What to do with large stock holding in taxable account

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tc101
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What to do with large stock holding in taxable account

Post by tc101 »

I have a friend who bought Home Depot stock back in 1981 when it first went public. That initial investment of a few thousand dollars is now worth over a million. His only other assets are an IRA with about $100K, a taxable bank account with some CDs worth about $100K, and a house that is paid for. He is 67 and wants to wait until he is 70 to start taking social security. He has a small business and is still working part time.

The Home Depot stock represents over 80% of his net worth. He wants to diversify into index funds, but is concerned about all the capital gains taxes when selling to stock. I told him I would ask for guidance here.

My thought is that he start selling over the next few years to keep the taxes a little lower. I don't know any way he can avoid paying lots of taxes.
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livesoft
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Re: What to do with large stock holding in taxable account

Post by livesoft »

He can give it to me and I will pay the taxes and keep any leftover money for myself. PM me the details. Thanks.

Otherwise the story is always the same:

1. Give away to charity.

2. Give away to others such as children.

3. Sell a little each year.

4. Die.
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tc101
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Re: What to do with large stock holding in taxable account

Post by tc101 »

He needs the money to live on in retirement so he won't be giving it away.

As far as I can understand after a quick look at the tax laws, his two options are to sell a little every year and pay 15% cap gains tax, or it all at once to get immediate diversification and pay 20% cap gains tax.

Is there any clear answer as to which is better?
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dpc
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Re: What to do with large stock holding in taxable account

Post by dpc »

If he needs the money for retirement, he should really diversify. That is more important than tax impact. Way too much of his net worth in one stock. It will all be long-term capital gains - I'd assume at 15% rate, but I'm not a tax accountant.

I'd be selling off big chunks pretty quickly. He just has to accept that he will be paying taxes on the gains. I don't think there is a magical solution for this. He's been very fortunate - he should be thankful and happy to cash in.

Cheers,

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dwickenh
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Re: What to do with large stock holding in taxable account

Post by dwickenh »

The answer depends on his current income without the capital gains, his need to eliminate the single stock risk(Enron), and the need for additional income.

I would diversify from the single stock as soon as possible(but without taking the largest tax hit).

I would try to spread the cap gains over a 5 year period in nearly equal installments to take advantage of the new tax laws.

A little time with a CPA may be worth the cost to come up with the most cost effective plan.

My 2 cents worth,

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Re: What to do with large stock holding in taxable account

Post by Tech »

I don't think it will be any different since he will pay the long-term capital gains on all the gain.
Unless any upcoming tax law changes. Just my opinion.

If someone has any fact, I would love to learn also.
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Re: What to do with large stock holding in taxable account

Post by bhsince87 »

Is he married or single? And what is his other income? He might owe zero in taxes if handled properly.
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cas
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Re: What to do with large stock holding in taxable account

Post by cas »

tc101 wrote: Sat Jan 27, 2018 11:19 am.
As far as I can understand after a quick look at the tax laws, his two options are to sell a little every year and pay 15% cap gains tax, or it all at once to get immediate diversification and pay 20% cap gains tax.
Selling it all at once (or in very large chunks) could cause several other taxes and fees to kick in:

1. AMT (Alternative Minimum Tax). The rules on AMT have changed with the new tax bill, but I suspect many hundred thousand $ in LTCG could still cause AMT to kick in. With AMT you can get marginal tax rates on LTCG much higher than expected (could be as high as 30.8% under the old tax regime, I think: 20% LTCG + 7% AMT exemption phase-out stealth tax + 3.8% NIIT). This article has #s and tax rates from the old tax regime, but it should give an idea on what I'm talking about: "AMT and Long-Term Capital Gains" http://fairmark.com/general-taxation/al ... ital-gain/

2. Net Income Investment Tax (NIIT): additional 3.8% on investment income (including LTCG). Starts to become a consideration when taxable income (includng LTCG) goes over $200,000 single and $250,000 MFJ, IIRC. See Michael Kitces "Harvesting Losses Or Harvesting Gains – Planning Around Four Long-Term Capital Gains Tax Rates" https://www.kitces.com/blog/harvesting- ... tax-rates/

