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Author: rumicro One star, 50 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75626  
Subject: Selling stocks with substantial run up Date: 2/5/2011 10:07 AM
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How does one handle unloading stocks with high appreciation and possibly kicking gross income into a high tax burden? Can one .."eat it too"?
Rumicro
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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68402 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/5/2011 10:37 AM
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Rumicro you are asking the wrong question. Do not let taxes determine your investment decisions. There is indeed a single dollar of income which will push your marginal tax rate from say 28% to 36%. Fine. That single dollar will result in 36 cents of tax. The proceeding dollar of income 28 cents of tax. Do you really want eight cents of tax to decide whether you sell an over valued stock or not?

Worded another way, while nobody wants to pay taxes, nobody has gone bankrupt because they had to pay taxes.

Gordon
Atlanta

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Author: rumicro One star, 50 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68403 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/5/2011 11:16 AM
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Gordon
Thanks for your post. How about when a normal taxable income of say, under 100G is (very luckily)boosted by a profit of 500 grand to add to the reportable income?
My question is about the alternatives if any. Selling, taking profit, paying huge taxes and then reinvesting the remains appears daunting.
I am grateful to be in this predicament and not complaining, just asking.
Rumicro

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68404 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/5/2011 11:46 AM
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What is prompting you to sell the stock? Does it need to be sold all at once? I'd be inclined to look at the tax brackets and sell an amount small enough to keep you in the current or next higher tax bracket each year.

Looking at the link below, it appears that if you're married, you could sell ~$50k and pay 25% tax or well over $100k and pay no more than 28%. OTOH, selling it all this year would push most of the proceeds into the 33% and higher bracket. Unless the investment is a dud, I personally don't think I'd sell it all at once.

http://www.savingtoinvest.com/2010/04/2010-and-2011-tax-brac...

Other thoughts, you could donate portions the stock to charity and take a deduction at the current value while not paying any tax on the proceeds.

Also, if you inherited the stock recently, the basis price is the date of death from whom you inherited the stock in which case the amount of tax owed could be quite low: http://www.smartmoney.com/personal-finance/taxes/taxes-on-in...

-murray

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68405 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/5/2011 12:08 PM
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How long have you held this stock(s)? If less than one year, you could hold onto it longer so you can have long term capital gains.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68411 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/5/2011 6:29 PM
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The first thing that you need to do is to actually run the numbers to see what the capital gains tax rate will be. I suspect that you are misunderstanding how the tax rates work.

As long as you qualify for long term gains, they max out at 15%.


http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United...


Gifting the stock to a charity or someone else may save on taxes.


If you need to spread the gains out over a few years without risking losing a lot, or to qualify for the long term tax rate, then you could use options to hedge yourself against price changes for long enough to get the sales spread across several different tax years.


Greg

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68414 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/6/2011 9:29 AM
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As long as you qualify for long term gains, they max out at 15%.

This is true if your income isn't high enough to push you into alternative minimum taxes. I just plugged in some fictitious numbers into Turbo Tax and my tax rate on long term capital gains would be 23% (we are subject to AMT).

I'm not sure if capital gains could push you into AMT.

-murray

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Author: rumicro One star, 50 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68415 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/6/2011 10:45 AM
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It would. Thanks for your help.
Rumicro

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68416 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/6/2011 11:56 AM
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This is true if your income isn't high enough to push you into alternative minimum taxes. I just plugged in some fictitious numbers into Turbo Tax and my tax rate on long term capital gains would be 23% (we are subject to AMT).

Techncially, that's not correct. The 15% rate on long term capital gains applies to the AMT as well.

However, adding the additional income from the gain can wreak havoc all over your tax return. It can add to your taxes by affecting:
passive activity losses (i.e. rentals),
how much of your social security benefits are taxable,
your itemized deductions for medical expenses, casualty losses, and miscellaneous deductions,
various phaseouts all over the place,
and several other things as well.

The bottom line affect can indeed be an increase to taxes that is larger than the 15% rate on the capital gain.

