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rated:
The company I worked for many years is being sold this year. I have acquired sizable amount of company stocks over years.They all will be chased in one day, (which I never planned to do). It will be little over $200K in long term capital gains, which will push us in top most tax bracket and we will end up paying huge income tax. Although I will have money to pay the tax, I am wondering if there is any why to invest money to reduce the tax bill? We will be putting max amount in my and wife's 401K. Any suggestion is welcome and thanks for your help.

Update:
Pulled trigger and sold all stocks I had for this company. The stock is treading close to the offered price. So instead of waiting for 6 months to close the deal, I choose to cash everything now for 5 cents less per share. Thanks again for your help. 

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More like if you have 1M in gains, they want to be able to collect now whereas if it is spread out, taxpayer could just ... (more)

seawolf21 (Feb. 26, 2017 @ 8:47p) |

$200,000 in capital gains, paid with a credit card.
Cost: $3,740 using the 1.87% fee.
Earn: $5,250 using the BoA Travel Re... (more)

DavidScubadiver (Mar. 13, 2017 @ 12:09p) |

Any reason why you reposted this? Your numbers are wrong anyways, he's got $200K in capital gains, not a $200K tax bill.... (more)

thegazelle (Mar. 13, 2017 @ 1:52p) |

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rated:
It the stock is being sold due to the merger, there is not much you can do to avoid taxation. If the merger drags until the beginning of the next year, you may have an opportunity to sell some voluntarily this year and forced sell next year.

If I was in your shoes, I would start working on my taxes for 2017 in 2017 itself. You should know whether you will be in the AMT region or past the AMT region. If past the AMT region, you would want to accelerate deductions into this year including pre-paying first installment of property tax that you may be paying in 2018. Obviously, all this should be done once we have more clarity from DC on the tax structure for 2017. 

rated:
Some ideas: Can you pre-pay mortgage payments for future months, not just against principal. Like could you pay all of your 2018 monthly mortgage payments so then you have no payments in 2018 due on mortgage thus pulling mortgage interest from 2018 into 2017 for a deduction? At the end of this year can you pay the next year property taxes early pulling that into this year too? Talk to a tax professional, do you need to make some kind of estimated payments or increase your withholdings before tax time next year so you aren't hit with penalties too?

rated:
WesternDigital said:    It will be little over $200K in long term capital gains, which will push us in top most tax bracket and we will end up paying huge income tax.
  cap gains tax is 15-20% , not your regular income tax brackets

rated:
Why would you not just sell some of it? You shouldn't really be sitting on a large pile of stock in your employer in general anyway. Thats putting you in possible double jeopardy if the company has any financial bumps. (lose your job and stock loses)

rated:
rufflesinc said:   
WesternDigital said:    It will be little over $200K in long term capital gains, which will push us in top most tax bracket and we will end up paying huge income tax.
  cap gains tax is 15-20% , not your regular income tax brackets

  
this is correct.  You'd pay the same amount of tax on this sale, regardless of how you split it up.

edit: the only way it would matter is if the sale of this stock pushes your income over $418,400 single, $470,700 married - which is the point where 15% on the capital gains goes up to 20%.

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jerosen said:   Why would you not just sell some of it? You shouldn't really be sitting on a large pile of stock in your employer in general anyway. Thats putting you in possible double jeopardy if the company has any financial bumps. (lose your job and stock loses)
  If your goal is to mitigate risk.  Biggest gains typically come with bigger risks... the most successful investors in terms of the wealth have thrown caution to the wind.  Not a play for most, but it also doesn't mean it is a rule that everyone should follow.

rated:
Dus10 said:   
 Biggest gains typically come with bigger risks... the most successful investors in terms of the wealth have thrown caution to the wind.

