Need Help/Ideas with Taxes for a large Long term Capital Gain

[leebuckeye]

All,

First time poster, and member to this forum. So if this question has been asked in the past and someone knows a good link please let me know about it.
My W2-Income this year will be 82k (SW Engineer). I put about 15k into my 401k.  I live in Ohio where the top tax rate is 5%
I made an investment a few years ago that panned out. There have been a handful of stocks that have quadrupled this year (AMD, S). I happened to be in one of those. My current long term capital gain is 450k, I have not sold the stock in question yet. I have reason to believe the stock may continue to appreciate into early next year but I feel a little worried having so much money in one stock without any diversification.
With my income I think this pushes me into the 20 percent federal bracket and 4% ACA tax. Plus the Ohio Tax of 5% which is 30% total....
I didn't anticipate this windfall so I didn't do any tax preparation. One thought would be to wait till next year and hope the 4% is repealed. I'm not sure if moving from the state to one I could retire in with lower taxes (Texas, Florida) makes sense (I am single, and 36 years old). I would eventually move in any case (I am not from Ohio and the cold weather gets to me). I have about 600k in retirement accounts. Is there any tool I can use (some sort of free turbotax) that would let me run some tax scenarios/ do some math. The other option is to sell a little now and a little into the start of the year to save about 5% each time at the federal level....

Ohio tax rates
$40,000 - $80,000   3.465%
$80,000 - $100,000   3.960%
$100,000 - $200,000   4.597%
$200,000+   4.997%

[seattlecyclone]

Let me tell you a story.

I spent three years working for a software startup, and we went public in the middle of my tenure there. The IPO price was several times the strike price of my options, and I was feeling pretty good about things. I left with an unrealized capital gain in the same general ballpark of what you have here. Like you, I was worried about having so little diversification, but like you I was also hesitant to realize such a large capital gain all at once. The stock has gone up and down since then. I've been selling off a few shares every month to gradually diversify and minimize the one-time tax hit, but the truth is that I probably would have been better off just biting the bullet and going all in on the index funds.

My suggestion: sell enough stock on Monday to realize a $200k gain. You'll owe the extra 3.8% net investment income tax on part of the gain, but you won't be in the 20% federal bracket for any of it. On the first trading day of the new year, repeat. Sell enough stock to realize a $200k gain. You'll probably have a bit left over after this, but it won't be as significant of a portion of your net worth. Sell it in 2018 if you still wish to diversify.

[SeattleCPA]

Let me tell you a story.

I spent three years working for a software startup, and we went public in the middle of my tenure there. The IPO price was several times the strike price of my options, and I was feeling pretty good about things. I left with an unrealized capital gain in the same general ballpark of what you have here. Like you, I was worried about having so little diversification, but like you I was also hesitant to realize such a large capital gain all at once. The stock has gone up and down since then. I've been selling off a few shares every month to gradually diversify and minimize the one-time tax hit, but the truth is that I probably would have been better off just biting the bullet and going all in on the index funds.

My suggestion: sell enough stock on Monday to realize a $200k gain. You'll owe the extra 3.8% net investment income tax on part of the gain, but you won't be in the 20% federal bracket for any of it. On the first trading day of the new year, repeat. Sell enough stock to realize a $200k gain. You'll probably have a bit left over after this, but it won't be as significant of a portion of your net worth. Sell it in 2018 if you still wish to diversify.

Agree with SeattleCyclone... That basic approach is pretty dang optimal.

The other thing I'd do is bump your 401(k) to the max if possible next year. (Why not.)

[Rubic]

Two guys from Seattle can't be wrong. ;-)

[leebuckeye]

Thanks guys, so the gain the should be $200k or the total income?  Is that to try to just split the gain and diversify or to try and avoid getting in the highest state income bracket? Or is it basically (the 30% tax is unavoidable) and get half and hope the stock goes up next year? So the 20% tax rate comes into effect around 400 in total income?

[SeattleCPA]

Seattle Cyclone's idea lets you avoid paying any 20% capital gains tax... and mostly avoid the 3.8%  net investment income tax (aka Obamacare surtax)... while at the same time letting you reduce all the "one big egg in the basket" risk...

[seattlecyclone]

The 20% federal capital gains rate has the same cutoff as the 39.6% rate for regular income: $415k of taxable income for a single filer, which equates to about $425k gross if you take the standard deduction. The 3.8% ACA investment tax kicks in at $200k gross. My advice has nothing to do with hoping the stock will go up by waiting until next year. Instead I think you should get rid of at least 90% of this stock ASAP. The fact that next year happens to be in about three weeks means that you aren't risking a whole lot by trying to split the sale up into two separate tax years, and the tax savings from doing so can be fairly significant.

