Should you accelerate income/stock gains to 2017 due to tax changes?
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Should you accelerate your income to this year? This one really boils down to your effective tax bracket for this year and next year. Knowing actual tax bracket is really hard due to the myriad of tax rules. For example, even though the stated AMT tax rate is 28%, in reality it is 35% - the reason being that for every dollar of income you lose 0.25 cents of exemption. The way you can estimate your real tax bracket is change your income in the tax software by $1,000 and see what change it produces in taxes. If your taxes change by $350, your tax rate is 35%.
This is without considering the state taxes. So if your state bracket is 10%, then you will be paying 10% to state and 35% to federal – i.e. you total tax bracket is 45%.
However, if you are not subject to AMT, then we can play some games with the total tax bracket. Let us say that your federal tax bracket is 25% and state tax bracket is 8%. So at first blush it seems that your total tax bracket is 33%. However, if you ensure that your state taxes are paid off this year, then you can deduct that 8% from federal taxes. So now you would save 25% on the 8% payment – i.e. you will save 2%. So now your total tax bracket is 31%. This is really powerful for high wage earners – those subject to 39.6% taxes and living in states like CA. Example – state tax bracket of 11.3% and federal bracket of 39.6 – so by paying taxes this year, the state tax deduction amounts to 0.396*11.3 = 4.5%.
You need to compare your overall (federal + state) tax bracket with next year to make a decision on accelerating income or not.
One of the things that you control for income appreciation is stock selling. One thing to mention with gains versus losses is that IRS is gains are not subject to wash sale rule. You can sell something, book a gain and rebuy that stock 2 seconds later and you still have booked a gain (though if it is dividend producing stock you may have altered the “qualified nature of the dividend” unless you hold the newly acquired stock for 60 day period after that). But for losses, you need to wait for the wash sale period of 30 days to rebuy something.
First let us look at LT gains. Is it worth accelerating LT gains to this year? While it is true that the tax brackets are reducing, the LT rates are not changing and there doesn’t seem to be a benefit of taking the taxes this year. However, if you are not in the AMT region, then the big difference is that you can deduct the state taxes from the federal taxes this year. The % you will save on LT gains by accelerating this year is going to be: 2017 federal rate * 2017 state tax rate (e.g. 0.25*0.08 = 0.02 as was mentioned earlier or 4.5% for high income earner in CA). But you get this advantage - only if YOU PAY MAKE THE STATE TAX PAYMENT THIS YEAR. If you don’t, there is no benefit. At 2%, it is probably not worth doing anything but at 4.5% - I am accelerating gains to this year.
Now let us look at ST gains. ST gains/losses are just like are normal income. In general, my recommendation would be that unless there are reasons for you to sell a stock, don’t sell a stock just due to tax reasons – instead let it keep growing until you have converted ST gains to LT gains at which point you get a nice reduction in tax rate that should offset the tax shenanigans. But some short sales are always short term transactions – example – the option part of covered call, short puts etc. For the most part, new tax brackets for 2018 are lower than 2017 tax rates – so accelerating ST gains may not make much of a difference. However, you would have to look at the combined effect of being able to deduct the ST income from state taxes. Even then the difference is very likely to be 1-2% at which point, it may not be worth accelerating ST gains and paying money to IRS early. And if you are in AMT region where the effective tax rate was 35%, you probably don’t want to accelerate ST gains this year. But the reverse may be true – if you can accelerate your ST losses such that you take 3,000 of capital losses, those losses might be worth more this year.
For myself, I am just trying to moving my LT gains to this year but I don’t want to do anything stupid. I believe in “NOT PAYING TAXES” – so will not cash out all my LT situations. However, I have situations like BA where the stock has gone up so much that I am more comfortable in liquidating that position and using the money to pay off my mortgage and diversifying into other securities. As far as I am concerned, the Trump tax bill is now fully factored into the stock prices since he signed the tax bill on Fri morning while the stocks were still trading. Now the market will start focusing on the next quarter earnings.
Right now I have some LT gains and some ST losses. Goal is to wipe out my ST losses so that they don’t eat into my LT gains. But most of the ST gains will be done through closing my short put/call positions and not by taking gain in positions that I expect will mature into LT gains later. Short positions must be closed on Dec 28 this year to have your broker include in that this year’s statement.
Happy trading!
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In my case, hard to say since I have QLD, DDM and AAPL. The first two has 600% gains and the second one has 11,000% gains so if I sell, basically 100% of the amount is gained so is there a strategy to sell and still use it again to make money while having cash from the sale?
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@almighty1 said in Should you accelerate income/stock gains to 2017 due to tax changes?:
In my case, hard to say since I have QLD, DDM and AAPL. The first two has 600% gains and the second one has 11,000% gains so if I sell, basically 100% of the amount is gained so is there a strategy to sell and still use it again to make money while having cash from the sale?
It is simple - you need to know your state tax bracket and you need to decide whether you want to take profits in the near futureand diversify or stay in the same positions.
