I've been mulling over a post about this for quite a while. If you've read this blog before you probably know that I like numbers and specific directions. That is the problem with this post. I've come to the conclusion that it is simply too difficult to cover all the different scenarios that would allow this in a way that people could apply it to their particular tax situations. Because of that, I've decided to write a more general post that suggests when you should consider selling appreciated stock in order to avoid Capital Gains taxes. I will then give advice on how to get accurate numbers in your situation to determine how much to sell.
First and foremost, if you are not in the 15% tax bracket or below, stop reading. This won't work for you.
If you are, then you can cash in appreciated stock or mutual funds at a 0% tax rate so long as the gains do not put your taxable income above the 15% tax bracket. You can then immediately buy the same stock back (if you want) and the new price will be what is later used to figure gain when you sell it again. You can do this every year and effectively eliminate gains from potential taxation!
Here is a list of things to consider when determining if it's worth contacting your tax guy for help on this:
- For 2013, your taxable income should be several thousand dollars below: $36250 if filing Single, $72500 if filing Married Filing Jointly, $48600 if filing Head of Household (taxable income is basically your income after all adjustments for deductions and exemptions)
- You have unrealized gains in taxable brokerage accounts or mutual funds that you have held for more than a year (in most cases this means you have stocks or mutual funds that are worth more than you originally paid for them)
- You're not under age 19 (24 if in school)
- You're not receiving Earned Income Credit on your tax return
- You're not receiving Social Security payments (if this is most of your income you might still benefit)
- Buying and Selling stocks or mutual funds in your taxable accounts doesn't cost too much in commissions
Much of the above involves over simplifications but it gives you a starting point to see if you might be close.
If the above apply to you, wait until Mid November, and contact your tax guy. Provide him with copies of your recent pay-stubs from all your jobs, as well as amounts of any other taxable income you have or expect to receive before the end of the year (interest, dividends, capital gains, etc.) He should be able to calculate how much gain you can have and still pay 0 taxes on it. Don't worry if it's not perfect, even if you go over a little, only the portion above the 15% tax rate gets taxed, and this at a favorable rate. Once you have this number, review your unrealized gains and losses information from your brokerage account and determine what to sell to stay below the number he provided.
You can do this every year you are in the 15% tax bracket!
Let's look at a simplified example:
You're Married, have $48,000 in wages and $2000 of interest and dividends. You have no kids and take the standard deduction. This means your Adjusted Gross Income is $50,000 and you get to subtract $20,000 from this to get taxable income ($12,200 standard deduction and $3900 for each exemption (you and your wife - you'd get $3900 for each kid if you had them)). So your taxable income is $30,000. This means you can have another $42,500 of income before you hit the 25% tax bracket.
So now lets assume you were an investing genius, and a stock you bought two years ago for $10,000 is now worth $110,000 (can I get some investing tips from you?) This means you have $100,000 in unrealized gains that will eventually be taxable income if the stock stays up in price and you don't give it away or do something else weird with it. Who wants to pay tax on $100,000?
So in this scenario, you can sell a portion of it, such that your profit would be $40000 (don't push it too close to the line) and you would pay $0 in taxes on it. Buy it back right away and your basis (what you paid for it) is now $50000. Your potential taxable gain is down to $60,000! If your situation stays the same for two more years, you could do it over and over until you had no gain to pay taxes on!
Obviously this is complicated, and I have over-simplified it. Talk to both your investment adviser AND your tax guy before you do it. But if all the bulleted points above apply to you - make the call!