  More concisely , they put it all on black and got lucky

rated:
Dus10 said:   
jerosen said:   Why would you not just sell some of it? You shouldn't really be sitting on a large pile of stock in your employer in general anyway. Thats putting you in possible double jeopardy if the company has any financial bumps. (lose your job and stock loses)
  If your goal is to mitigate risk.  Biggest gains typically come with bigger risks... the most successful investors in terms of the wealth have thrown caution to the wind.  Not a play for most, but it also doesn't mean it is a rule that everyone should follow.
 

  coincidentally, the biggest losers in terms of wealth have done the same.

rated:
defjukie said:   
 
  coincidentally, the biggest losers in terms of wealth have done the same.

  let's name some names!

rated:
WesternDigital said:   ... It will be little over $200K in long term capital gains, which will push us in top most tax bracket and we will end up paying huge income tax. ...
  I am going to reiterate what others have said, because there seems to be so much confusion about income tax, even on FWF -- long term capital gains will not change your tax bracket.

rated:
acroBios said:   Some ideas: Can you pre-pay mortgage payments for future months, not just against principal. Like could you pay all of your 2018 monthly mortgage payments so then you have no payments in 2018 due on mortgage thus pulling mortgage interest from 2018 into 2017 for a deduction?
You generally can't write off prepaid interest.  Making a year's worth of payments in advance isn't going to work.

OP - bite the bullet and enjoy the windfall.  

rated:
WesternDigital said:   The company I worked for many years is being sold this year. I have acquired sizable amount of company stocks over years.They all will be chased in one day, (which I never planned to do). It will be little over $200K in long term capital gains, which will push us in top most tax bracket and we will end up paying huge income tax. Although I will have money to pay the tax, I am wondering if there is any why to invest money to reduce the tax bill? We will be putting max amount in my and wife's 401K. Any suggestion is welcome and thanks for your help.
First, congrats. That's fantastic news.

Second, you can consider tax-loss harvesting if there are holdings in taxable accounts you have that are below where you bought them. Be aware of wash sale rules.

rated:
Since you were a bit unclear on how LTCG are taxed, I recommend also making sure that your profits are going to be LTCG. I've gotten company stock a couple of ways that instead counted as compensation, and were taxed as regular income. This will make a very big difference in the tax bill and possibly in the ways to reduce or offset it.

I think the general rule is that the stock must have been purchased instead of granted, and I think ESPP programs have an additional holding rule beyond the usual 1 year to avoid short term rates on appreciation.

rated:
rufflesinc said:   
WesternDigital said:    It will be little over $200K in long term capital gains, which will push us in top most tax bracket and we will end up paying huge income tax.
  cap gains tax is 15-20% , not your regular income tax brackets

  Do not forget the additional medicare tax on net investment income.  A 3.8% Medicare surtax is levied on amounts greater than modified adjusted gross income (MAGI) above $200,000 for individuals or $250,000 for couples filing jointly.

rated:
rufflesinc said:   
WesternDigital said:    It will be little over $200K in long term capital gains, which will push us in top most tax bracket and we will end up paying huge income tax.
  cap gains tax is 15-20% , not your regular income tax brackets

  don't forget the healthcare tax.  That's another ~4% for NIIT. 

https://www.irs.gov/uac/newsroom/net-investment-income-tax-faqs

if you just want to delay half of it and you're willing to be a bit of a jerk to the acquirer, you can exercise your statutory appraisal rights in the merger and delay payment until a court decides the fair value of your holdings (usually this is for when you object and think the merger price is a lowball one, ala Dole or Dell who paid ~20% more to those who fought the deal in settlements afterwards).   Just wait until early 2018 and then settle for the same price and they'll be happy to be rid of you.

rated:
WesternDigital said:   The company I worked for many years is being sold this year. I have acquired sizable amount of company stocks over years.They all will be chased in one day, (which I never planned to do). It will be little over $200K in long term capital gains, which will push us in top most tax bracket and we will end up paying huge income tax. Although I will have money to pay the tax, I am wondering if there is any why to invest money to reduce the tax bill? We will be putting max amount in my and wife's 401K. Any suggestion is welcome and thanks for your help.
  
The main way you deal with the huge tax bill is to pay it. You can perhaps moderate the bill with tax-loss harvesting to off-set the long-term capital gains (if applicable). You should prepare to pay ~$30k (or 40K if your income income is high enough). Your broker will not, as a rule, withhold anything. So set aside 15/20% to pay your taxes. Recommend sticking in a decent interest-bearing account of some fashion.

Here's a good breakdown from Schwab. As you can see, the capital gains does NOT change your ordinary income tax bracket. Main consideration for capital gains is whether you're at the 15% or 20% rate for qualified dividends and long-term capital gains.
http://www.schwab.com/public/schwab/nn/articles/Taxes-Whats-New 

If you have any stock options (in addition to aforementioned stock), those are handled generally like income.