Another thing to consider: if you have any charitable aspirations at all, now would be a perfect opportunity to set up a donor advised fund. You can donate appreciated shares to the fund, deduct the full value on your taxes this year, and distribute the money to actual charities over many years.

[tonysemail]

If you owe people money, then you can give them appreciated shares instead of cash.
For example, I owe my brother $5k so I gave him company stock because he's under-employed and would owe no taxes on the realized capital gains.
I would do the same with my parents, but they are on the shit list right now.
I also used my kids' UGMA accounts to harvest $2k of capital gains this year.

[CareCPA]

If you owe people money, then you can give them appreciated shares instead of cash.
For example, I owe my brother $5k so I gave him company stock because he's under-employed and would owe no taxes on the realized capital gains.
I would do the same with my parents, but they are on the shit list right now.
I also used my kids' UGMA accounts to harvest $2k of capital gains this year.

Can you point me to your research where he won't owe taxes on the capital gains? Or are you saying he's in a low enough tax bracket that his capital gains rate is 0%? I think that's an important distinction.

[tonysemail]

Can you point me to your research where he won't owe taxes on the capital gains? Or are you saying he's in a low enough tax bracket that his capital gains rate is 0%? I think that's an important distinction.

I mean the latter.  My brother won't make much income this year.

[Playing with Fire UK]

If you owe people money, then you can give them appreciated shares instead of cash.
For example, I owe my brother $5k so I gave him company stock because he's under-employed and would owe no taxes on the realized capital gains.
I would do the same with my parents, but they are on the shit list right now.
I also used my kids' UGMA accounts to harvest $2k of capital gains this year.

Can you give some of the shares to a spouse or partner to share tax in a similar way?

[MrSpendy]

If you are going to spread the sale out over a number of years (for sake of "letting it run" or spreading out your tax bill), you may want to hedge with options to reduce risk, though the cost of doing so may exceed taxes deferred / the incremental benefit of spreading it out.

Just be careful, as there are complex rules regarding de-risking positions on appreciated stock and recognition of gains.


http://www.schwab.com/public/schwab/nn/articles/Hedging-Tax-Traps-for-the-Unwary

Importantly, a put option used by itself to hedge the risk on an existing position should not trigger a constructive sale as long as the exercise price is at or below the price of the existing position. And there are a number of other viable hedging and diversification strategies which, when properly structured, can help avoid constructive sale treatment.

[With This Herring]

If you owe people money, then you can give them appreciated shares instead of cash.
For example, I owe my brother $5k so I gave him company stock because he's under-employed and would owe no taxes on the realized capital gains.
I would do the same with my parents, but they are on the shit list right now.
I also used my kids' UGMA accounts to harvest $2k of capital gains this year.

Can you give some of the shares to a spouse or partner to share tax in a similar way?

In the US, generally married people file together on the same tax return.  Giving shares to a spouse would generally do you no good.  An unmarried partner might be a different story.

[Playing with Fire UK]

If you owe people money, then you can give them appreciated shares instead of cash.
For example, I owe my brother $5k so I gave him company stock because he's under-employed and would owe no taxes on the realized capital gains.
I would do the same with my parents, but they are on the shit list right now.
I also used my kids' UGMA accounts to harvest $2k of capital gains this year.

Can you give some of the shares to a spouse or partner to share tax in a similar way?

In the US, generally married people file together on the same tax return.  Giving shares to a spouse would generally do you no good.  An unmarried partner might be a different story.

Thanks. I figured it would be easier with an unmarried partner. Is that option to give a spouse a gift that was in The Shawshank Remption a thing or not? [I hope it is clear about how little I know about US taxes.]

[With This Herring]

If you owe people money, then you can give them appreciated shares instead of cash.
For example, I owe my brother $5k so I gave him company stock because he's under-employed and would owe no taxes on the realized capital gains.
I would do the same with my parents, but they are on the shit list right now.
I also used my kids' UGMA accounts to harvest $2k of capital gains this year.

Can you give some of the shares to a spouse or partner to share tax in a similar way?

In the US, generally married people file together on the same tax return.  Giving shares to a spouse would generally do you no good.  An unmarried partner might be a different story.

Thanks. I figured it would be easier with an unmarried partner. Is that option to give a spouse a gift that was in The Shawshank Remption a thing or not? [I hope it is clear about how little I know about US taxes.]

I was guessing you weren't into US tax law, with your name including "UK."  :)

But I only saw The Shawshank Remption once and remember none of it, haha.  I found this link, but I don't know enough about the film to speak to its accuracy for the year in which the film was set or at any other time.