3. Income Related Medicare Adjustment Amount (IRMAA). Probably not as big a $ amount in the general scheme of things as AMT side-effects or NIIT (but it still could be $thousands), but something to be aware of. (IRMAA may become more of consideration if the plan becomes selling in smaller chunks over several years, since then IRMAA might kick in for several years.)
See:
"Medicare Premiums: Rules For Higher-Income Beneficiaries" https://www.ssa.gov/pubs/EN-05-10536.pdf (better overview of IRMAA, but IRMAA brackets aren't correct for 2018)

"2018 Medicare Costs" https://www.medicare.gov/Pubs/pdf/11579 ... -Costs.pdf (shows 2018 IRMAA brackets)

IRMAA isn't an IRS tax (it is actually a reduction in subsidy), so it won't show up in any tax software simulations/planning.

4. Used to be PEP/Pease phase-out marginal tax effects that could be triggered by LTCG, but those went away with the new tax bill. But I mention them because there may be other unexpected marginal tax effects at high incomes that I'm oblivious about.

5. State tax - in many states, LTCG are taxed at ordinary income tax rates. And in many states, larger income -> higher state tax bracket.

Moral of the story is that with big chunks of LTCG, it is best to do some simulation and planning with tax software before actually making the sales. Of course, that is difficult this year since the 2017 tax software will be very different from the 2018 software and won't give accurate results.
Last edited by cas on Sat Jan 27, 2018 12:29 pm, edited 2 times in total.
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tc101
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Re: What to do with large stock holding in taxable account

Post by tc101 »

Is he married or single? And what is his other income? He might owe zero in taxes if handled properly.
Married. Wife not working. How could he owe zero taxes?
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Re: What to do with large stock holding in taxable account

Post by livesoft »

tc101 wrote: Sat Jan 27, 2018 12:18 pm
Is he married or single? And what is his other income? He might owe zero in taxes if handled properly.
Married. Wife not working. How could he owe zero taxes?
Like this:
viewtopic.php?p=3684517#p3684517

Basically, with the size of his portfolio, the sustained withdrawal rate is well below the 0% tax rate on LTCG, so withdrawing enough each year to live should result in no additional LTCG taxes.

I don't know much about them, but options to insure against loss of a single stock holding are not uncommon. It will cost money, but may be less than other tax hits from IRMAA, etc. It would be interesting if any readers actually had a put option in such a case.
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Re: What to do with large stock holding in taxable account

Post by bligh »

tc101 wrote: Sat Jan 27, 2018 12:18 pm
Is he married or single? And what is his other income? He might owe zero in taxes if handled properly.
Married. Wife not working. How could he owe zero taxes?
Have a look at this page :

https://en.wikipedia.org/wiki/Capital_g ... ted_States

Notice how if a Married Filing Jointly household has an income less than $77,200 they pay a 0% capital gains tax?

I am a rookie myself at tuning the tax numbers (others on this board are masters at it) but to keep things simple let ignore deductions, tax credits, and such. Imagine your friend quits his job, has no social security, pensions or any other income. He then sells $65K of his holdings each year, comprising of $60K in long term capital gains. I believe he will owe no taxes on those capital gains.

There is a maximum amount he will be able to sell each year without incurring any capital gains taxes. A good tax professional would help him find that number.
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Re: What to do with large stock holding in taxable account

Post by bhsince87 »

tc101 wrote: Sat Jan 27, 2018 12:18 pm
Is he married or single? And what is his other income? He might owe zero in taxes if handled properly.
Married. Wife not working. How could he owe zero taxes?
Yes, please read the link livesoft provided.


With no other income, he could sell around $100k per year and pay no FEDERAL taxes on it. Local might be different. $77.4k plus 24k standard deduction keeps them in the zero cap gains bracket.

But it looks like he would also be earning $17k or so in dividends a year, so that would need to be factored in as well.

If he wants to diversify faster, the 15% rate isn't too bad, everything else considered.
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Re: What to do with large stock holding in taxable account

Post by stlutz »

My suggestion is not to put the tax horse before the asset allocation dog.

