Dealing with large long term stock gains

[disneysteve]

As is apparent from my earlier questions today about stock cost basis, I've been digging into our individual stock holdings. One thing that has become very clear is that we're sitting on some substantial gains as we've owned some of these stocks since as far back as 1992.

For example, we paid $33.72 for DIS. It's now $191.
We paid $30.53 for PEP. It's now $133.
We paid $6.27 for YUM. It's now $109.

Huge gains are a good thing, but someday if we sell those shares it won't be pretty. I guess the plan should be to leave them alone and pass them on to our daughter when we're gone so she gets the stepped up cost basis.

[Jluke]

That’s the funny thing about investing in a taxable account.

you want your investment to grow but in the end you don’t want to pay taxes on those gains.

If someone might be in a lower tax bracket later on then would be the time to take some gains with no or minimal taxes owed.

I’m guilty of this too

[Like2Plan]

As is apparent from my earlier questions today about stock cost basis, I've been digging into our individual stock holdings. One thing that has become very clear is that we're sitting on some substantial gains as we've owned some of these stocks since as far back as 1992.

For example, we paid $33.72 for DIS. It's now $191.
We paid $30.53 for PEP. It's now $133.
We paid $6.27 for YUM. It's now $109.

Huge gains are a good thing, but someday if we sell those shares it won't be pretty. I guess the plan should be to leave them alone and pass them on to our daughter when we're gone so she gets the stepped up cost basis.

In addition to leaving them alone. (By the way, if you predecease your DW, she would receive a stepped up basis on part/all of the shares depending on how they are registered--and varies from state to state )

https://www.kiplinger.com/article/retirement/t021-c032-s014-a-widow-s-broker-made-a-huge-mistake.html

The good news is it is not an all or nothing proposition. You can stop reinvesting dividends- then, you can sell some of the shares, pay the taxes and reinvest. You could even buy back the same shares, if you want (there is no wash sale on gains). Do a little of this each year and it will give you more options.

You could also set up a Donor Advised Fund and deposit your appreciated shares into it. Re-purchase the shares you want to keep with the money that you would have otherwise donated to charity.

[disneysteve]

If someone might be in a lower tax bracket later on then would be the time to take some gains with no or minimal taxes owed.

I guess the hope is that in retirement, our income will fall below the cutoff to pay 0% on LTCG. For 2020, that cutoff was $80,000 (MFJ). I suppose the idea is to sell just enough of your taxable stuff each year to stay under that limit, avoid the capital gains tax, and use the proceeds to cover your living expenses. And of course simultaneously stay under the ACA subsidy cap.

[Fishindude77]

Paying taxes are high class problems.
Don't fuss over it.

Sounds like that stock did everything you wanted it to.
If you ever sell them, just pay the taxes and you're still way ahead of the game.

[Like2Plan]

Paying taxes are high class problems.
Don't fuss over it.

Sounds like that stock did everything you wanted it to.
If you ever sell them, just pay the taxes and you're still way ahead of the game.

The good thing is that you have choices as to when you pay the taxes because you control when they are sold. I don't think most people think it is a problem, but it is more of a question --would you rather pay 0%, 15% or 20% on the gains?

[disneysteve]

Paying taxes are high class problems.
Don't fuss over it.

Sounds like that stock did everything you wanted it to.
If you ever sell them, just pay the taxes and you're still way ahead of the game.

I don't think most people think it is a problem, but it is more of a question --would you rather pay 0%, 15% or 20% on the gains?

Exactly. If we made $100/share, even paying 15% taxes, we're still ahead $85/share. But if there's a way to time that sale so that we pay 0%, obviously that's the better option.

I'm getting into the serious phase of retirement planning - not the saving part but the withdrawal part. I'm studying up on how to start tapping all that we've accumulated to fund our retirement while minimizing taxes and maximizing benefits. How to deal with taxable capital gains is definitely a piece of that.

[LivingAlmostLarge]

I don't think it's wrong to try and manage 0% capital gains. I'm going to try. It also maximizes your income and savings. Also if you aren't super funded for retirement and are used to stretching the dollar why not? I don't know if it's in my DNA to just withdraw my savings without looking at the most bang for my buck. It's an innate thing. So I get where steve is coming from. I can't help myself from wanting to stretch my dollars for maximum value. Even freebie stuff like hotel rooms and airline miles i tend to not use unless I get great value. If not i pay and hoard my miles.

[disneysteve]

Even freebie stuff like hotel rooms and airline miles i tend to not use unless I get great value. If not i pay and hoard my miles.

I just might have over 560,000 Marriott points in my account right now, but clearly I'd have no idea what you're talking about here.

[QuarterMillionMan]

Good problem to have disneysteve. Take some profits and just pay the taxes. I know that I would have no problem paying the long term capital gains tax.

[disneysteve]

Good problem to have disneysteve. Take some profits and just pay the taxes. I know that I would have no problem paying the long term capital gains tax.

Certainly not a bad problem to have. It's just something you don't hear talked about much in all of the "buy and hold" conversations. When you do buy and hold, decades later there can be some serious gains to deal with when holdings have grown 5 or 10 or 20-fold.

[srblanco7]

I'm getting into the serious phase of retirement planning - not the saving part but the withdrawal part. I'm studying up on how to start tapping all that we've accumulated to fund our retirement while minimizing taxes and maximizing benefits. How to deal with taxable capital gains is definitely a piece of that.

Given that you'll have substantive retirement savings (and growth), paying taxes while funding a comfortable retirement is unavoidable. That being said, no need to pay more than necessary

[moneybags]

2 suggestions:

1. Gift some to your daughter while she has a low income. Capital gains tax is 0% on income under $40,000. The shares would still be at your basis, but the tax on gain would be zero.
2. If you have one, sell a different holding that would result in a loss; offset the gain.

[disneysteve]

2 suggestions:

1. Gift some to your daughter while she has a low income. Capital gains tax is 0% on income under $40,000. The shares would still be at your basis, but the tax on gain would be zero.

I had the same thought. Then the question is how to have her transfer the money back to us. The current gift limit is 15K which would work. We could gift her the stock and she could gift us the proceeds. Does doing that raise any red flags with the IRS? It's not hard to see the reason behind that if anyone is paying attention.

Of course, we could gift her the stock, have her sell it, and then have her use that money to pay for stuff that we would normally pay for so that we "get" the money indirectly.

2. If you have one, sell a different holding that would result in a loss; offset the gain.

I sold our one loser last year for just that reason. We don't own any other losers thankfully.

We could also donate shares, but I'd prefer to save that option for 401k and t-IRA withdrawals since those are taxed as ordinary income.

[moneybags]

I had the same thought. Then the question is how to have her transfer the money back to us. The current gift limit is 15K which would work. We could gift her the stock and she could gift us the proceeds. Does doing that raise any red flags with the IRS? It's not hard to see the reason behind that if anyone is paying attention.

Of course, we could gift her the stock, have her sell it, and then have her use that money to pay for stuff that we would normally pay for so that we "get" the money indirectly..

Having her transfer the money back to you may qualify as tax evasion. Maybe someone here knows for sure. The gift limit would actually be $30K (married couple), but the capital gain does increase income, so you have to keep that in mind.