Edit: Good read:
https://personal.vanguard.com/us/insights/article/cap-gains-expl...

rated:
I'm in the same boat (last year). Note that the way you acquired the stock makes a difference. If you got it through ESPP you will be W2'd for the discount (which is based on the price at the start of the purchase period). If you got it through RSUs, you already paid income tax on it, which will adjust cap gains downward, etc.

The gain is entirely based on how much CASH you get. So if the company is acquired for $8 of cash per share plus $2 of company stock, the cap gains is based on $8, not $10.
Calculating the exact tax liability can be a real pain.

The only advice I can give is remember to pay estimated tax on the gain.

rated:
As another poster mentioned - tax loss harvesting if possible. Do you have any stocks/funds etc that's in the red? Sell those to offset some of the gain.

rated:
For everybody saying that LT capital gains rate is 15-20%, you lucky guys probably don't deal with capital gains.

1. You also have to include state taxes (if you live in a taxable state). CA, for example, does not have preferential treatment for capital gains. S
2. You have the traditional medicare tax of 3.8% as somebody else mentioned. [Obviously how much of your 200K is subject to this depends on your base income].
3. And there is the hidden AMT exemption wipeout. Since the OP hasn't mentioned the income, it is hard to know where he stands but I am figuring that he is smack in the middle of the AMT region. If the deduction is not completely phased out, add 7% from AMT deduction wipeout.

So your total taxes are: 15-20% + 3.8% + 7% + state taxes.

If you are lucky and past the AMT phase, then you may get the benefit of deducting the state taxes.

rated:
PrincipalMember said:   For everybody saying that LT capital gains rate is 15-20%, you lucky guys probably don't deal with capital gains.

1. You also have to include state taxes (if you live in a taxable state). CA, for example, does not have preferential treatment for capital gains. S
2. You have the traditional medicare tax of 3.8% as somebody else mentioned. [Obviously how much of your 200K is subject to this depends on your base income].
3. And there is the hidden AMT exemption wipeout. Since the OP hasn't mentioned the income, it is hard to know where he stands but I am figuring that he is smack in the middle of the AMT region. If the deduction is not completely phased out, add 7% from AMT deduction wipeout.

So your total taxes are: 15-20% + 3.8% + 7% + state taxes.

If you are lucky and past the AMT phase, then you may get the benefit of deducting the state taxes.

  
Absolutely true. We were in the exact same situation a few years back.

rated:
WesternDigital said:   The company I worked for many years is being sold this year. I have acquired sizable amount of company stocks over years.They all will be chased in one day, (which I never planned to do). It will be little over $200K in long term capital gains, which will push us in top most tax bracket and we will end up paying huge income tax. 
  Why do you have to cash them just because the company is being sold?

rated:
PrincipalMember said:   For everybody saying that LT capital gains rate is 15-20%, you lucky guys probably don't deal with capital gains.

1. You also have to include state taxes (if you live in a taxable state). CA, for example, does not have preferential treatment for capital gains. S
2. You have the traditional medicare tax of 3.8% as somebody else mentioned. [Obviously how much of your 200K is subject to this depends on your base income].
3. And there is the hidden AMT exemption wipeout. Since the OP hasn't mentioned the income, it is hard to know where he stands but I am figuring that he is smack in the middle of the AMT region. If the deduction is not completely phased out, add 7% from AMT deduction wipeout.

So your total taxes are: 15-20% + 3.8% + 7% + state taxes.

If you are lucky and past the AMT phase, then you may get the benefit of deducting the state taxes.

  
Spot on 1-3. Thanks.

 

rated:
how do you "chase in" stocks? what's the meaning of that?

rated:
rufflesinc said:   
defjukie said:   
 
  coincidentally, the biggest losers in terms of wealth have done the same.

  let's name some names!

  well anybody who was flipping houses in 2007. I knew several people who were juggling 4-5 houses at a time in various stages of flipping. And then the music stopped.... it ended very badly for them

rated:
ok so this probably isn't in the fatwallet spirit.... but if you ever intended to make charitable donations, you could give your appreciated shares to a charity (or your personal donor advised fund)... you won't pay any tax on the gains, and you'll get a big deduction for the donation...

rated:
Depends on if you hold shares, options, or RSUs, plus if unvested options/RSUs immediately vest on a takeover or just convert. Finally, the merger has to be for cash and not a non-taxable stock Swap.