By deferring gain for 36 years, he's already realized a lot of tax benefit by deferring the payment of tax that long. If he had been trading in and out of various stocks over that period he would have ended up with less after tax dollars than he would if he sold the whole thing now. It might be worth anchoring on a different dollar amount.

I think we all agree that he needs to unload about 90% of this holding and move into more diversified investments. Fortunes change for specific companies--look at GE.
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Re: What to do with large stock holding in taxable account

Post by whodidntante »

I think I would have a gigantic tax bill in 2018 in your friend's shoes. Single stock risk is a real thing.
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Re: What to do with large stock holding in taxable account

Post by Kevin M »

He would pay 0% federal LTCG to the extent his taxable income is in the 12% bracket. Does his state tax LTCG?

Something I did to reduce the company-specific risk over a 3-year period during which I was exercising company stock options (to minimize tax impact) was to sell calls on the stock. This limited my upside, but gave me downside protection. He might consider selling covered calls if he wants to minimize the chance of a disastrous outcome while spreading the LTCG over several years.

At the time, the best broker to buy and sell options was Interactive Brokers, as the commissions were much smaller than somewhere like Vanguard or Fidelity.

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Re: What to do with large stock holding in taxable account

Post by 123 »

He can hold onto the stock and, with the passage of time, wait for the price of the stock to go down so there is less taxable gain and thus less in tax. Most companies go through a cycle of growth, stability, decline, and liquidation. It happens because management loses their way among many priorities or changes in management result in conflicting priorities. Plenty of "solid" companies have failed. they can fail faster these days then in earlier days. It doesn't matter how solid, bright, and shiny the company is, they all seem to eventually fail, think Kodak, Polaroid, Woolworth's, Montgomery Ward, etc. Sears is soon to go on the list.

Tell him to wait, his tax "problem" will eventually go away.
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Re: What to do with large stock holding in taxable account

Post by dual »

I looked into the cost of buying put options while your friend is selling portions of his HD holdings. I am not an expert on this but here is my take.

According to this http://www.nasdaq.com/symbol/hd/option-chain, with the current stock price of $207 per share a Jan. 18, 2019 put option with a strike price of $195 costs $10.95. AFAIK this gives you the right to sell 100 shares of stock at the specified price. So it protects 100*$207 = $20,700 of stock.

If your friend has $1Million of stock, it would cost him $10.95*(1e6/2e4) = $547.50 to get protection from a greater than 5%, $50,000, loss over a year period.

That seems like something I would definitely consider doing
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Re: What to do with large stock holding in taxable account

Post by livesoft »

Kevin M wrote: Sat Jan 27, 2018 12:38 pmSomething I did to reduce the company-specific risk over a 3-year period during which I was exercising company stock options (to minimize tax impact) was to sell calls on the stock. This limited my upside, but gave me downside protection. He might consider selling covered calls if he wants to minimize the chance of a disastrous outcome while spreading the LTCG over several years.
I don't think covered calls would help minimize the chance of a disastrous outcome. That's because if HD drops in price, the covered call does not protect against that downside nor let one sell at the old (higher) price, does it?

Selling covered calls create extra income in the event that a stock does not go up in price and get called away.
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Re: What to do with large stock holding in taxable account

Post by ved »

livesoft wrote: Sat Jan 27, 2018 1:20 pm
Kevin M wrote: Sat Jan 27, 2018 12:38 pmSomething I did to reduce the company-specific risk over a 3-year period during which I was exercising company stock options (to minimize tax impact) was to sell calls on the stock. This limited my upside, but gave me downside protection. He might consider selling covered calls if he wants to minimize the chance of a disastrous outcome while spreading the LTCG over several years.
I don't think covered calls would help minimize the chance of a disastrous outcome. That's because if HD drops in price, the covered call does not protect against that downside nor let one sell at the old (higher) price, does it?

