Capital gains estimation? Transfer of stock portfolio to index funds...

[cbee6390]

I'd like to sell my (un-diverse) inherited Raymond James portfolio ($135K in it) and re-invest Mustachian-style in Vanguard and/or Wealthfront. Mainly Capital One, Time Warner, IBM, Cisco and some mutual funds (ugh). The stocks will have the largest gains; the mutual funds were a gift only a few years ago (from parents/grandparents).

Anyone have any idea how much of a hit I'd take at first on capital gains? I'm assuming it would be worth it, for greater stability and returns long-term? (I wouldn't be accessing this money any time soon - would probably save it for retirement.)

[MustacheAndaHalf]

The IRS starts counting gains from when the funds become yours, rather than their original purchase prices.  You might look for "irs step up in basis" online to learn more.

You could also look for "cost basis" in your account summary.  Generally your profit is "cost basis" (value at time you gained them) compared to current value.

[cbee6390]

Thanks. Didn't realize. Still, most became 'mine' 26 years ago...

[Spork]

Depending on the stock, it can be pretty easy to not just estimate but to figure out exactly.  And... you might as well do it because if you sell them, you're going to have to do it anyway.

As M-1/2 states: figure out the cost basis.  It might even be available to you online at Raymond Jones.  There was a law passed a few years back requiring firms to track it.  The glitch can come if you owned the shares before the law passed -- then it is solely on you.

It can become tedious with reinvested dividends.  You end up with a long line of purchases over many years.   Mergers/spin-offs and the like can also be a pain to track.  It seems like every one of them is just a little bit different than the first.  And when you have Company X merging with Company Y, then spinning off Company Z, which buys Company ....   (you get my drift).  You have to tie the sale of your stock back to the original purchase... and with lots of complicated maneuvers, that tie can be a PITA.  But it is do-able.  And you'll have to do it some day for taxes.  You might as well keep a current up-to-date record of the cost basis and be done with it.

[cbee6390]

Got it. So on my RJ account, it says:

$68,352.05 Cost Basis
$115,157.88 Current Value
$42,644.62 Cost Basis Gain

So I'd pay taxes on the 42K, yes?

And then my plan would be to put the remaining money into Wealthfront, which has a portfolio transfer feature that they do over a year or two, I believe...

We still think is a good plan, yes?

[TexasRunner]

If you were a minor, would they still have been yours?  Just curious if some of those years could be exempted...  Can minor's own stock?  Seems like it would be entering a contract of some sort. 

[Spork]

Got it. So on my RJ account, it says:

$68,352.05 Cost Basis
$115,157.88 Current Value
$42,644.62 Cost Basis Gain

So I'd pay taxes on the 42K, yes?

That would be my understanding, yes.  I'm no CPA... just a dude that has owned a few securities and paid taxes.

Just to be clear: These are in a normal, taxable account, right?  Not in an IRA or a Roth IRA or some sheltered account? 

One thing to remember: The tax rate will be lighter than if you earned income.  Assuming these are all long term gains (held more than a year)... If you are single your AGI is between $37,650 and $91,150 -- you'll be taxed 15%.  (Married $75,300-151,900.) 

[seattlecyclone]

The IRS starts counting gains from when the funds become yours, rather than their original purchase prices.  You might look for "irs step up in basis" online to learn more.

The basis only steps up on inherited funds. For gifts, the stock retains the original cost basis from the person who purchased it.

For stock purchased prior to 2011 (or thereabouts), the brokerage was not required to keep track of the cost basis. I wouldn't necessarily trust your broker to be correct about the cost basis on any shares you've owned longer than this. Instead you are supposed to retain records of the original purchase and report it honestly on your tax return.

[cbee6390]

This is really helpful, thanks all -- especially good to know as right now I make $90K pre-tax, so this is my last year to get the 15% cap gains rate.

[MDM]

...so this is my last year to get the 15% cap gains rate.

Is that true?

If your Taxable Income - see line 43 from your most recent (or projected) Form 1040 - is less than $75,300 you pay 0% on all capital gains included in that taxable income.

If your Taxable Income - see line 43 from your most recent (or projected) Form 1040 - is greater than $75,300 but your "ordinary" (i.e., not LTCG) is less than $75,300 you pay 0% on capital gains included in that taxable income between the ordinary income amount and $75,300, and 15% on the remaining capital gains.

This holds true until your taxable income is greater than $466,950 so I'll assume we can stop here....

[With This Herring]

IRS: Cost basis for gifted stock
IRS: Cost basis for inherited stock
Neither basis determination is as clear-cut as previously suggested.  The date of valuation for inherited stocks can be one of two dates.  If you can get a copy of the related returns, that would be ideal.  For gifted property, your basis for the initial shares can vary depending on whether you will have a gain or a loss.

For anything that you got over 20 years ago, I don't know that you can rely on your Raymond James reports.  They could be using incorrect assumptions to determine basis.  Double-check that all securities actually HAVE basis numbers.  I have seen broker statements that just have blanks where the basis should be, then still have a total at the bottom.

Your broker may offer an online tool to help you look at the cost basis for your securities, where you enter that you purchased X shares of Company Y at Z date and did/did not reinvest dividends.  Schwab uses GainsKeeper, which I found to be very helpful.  Another one is NetBasis which I have not tried.  Outside of brokerages, this appears to be a rather expensive service online.  Google Finance might be an option, but run one stock at a time and realize that it will adjust your per-share basis for splits but not for return of capital.  Any dividends will be thrown in Cash, so if you used dividend reinvestment, this won't work.

Alternatively, the investor relations pages of some businesses provide a similar feature for just that entity's stock.
Time Warner (the top calculator has some interesting info in the tables to go with the "Chart $10000 option", but I can't get the second calculator to work)
Capital One (I can't get this to work at all)

You can also calculate your cost basis manually using information on pricing, dividends + return of capital, splits, and mergers from Yahoo Finance and other commonly used online sources.

Whatever you do to confirm your cost basis, please print out the records from calculators and/or save your own calculations.  Keep the information with your tax return in case you are audited.

Also, regarding MDM's post:
Depending on your state of residence, you may still end up paying tax on capital gains on the state level, even if you fall below the federal threshold.
Also, if it turns out that you have a substantial loss overall, you wouldn't want to miss out on the current $3K deduction and the carryforward.

[Spork]

Since we're not really sure where your taxable income is landing... (We don't know other income sources or married/single or deductions, etc...)

I feel like I might add one other thing:  Remember that if you are trying to hit a target number, you don't have to transfer the whole damn amount!   What I mean is (for example), if you look at your taxable income and see that you could sneak in another $10k of long term capital gains and still fall underneath the married/$75,300 -- you could sell just a portion of your RJ assets and move them to Vanguard.  Repeat every year until done.

You could also look at ways of reducing your taxable income (more money into 401k/tIRA, HSA contributions, etc).  This might step up your yearly transitions.

[ClaycordJCA]

Once you confirm the cost basis for all holdings, you might consider contacting Vanguard and seeing if you can transfer the holdings in-kind and what the transaction fees would be to sell them once in Vanguard. Another option is to do the same at a brokerage that doesn't charge to sell mutual funds. I believe Fidelity does not. If so, you could then invest in Vanguard ETFs or low-cost Fidelity index funds in the Fidelity account. Fidelity charges a $7.95 fee for ETF purchases. You might also check out TD Ameritrade since they offer commission free Vanguard ETFs. Fidelity and TDA may also provide a transfer bonus of several hundred dollars if you keep the account for six months, which could help offset the transaction fees.