btw, I didn't see any news about WDC. Is there something we should know (wink wink)?

rated:
kgotze said:   ok so this probably isn't in the fatwallet spirit.... but if you ever intended to make charitable donations, you could give your appreciated shares to a charity (or your personal donor advised fund)... you won't pay any tax on the gains, and you'll get a big deduction for the donation...
  making charitable deductions while minimizing expenses is very much in the spirit of fatwallet.  I find my charitable contributions nearly as fulfilling as making goofy purchases that are really good deals!

rated:
acroBios said:   Some ideas: Can you pre-pay mortgage payments for future months, not just against principal. Like could you pay all of your 2018 monthly mortgage payments so then you have no payments in 2018 due on mortgage thus pulling mortgage interest from 2018 into 2017 for a deduction? At the end of this year can you pay the next year property taxes early pulling that into this year too? Talk to a tax professional, do you need to make some kind of estimated payments or increase your withholdings before tax time next year so you aren't hit with penalties too?
  
Technically you can only get away with this, for 1 month at the end on December.   I would not want to bend any rules in Op's circumstance since they are likely in a position to be an "Audit Magnet" 


To my knowledge:  IRS does not allow deductions for "Prepaid Interest" in the regard you are describing.

rated:
bation46 said:   how do you "chase in" stocks? what's the meaning of that?
  cash in?

rated:
Thank a lot for good suggestions. Here is some more info that was asked:
1. I live and work in CA
2. Current combined W2 income is $200,000 + (0 to 20% bonus)
3. No current holding is in negative (fortunately!) in stock portfolio.
4. In past, every time I have sold my company stocks, I was hit with AMT.

Some ideas to lower tax liability:
1. I never contributed towards Education IRA 529 before. I am planning to start it this year.
2. May be pay next years property taxes this year? usually 50% is due in December and remaining 50% next year in April.
3. Consult professional investment adviser? (I have tried it before, I did not like their ideas. I guess I am doing ok on my own with help of FWF and Bogleheads)
....

Thanks again for some good advise and ideas.

rated:
libralibra said:   Depends on if you hold shares, options, or RSUs, plus if unvested options/RSUs immediately vest on a takeover or just convert. Finally, the merger has to be for cash and not a non-taxable stock Swap

btw, I didn't see any news about WDC. Is there something we should know (wink wink)?

  
Not employed with WDC

rated:
So, WD,

I was in the same boat 2 years ago, but the worst of it came out after-the-fact.

My company was bought out, in a stock-for-stock-and-a-little-cash transaction. Wonderful. Only, after the fact, we discovered that the transaction was considered taxable. So, it was just as if we had sold the stock in our old company, and bought stock in the new. ANd we had to pay capgains taxes on it.

Ultimately, there's nothing you can do, except pay the stupid taxes. If this is a 2017 transaction, you can sell some other stocks for a loss to reduce the taxes. But only do that if the sale fits in your investing strategy. (selling for a loss doesn't fit in mine, so I don't).

And, like others commented, you also get to pay obamacare tax, probably. AND, I disagree with others' comments about tax bracket. If I remember the math, this will push you into the next bracket, BUT, also if I recall, the additional money that's in the next bracket will be taxed at LTCG rates. I'm thinking, all told, this might be enough to push you into the higher LTCG rate "reserved" for the uber-rich.

I've contributed to 529's for a while. Uncle Sam offers no tax benefit to contributions -- dunno about CA (I live in AZ, please stay home ) I think using excess, after taxes, to contribute to a 529 is a wonderful idea. In fact, when the company got taken private 10-ish years ago, we did that.

