sell too many stocks to exceed that limit after the standard deduction and youíll pay 0% on capital gains and just normal income tax on the rest of your income (so 12% and 10%).
Title: Re: basic income tax/stock situation question
Post by: EliteZags on December 17, 2019, 02:27:14 PM
sorry I'm missing something here with the 0% capital gains thing, the gains will still count as income to taxed at 12% up till the $39,375 after standard deduction right?
Title: Re: basic income tax/stock situation question
Post by: MDM on December 17, 2019, 02:47:36 PM
sorry I'm missing something here with the 0% capital gains thing, the gains will still count as income to taxed at 12% up till the $39,375 after standard deduction right?
Are you aware of the Qualified Dividends and Capital Gain Tax Worksheet? You can see a worked example in cells Calculations!K3:M33 if you enter your situation into the case study spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/).
Title: Re: basic income tax/stock situation question
Post by: EliteZags on December 17, 2019, 02:57:38 PM
If you have a choice between taking capital gains at 0% tax, or converting some traditional money to Roth at 12%, the conversion may be better in the long run if you expect the 22% bracket to be typical of future years for you.


is this because the future gains on whatever I convert to Roth is untaxed, so long term more tax advantage in doing that now?
Title: Re: basic income tax/stock situation question
Post by: Odiedog859 on December 17, 2019, 03:03:59 PM
No, only the ordinary income portion is taxed at the 12% rate.  Long term gains are taxed at 0% up to that $39,375 point.  That's the "layered" reference I mentioned.  E.g. you could have $39,375 of ordinary income, reduced to $27,375 with the $12k standard deduction, taxed at a  12% rate (marginal, not total tax rate) allowing $12k of capital gains to be realized and taxed at 0%.   Warning, that is a VERY oversimplification of how it works and you might have other factors but that basically how it works.  And it only applies to federal taxes.

Edit: The challenge is to get a good estimate of what those ordinary income items will be.  If you miss something and it puts you over the limit, only the amount of capital gains over the limit will be hit with the 15% tax rate.  Again layered:  e.g. $45,000 ordinary income less standard deduction ($12,000) = $33,000.  If you underestimated and still realized $12,000 of long term capital gains, you would pay 0% on the $6,375 of the gain and 15% of the rest (math might be off but you get the idea I hope.)
Title: Re: basic income tax/stock situation question
Post by: MDM on December 17, 2019, 04:02:56 PM
If you have a choice between taking capital gains at 0% tax, or converting some traditional money to Roth at 12%, the conversion may be better in the long run if you expect the 22% bracket to be typical of future years for you.
is this because the future gains on whatever I convert to Roth is untaxed, so long term more tax advantage in doing that now?
Yes!

See the '0% LTCG or t->R' tab in the spreadsheet mentioned previously for details.
Title: Re: basic income tax/stock situation question
Post by: EliteZags on December 17, 2019, 05:27:22 PM
actually didn't even think about this until now, I didn't enroll in 401K this year since my new company doesn't match and I didn't see any tax advantage for 2019, but would there be any benefit in contributing any this year to allow me to convert more Roth at 12% tax?
Title: Re: basic income tax/stock situation question
Post by: MDM on December 17, 2019, 05:40:18 PM
actually didn't even think about this until now, I didn't enroll in 401K this year since my new company doesn't match and I didn't see any tax advantage for 2019, but would there be any benefit in contributing any this year to allow me to convert more Roth at 12% tax?
If your company has a Roth option for the 401k, contributing directly to that will (unless there are unusual circumstances) give the same result as contributing to a traditional 401k while converting the same amount from traditional to Roth IRA.
Title: Re: basic income tax/stock situation question
Post by: EliteZags on December 17, 2019, 06:28:39 PM
I'm at a new company with traditional 401K no match, I'm now thinking I should go ahead and contribute the entirety of whatever paycheck(s) they will let me in 2019 so I can covert that amount from my old 401K to Roth IRA at 12% tax
Title: Re: basic income tax/stock situation question
Post by: TheHardenedInvestor on December 17, 2019, 07:24:50 PM
I'm at a new company with traditional 401K no match, I'm now thinking I should go ahead and contribute the entirety of whatever paycheck(s) they will let me in 2019 so I can covert that amount from my old 401K to Roth IRA at 12% tax

Slow down. Read some more. You probably canít even contribute anymore in 2019 to your 401k. I get paid on Dec 20th and thatís the last paycheck for 2019. You likely donít have any more time to contribute. Just read and financially prepare yourself for 2020.
Title: Re: basic income tax/stock situation question
Post by: EliteZags on December 17, 2019, 07:57:31 PM
I believe I actually have til tomorrow to decide on contribution for the final 2019 check which I could put 100% into 401K and be able to add a good chunk of Roth conversion if it makes sense to do so