Selling covered calls create extra income in the event that a stock does not go up in price and get called away.
Correct. He should buy puts to limit the downside.
OP - is this stock in a taxable account or a tax-deferred?
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Re: What to do with large stock holding in taxable account

Post by livesoft »

ved wrote: Sat Jan 27, 2018 1:39 pmOP - is this stock in a taxable account or a tax-deferred?
Thread title says taxable account.
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Re: What to do with large stock holding in taxable account

Post by cas »

This is a drop in the bucket, but easy and something I've seen a lot of people (including me) miss:

Does he, by any chance, have the dividends of the Home Depot set to reinvest back into more Home Depot shares? If so ... stop ... and invest the dividends into something diversifying. That doesn't solve the diversification issue, but it stops digging the hole deeper.

(Also, if he has been reinvesting dividends, you might want to inquire whether all those reinvested dividends are included in his cost basis.)
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Re: What to do with large stock holding in taxable account

Post by telemark »

If he sells now and pays 20% in long term capital gains that leaves him with $800K. How much was that stock worth a year ago, or two years ago? Looking at a price chart for HD I'd guess a lot less than that. How much could he lose if he sells slowly and the price drops again? If it were me I would sell now.
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Re: What to do with large stock holding in taxable account

Post by Gill »

acanthurus wrote: Sat Jan 27, 2018 11:38 am I think this is why exchange/swap funds were invented.

https://www.forbes.com/sites/agoodman/2 ... 41a46a324e
Exchange funds serve as perfectly legal tax shelters and a way for wealthy individuals to diversify a single large stock position and to defer large capital gains taxes for years or decades. Investors should consult with a financial advisor to see if this strategy is appropriate for their specific situation.
I don't know if these are good products or not. Perhaps someone with more knowledge can comment on them.
The pure exchange funds were outlawed years ago. This seems to be a variation of those and not very attractive and also with very high minimums.
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Re: What to do with large stock holding in taxable account

Post by TravelGeek »

cas wrote: Sat Jan 27, 2018 12:17 pm Moral of the story is that with big chunks of LTCG, it is best to do some simulation and planning with tax software before actually making the sales. Of course, that is difficult this year since the 2017 tax software will be very different from the 2018 software and won't give accurate results.
For the Fed part, Intuit TaxCaster (and H&R Block’s equivalent tool) let you now do a 2018 calculation/projection.
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Re: What to do with large stock holding in taxable account

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Re: What to do with large stock holding in taxable account

Post by Toons »

Start selling and paying capital gains taxes.
He made money.
After realizing gains the govt. wants their share.
No big deal,
It is what it is.
I would rather make a profit and pay taxes than,
not make a profit and not pay taxes.
Which I will be doing for 2017 and beyond :happy :happy
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Re: What to do with large stock holding in taxable account

Post by dual »

libralibra wrote: Sat Jan 27, 2018 4:42 pm quote=dual post_id=3746549 time=1517080378 user_id=408]
If your friend has $1Million of stock, it would cost him $10.95*(1e6/2e4) = $547.50 to get protection from a greater than 5%, $50,000, loss over a year period.
This is also wrong - your cost calculation is off by 2 orders of magnitude.
I think you are correct.

https://www.investopedia.com/university ... ption2.asp
On most U.S. exchanges, a stock option contract is the option to buy or sell 100 shares; that's why you must multiply the contract by 100 to get the total price.
I said I was a beginner at this.

So it would cost about $54,000/year to get protection from a loss of greater than $50,000 on OP's $1Million of HD shares at any time in that year period.

I would rather sell and pay the taxman than pay this for the insurance.
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Re: What to do with large stock holding in taxable account

Post by bltn »

Looking at the 2018 tax tables, he will be able to report up to 479,000 dollars in taxable income before he gets into the 20% capital gains tax bracket. Assuming dividend income and earned income, he could sell 400,000 dollars of the stock and still stay in the 15% bracket. He would have to pay the 3.8% medicare surcharge on about 200,000 dollars of it. He would save about 50,000 to 60,000 dollars at least in taxers over a 3 year sell off. But there is a small risk that something could happen to Home Depot. There s a larger risk that the stock market could go down for a period of several years. If a million dollar capital gain is realized this year, taxes on the gain will be around 220,000 dollars. If I understand the tables right. I m not a pro.
If it were me, I d sell at least 400,00 dollars worth of the stock this year, right away. Consider selling more later this year or right after the first of next year.
Selling 90% of it this year would not be a bad idea either.
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Re: What to do with large stock holding in taxable account

Post by grabiner »

dual wrote: Sat Jan 27, 2018 1:12 pm I looked into the cost of buying put options while your friend is selling portions of his HD holdings. I am not an expert on this but here is my take.