I've been inclined to "consult professional", but in this case, I'd suggest a tax person rather than a professional investor. I say that, but when push comes to shove, my "professional tax guy" is TurboTax premier. Technically, we have a "Professional investor" -- he's from Edward Jones, and my wife considers him an empty shirt. We do most of our trading through Ameritrade, avoiding edward Jones.

rated:
Is WDC getting acquired??
nm, saw the later reply

rated:
OP I did exactly what you are doing i.e. max out on 401k It seems max on total contributions (employee plus employer) is $54,000  (or 100% of your salary, whichever is less). Its worth asking your employer if they could help. BTW there is a possibility of paying higher tax when you withdraw 401k in the future (they predict tax rate will go up)

BTW experts, if we can spread losses why not gains? Probably the big fishes are longing for this

rated:
xerty said:   if you just want to delay half of it and you're willing to be a bit of a jerk to the acquirer, you can exercise your statutory appraisal rights in the merger and delay payment until a court decides the fair value of your holdings (usually this is for when you object and think the merger price is a lowball one, ala Dole or Dell who paid ~20% more to those who fought the deal in settlements afterwards).   Just wait until early 2018 and then settle for the same price and they'll be happy to be rid of you.
  This only works if you have the sufficient wherewithal to fight a bunch of M&A lawyers and are ready to pony up some of that future windfall to lawyer up yourself. Otherwise, the extra cash doesn't come freely.

​I'm surprised no one has mentioned super PACs yet. In the new age of Citizens United, this can be easily (ab)used by donating your shares to a super PAC your 'neighbor' created. Send along an agency letter on how to spend the money and neither you nor the super PAC will have to pay any taxes on any of that! And if you/super PAC do get audited, then make some noise about IRS targeting GOP/Dem-leaning super PACs depending on your local political climate.

rated:
rufflesinc said:   
WesternDigital said:    It will be little over $200K in long term capital gains, which will push us in top most tax bracket and we will end up paying huge income tax.
  cap gains tax is 15-20% , not your regular income tax brackets

  
In the interest of accuracy to readership, the cap gains tax is actually 0-20%

Of course, not relevant to the OP since he makes too much, but for readers coming to understand this topic, you can pay 0% on long term capital gains if your income is within 15% tax bracket.

rated:
WesternDigital said:   Thank a lot for good suggestions. Here is some more info that was asked:
1. I live and work in CA
2. Current combined W2 income is $200,000 + (0 to 20% bonus)
3. No current holding is in negative (fortunately!) in stock portfolio.
4. In past, every time I have sold my company stocks, I was hit with AMT.

Some ideas to lower tax liability:
1. I never contributed towards Education IRA 529 before. I am planning to start it this year.
2. May be pay next years property taxes this year? usually 50% is due in December and remaining 50% next year in April.
3. Consult professional investment adviser? (I have tried it before, I did not like their ideas. I guess I am doing ok on my own with help of FWF and Bogleheads)
....

Thanks again for some good advise and ideas.

  
- Contributions to 529 won't alter your taxes.
- Since you will be smack in the middle of AMT, it would not make sense to accelerate deductions - e.g. do not pay your property taxes early.
- Don't know if you will have taxes withheld on this cap gains. If not, or if not enough taxes are withheld, you may have an opportunity to change your 2018 taxes. For 2017, if it doesn't make a difference in taxes, don't try to pay CA estimated taxes on the cap gains. Make sure you understand the rules about how much you must withhold to avoid penalty (CA FTB is really bad at trying to charge penalty). Then since you will pay state taxes in 2018, you would have an opportunity to deduct them in 2018. Best way to play the game is input your data in tax software and play with it. But personally, you do nothing for now until Trump outlines his plan - there is no point in planning based on laws that might become obsolete.
 

rated:
msenthil said:   
BTW experts, if we can spread losses why not gains? Probably the big fishes are longing for this
 

  
Because IRS wants to win. If you have 1M gain, they want taxes for that in that year. If you have 1M in losses, they would be so happy if you don't collect them - so that is why only a $3,000 limit against other income or offset against other gains.

Same thing with wash-sale rule - applies only to losses and not to gains. If you sell something for a gain and then buy it back, you still have to pay taxes on the gain - you can't "wash buy" the gain

Skipping 3 Messages...
rated:
DavidScubadiver said:   $200,000 in capital gains, paid with a credit card.
Cost: $3,740 using the 1.87% fee.
Earn: $5,250 using the BoA Travel Rewards card (assuming you have the Platinum Honors status).
Gain: $1,510.
And, if you have a lot of miscellaneous deductions, you can write off the $3,740 convenience fee.

Sure, this may be a hassle with such a large amount due, and you will have to call to make arrangements for the large payment, but I bet you can make a series of payments in order to get the maximum advantage with a lower credit limit.

  Any reason why you reposted this? Your numbers are wrong anyways, he's got $200K in capital gains, not a $200K tax bill.  

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