--Peter

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68418 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/6/2011 2:07 PM
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Techncially, that's not correct
...


While technically you are likely correct, I don't really care. What's important to me is if I sell stock netting $1k, how much more tax will I pay? But then I think you understand that.

FWIW, I think AMT has to go; I don't mind paying taxes, I just think it's ridiculous how AMT complicates estimating your taxes.

-murray

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68419 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/6/2011 5:27 PM
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FWIW, I think AMT has to go; I don't mind paying taxes, I just think it's ridiculous how AMT complicates estimating your taxes.

You realize this effect of paying MORE than your apparent marginal rate on additional income has nothing to do with AMT? There's a nasty spot for Social Security recipients around the break between the 10% and 15% brackets, where you get an effective rate of something like 30% on additional income. And those people aren't anywhere near having AMT as an issue.

I wouldn't want to get rid of AMT - is serves a useful purpose of limiting how many tax benefits you can pile onto a single return. But it does need to be tweaked to get it back to that original purpose and not just hitting everyone with income in a certain range.

As far as estimating your taxes - it actually makes that job simpler. If you know you will be in AMT, you don't need to worry about estimating a number of deductions. No deductions for taxes. No deduction for your employee business expenses. Higher threshold for medical expenses. No personal exemption, so no worrying about whether your college age kid is a dependent or not. Almost a flat tax rate - the only brackets are 26% and 28% - so you can just use 28% for planning and be done with it.

--Peter

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68426 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/7/2011 5:56 PM
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As far as estimating your taxes - it actually makes that job simpler.

Have you ever tried to estimate taxes subject to AMT? It's far from a flat tax, particularly if you're near the cutoff and you have to figure your taxes both ways and, as mentioned, there are a variety of items that are phased out. Throw in the fact that the government, on occasion, waits until December to set the AMT exemptions and it's extremely difficult to estimate your taxes mid to late in the year.

As I mentioned, I don't mind paying taxes and will gladly pay my fair share. I agree that, in principle, AMT has a purpose, but the implementation is ridiculous.

-murray

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68427 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/7/2011 6:54 PM
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Have you ever tried to estimate taxes subject to AMT?

Yes. Quite often. Multiple times per year, in fact.

It's far from a flat tax, particularly if you're near the cutoff and you have to figure your taxes both ways and, as mentioned, there are a variety of items that are phased out.

I guess that your idea of estimating and my idea of estimating are somewhat different. I try to estimate close enough to avoid penalties for my clients. Generally, that's to the nearest $1000 or so. Trying to get any closer is an exercise in frustration.

Throw in the fact that the government, on occasion, waits until December to set the AMT exemptions and it's extremely difficult to estimate your taxes mid to late in the year.

Yes - there are issues with Congress acting timely and responsibly. However, in the recent years, every time they've changed AMT late in the year it has been to reduce the AMT. So if you were estimating based on the law as it existed early in the year, your estimates would be on the high side after Congress did their thing. That will keep you out of problems with penalties, but could cause you to pay in more than absolutely necessary. Which gets us back to the concepts around the accuracy of estimates noted above.

--Peter

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68429 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/7/2011 7:59 PM
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Trying to get any closer is an exercise in frustration.

Yes, that's my point.

So if you were estimating based on the law as it existed early in the year, your estimates would be on the high side after Congress did their thing. That will keep you out of problems with penalties, but could cause you to pay in more than absolutely necessary.

I think it's more like a couple thousand dollar swing when they do a late in the year exemption. With interest rates so low, I've decided it's not worth the frustration you mentioned and just take my several thousand dollar refund like most red blooded americans :)

-murray

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Author: wburble Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68430 of 75626
Subject: Re: Selling stocks with substantial run up Date: 2/7/2011 10:01 PM
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http://www.investorwords.com/830/charitable_remainder_trust....


Have you considered annuitizing through a charitable remainder trust?

http://en.wikipedia.org/wiki/Charitable_remainder_unitrust

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