Creating Exact Taxable Income for Tax Purposes

[AndThen]

TL;DR: How do you know how much stock to sell in a taxable account to create an exact amount of taxable income?


For tax purposes, at least at my current understanding, my retirement plan is to have an income of say $16,000. This would put me at receiving near max subsidy for obamacare in addition to paying $0 in federal taxes. If my taxable vanguard mutual funds are throwing off $10k in dividends per year, I would still have to "earn" an additional $6k to meet the $16k goal. I could do a roth IRA conversion and create $6k of income. Or my second option is to sell my company stock that I have from the ESPP I've been participating in that gets me stock at a 15% discount, but this stock has been purchased at various prices throughout the years. So my question is, how do I know how much stock to sell to generate a taxable event of $6k?

Hopefully my understanding of this isn't totally off...

[seattlecyclone]

Your taxable income on stock sales is generally just the difference between your sale price and your purchase price. So you'll need to find records of your purchase price for your stock (brokers have been required to track this for you for the past few years, but they may not have cost basis recorded for stock you've had for several years). Once you have this, it should be pretty simple to look at the current market value and subtract your cost basis per share to determine exactly how many shares you'll need to sell to hit your target income.

Be aware that hitting your target income exactly will be hard. Many index funds pay dividends right at the end of the year, so if you own any of these in taxable accounts you'll have to wait to make your sales until after the dividend amounts have been announced. Also you'll likely need to sell a whole number of shares, so even if you do everything perfectly you could be off by as much as the price of one share in one direction or another. Still, if you do it right you should be able to get within a few hundred dollars of your goal.

[AndThen]

Thanks for the reply. Yeah, I understand that it won't be exact. But as close to $16k as possible would be the goal.

So another dumb question. Say I bought 2k shares at $20 each, 2K at $25 each, and 2k at $30 each, which were purchased in that order. If I sell 4k shares, which shares would be sold? Oldest first?

[seattlecyclone]

Many brokerage websites offer the option to designate which shares you want to sell if you purchased shares in separate lots over a period of time. If you make no particular designation, the oldest shares are sold first.

[AndThen]

Awesome. Appreciate the help. Hopefully etrade is able to make this process relatively painless.

[milesdividendmd]

Selling your stock and dividends should not be taxable events if you are at   15% tax bracket or below, as long as you don't take >70 K in dividends/ gains.

Is the concern related specifically to Obamacare subsidies?

[AndThen]

Yeah, its both obamacare and paying $0 federal taxes. It looks like $16k is around the sweet spot for obamacare. With my taxable account throwing off $10k of qualified dividends, that leaves 6-10k additional to pay $0 taxes The roth ira conversion is the easiest by far, but I need to eventually sell my company stock. So i was just trying to figure out how to use that for my magic $16k number.

So you're saying, at the 15% bracket, selling stock wouldn't count for the obamacare number?

[milesdividendmd]

I'm saying that at the 15% tax bracket you can make 70K a year in investment income without paying any federal taxes on that income.

I have no idea about Obamacare eligibility.

If you do rollover your assets into a Roth definitely get your dividend payers in there post haste. Dividend paying stocks are about as tax inefficient as it gets.

[brooklynguy]

I'm saying that at the 15% tax bracket you can make 70K a year in investment income without paying any federal taxes on that income.

I have no idea about Obamacare eligibility.

If you do rollover your assets into a Roth definitely get your dividend payers in there post haste. Dividend paying stocks are about as tax inefficient as it gets.

Dividend paying stocks are only tax inefficient if the recipient has to pay taxes on the dividends, which, as you just got through saying, the OP most likely will not have to do.  If the OP is struggling to find enough income to qualify for maximum ACA subsidies, he or she may actually want to consider keeping dividend paying stocks in taxable accounts in order for the income to count for purposes of qualifying for subsidies.

Subsidy eligibility is based on modified adjusted gross income.  I believe both dividends and capital gains in taxable accounts count towards MAGI, but neither dividends nor capital gains in tax-advantaged accounts do.  The following is a pretty good breakdown of MAGI for ACA purposes:

http://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf

[milesdividendmd]

Brooklyn: 
 
It's certainly true that if you don't have to pay any taxes, there is no such thing as a tax inefficient investment.

But if tax efficiency is of any concern to an investor, then dividend stocks, and REITs are The most important asset types to place within tax-advantaged accounts.

It seems that from the standpoint of the ACA, this is relevant as well, according to your link. (Thanks for posting it.)

[brooklynguy]

Agreed.  But if one is doing roth conversions from an existing IRA, moving dividend stocks into the roth won't really increase tax efficiency.  The dividend income is sheltered in the IRA too.

[AndThen]

Thanks for the link, brooklynguy. All of the stocks and dividends in question are all in taxable accounts. So i think that would work just fine as originally planned. I would just have to work with my brokerage to figure out exactly how many shares to sell to accomplish the goal.

[ampersand]

In case you see it while looking at your brokerage about what stocks sell first; FIFO is  First In First Out, and LIFO is Last In First Out