According to this http://www.nasdaq.com/symbol/hd/option-chain, with the current stock price of $207 per share a Jan. 18, 2019 put option with a strike price of $195 costs $10.95. AFAIK this gives you the right to sell 100 shares of stock at the specified price. So it protects 100*$207 = $20,700 of stock.
The put is actually priced at the value for 1 share, so protecting 100 shares costs $1095, which is more than 5% of the stock price.

But what your friend really wants is protection against a catastrophic loss, not a loss in line with normal fluctuations. A put at $155, which costs $2.81, will protect against a 25% decline.

Essentially, this is an insurance policy with a large deductible, just as he may have a policy limiting his losses to $2000 if his $20,000 car is damaged.

(edited to fix typo)
Last edited by grabiner on Sun Jan 28, 2018 6:17 pm, edited 1 time in total.
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Re: What to do with large stock holding in taxable account

Post by Kevin M »

livesoft wrote: Sat Jan 27, 2018 1:20 pm
Kevin M wrote: Sat Jan 27, 2018 12:38 pmSomething I did to reduce the company-specific risk over a 3-year period during which I was exercising company stock options (to minimize tax impact) was to sell calls on the stock. This limited my upside, but gave me downside protection. He might consider selling covered calls if he wants to minimize the chance of a disastrous outcome while spreading the LTCG over several years.
I don't think covered calls would help minimize the chance of a disastrous outcome. That's because if HD drops in price, the covered call does not protect against that downside nor let one sell at the old (higher) price, does it?

Selling covered calls create extra income in the event that a stock does not go up in price and get called away.
It may not be a great strategy for a really quick drop in stock price, but the premium you earn from selling the call hedges your downside by the amount of the premium. If the stock price falls enough, you close out your existing position, and sell calls at a lower strike price to continue the downside hedge. As I recall, if the stock price rose to where there was a reasonable risk of exercise, I closed out the position and sold calls at a higher strike price. It was some years ago, but I think this was basically what I did.
libralibra wrote: Sat Jan 27, 2018 4:42 pm
Kevin M wrote: Sat Jan 27, 2018 12:38 pm Something I did to reduce the company-specific risk over a 3-year period during which I was exercising company stock options (to minimize tax impact) was to sell calls on the stock. This limited my upside, but gave me downside protection.
This is totally wrong. Covered calls cap your gains while you hold 100% downside risk.
Not so. Your downside risk is hedged by the amount you earn in selling the call. Not as much downside protection as buying a put, but I liked the idea of earning something extra if the stock didn't move much in either direction, rather than paying for the insurance by buying a put.

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Re: What to do with large stock holding in taxable account

Post by drk »

telemark wrote: Sat Jan 27, 2018 2:16 pm If he sells now and pays 20% in long term capital gains that leaves him with $800K. How much was that stock worth a year ago, or two years ago? Looking at a price chart for HD I'd guess a lot less than that. How much could he lose if he sells slowly and the price drops again? If it were me I would sell now.
Given the facts of this post, this still strikes me as the only logical answer. This is a person who appears to have accidentally accumulated a $1 million position in a stock over the course of nearly 40 years and who now has a friend asking an internet forum how to unwind that position in order to diversify. That does not sound like a person who is going to quickly get up to speed with the mechanics of using options for protection while selling the stock piecemeal over the next few years. Just sell it.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
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Re: What to do with large stock holding in taxable account

Post by FiveK »

For a couple both 65 or older, with no state tax and income only from LTCG, the marginal rates are shown below. The four spikes are due to Medicare IRMAA. One may enter one's actual situation into the personal finance toolbox spreadsheet to get a chart applicable to that situation.

Image
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