16 Mar What will I owe in taxes on a stock sale?
Q. I have a stock account with three different stocks in it. They’re all up, and I want to sell half my account so I can use the money for a home down payment. How can I determine what I will owe in taxes, and is there anything I can do to lower what I will owe?
A. You may want to pull that money out fast because you plan to use it for a home purchase. You don’t want to take the chance that money you need in the short term could be gone if the stock market moves lower.
There are several strategies you can consider, but it’s unlikely you can avoid taxes entirely.
You said all three stocks were up from your purchase price. One approach would be to sell half the positions from all three stocks, said Devang Patel, certified financial planner with MetLife Premier Client Group in Cranford.
This would ensure that you still have equal exposure to all three holdings, Patel said.
Another approach would be to analyze and sell the positions that are closer to fair value or overvalued.
“If one stock is selling above its fair price based on analysts’ ratings, sell that stock and maintain your positions in the other two,” Patel said.
Exactly how the sale would be taxed depends on many factors.
“Primarily you’ll need to know how long you’ve held the stock for, your marginal tax bracket, the level of gains or losses you may have from other capital assets and if you have any unused carry forward losses from previous years,” said Chadderdon O’Brien, a certified financial planner with Lassus Wherley in New Providence.
The holding period for each stock is important because it influences the tax rate applied to the gain, he said. If you’ve held the stock position for less than a year, the gain will be considered short-term and taxed at your marginal tax rate. However, if the stock position has been held for longer than a year, the gain is eligible for long term capital gains tax treatment, O’Brien said.
He said capital gains rates are typically lower than ordinary income rates, and the exact rate that applied to your situation is dependent on your overall income level and tax filing status.
In 2015, the capital gain tax rate is zero percent for taxpayers in the 10 and 15 percent marginal tax brackets — those with income below $37,450 for singles and $74,900 married filing jointly. For taxpayers in the 25 to 35 percent marginal tax brackets, the long-term capital gains rate is 15 percent. For taxpayers in the highest marginal tax bracket of 39.60 percent — income in excess of $413,201 for single filers and $464,850 for married filing jointly — the long-term capital gain rate is 20 percent.
“It should be noted that there are additional surtaxes applied to investment gains/income at higher income levels, currently $200,000 for single filers and $250,000 for married filing jointly filers,” O’Brien said.
The level of gains or losses you have from other capital assets will affect the tax calculation and has the potential to reduce the amount you’ll owe, he said.
“Each year, gains and losses are netted out. If you have unrealized losses in other investment positions, these can be realized to reduce the gain attributed to your stock,” O’Brien said.
In addition, if you had net investment losses in previous years that have not yet been applied to current gains or income, these too can be used to reduce the taxable gain from the stocks, he said.
Other strategies such as charitable giving have the potential to reduce your taxable income which can indirectly reduce taxes on capital gain.
“The bottom line is that most taxpayers pay 15 percent on long-term capital gains,” he said. “Other investment activity has the potential to reduce the tax liability attributed to the sale of stock if the other positions are held at a loss.”
As your tax situation becomes more complicated, it may be worth discussing your situation with a personal income tax professional.
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This post first appeared in March 2015.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.