Can we avoid taking a tax bath?

Ghoulish Delight · 08-29-2005, 02:42 PM

Having just surpassed the one year mark at my current job, I was granted some vested stock options. 500 shares that I can purchase at 50% of market price and sell immediately at market price (among other options). At the current price, that ends up being a $5000 profit. My first instinct was, "Awesome, what a perfect way to pay for our trip to Paris." But then I thought to look up what kind of capital gains (and other) tax hit we'd take. Well, based on my company's witholding rate...we'd end up only seeing $3000 of that. Damn.

So then I got to thinking about our plan to once again look into buying a house next year. At that time, I will have 2 years of employment behind me, and another 500 shares to option. Now, I know that once can "avoid" (more accurately, put off) capital gains taxes by immediately reinvesting the money instead of cashing out. So that begs the question, as a first time home buyer, is there a way to roll the gains from a stock option into the purchase of the home (say, as a down payment or perhaps for closing costs) that would shelter it from the tax? If not, it may still be a good choice for us to just bite the bullet, pay the tax, and use what's left to pay closing costs anyway. But it'd be nice to just funnel it all over. Especially if our company stock goes are higher (which looks likely, the company is strong right now).

As it is, I'm toying with the idea of just exercising the option and leaving the investment in there. The stock would have to tank pretty bad to negate the instant 100% return and be worse than the 3.5% or so I can get in a CD.

Anybody have any tax knowledge on this one?

Tref · 08-29-2005, 03:52 PM

Quote:

Originally Posted by Ghoulish Delight

Anybody have any tax knowledge on this one?

I have bath knowledge, but not the tax part.

Ghoulish Delight · 08-29-2005, 03:56 PM

Quote:

Originally Posted by Tref

I have bath knowledge, but not the tax part.

No, I don't need any advice on avoiding baths. I'm already good at that.

scaeagles · 08-29-2005, 04:11 PM

Well, probably stating the obvious here, but if you sell a home, you have two years to reinvest the profits from the home without having to pay capital gains taxes on that money.

I also know that you can move money between retirement accounts without paying any penalties (as in closing one, taking the money, and putting it elsewhere that qualifies as a retirement account).

However, when I purchased my house, I got no breaks for the money I put down. This money did not come from the market, but from earnings. It would seem that since you are making a profit from the sale of stock, which has nothing to do with retirement and is not from the housing market, that you are screwed and will pay capital gains taxes on it.

I am curious, though. Capital gains rates are a flat rate, are they not? And I thought they were 28%. How is it, then, based on your OP, that your effective rate is 40%? Tax law changes all the time, but I thought stock options were typically offered because of their tax advantage - it is not deemed as work related income, and liquidation would then only require capital gains taxes, with no medicare or social security taken out.

I am not a tax lawyer, so I am sure everything I have stated is WAY out of date.

Ghoulish Delight · 08-29-2005, 07:22 PM

Quote:

Originally Posted by scaeagles

I am curious, though. Capital gains rates are a flat rate, are they not? And I thought they were 28%. How is it, then, based on your OP, that your effective rate is 40%? Tax law changes all the time, but I thought stock options were typically offered because of their tax advantage - it is not deemed as work related income, and liquidation would then only require capital gains taxes, with no medicare or social security taken out.

According the ETrade page, they will indeed be witholding federal, state tax, SDI, medicare, and SS. Those are 25%, 9.3%, 1.08%, 1.45%, and 6.2% respetively. Don't ask me why it falls under all that instead of just CG.

Perhaps you're thinking of an employee stock purchase plan vs. a stock option. My company offers both, this is a stock option.

08-29-2005, 02:42 PM	#1
Ghoulish Delight I Floop the Pig Join Date: Jan 2005 Location: Alternative Swankstyle Posts: 19,348	Can we avoid taking a tax bath? Having just surpassed the one year mark at my current job, I was granted some vested stock options. 500 shares that I can purchase at 50% of market price and sell immediately at market price (among other options). At the current price, that ends up being a $5000 profit. My first instinct was, "Awesome, what a perfect way to pay for our trip to Paris." But then I thought to look up what kind of capital gains (and other) tax hit we'd take. Well, based on my company's witholding rate...we'd end up only seeing $3000 of that. Damn. So then I got to thinking about our plan to once again look into buying a house next year. At that time, I will have 2 years of employment behind me, and another 500 shares to option. Now, I know that once can "avoid" (more accurately, put off) capital gains taxes by immediately reinvesting the money instead of cashing out. So that begs the question, as a first time home buyer, is there a way to roll the gains from a stock option into the purchase of the home (say, as a down payment or perhaps for closing costs) that would shelter it from the tax? If not, it may still be a good choice for us to just bite the bullet, pay the tax, and use what's left to pay closing costs anyway. But it'd be nice to just funnel it all over. Especially if our company stock goes are higher (which looks likely, the company is strong right now). As it is, I'm toying with the idea of just exercising the option and leaving the investment in there. The stock would have to tank pretty bad to negate the instant 100% return and be worse than the 3.5% or so I can get in a CD. Anybody have any tax knowledge on this one? __________________ 'He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.' -TJ
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08-29-2005, 04:11 PM	#4
scaeagles I LIKE! Join Date: Jan 2005 Posts: 7,819	Well, probably stating the obvious here, but if you sell a home, you have two years to reinvest the profits from the home without having to pay capital gains taxes on that money. I also know that you can move money between retirement accounts without paying any penalties (as in closing one, taking the money, and putting it elsewhere that qualifies as a retirement account). However, when I purchased my house, I got no breaks for the money I put down. This money did not come from the market, but from earnings. It would seem that since you are making a profit from the sale of stock, which has nothing to do with retirement and is not from the housing market, that you are screwed and will pay capital gains taxes on it. I am curious, though. Capital gains rates are a flat rate, are they not? And I thought they were 28%. How is it, then, based on your OP, that your effective rate is 40%? Tax law changes all the time, but I thought stock options were typically offered because of their tax advantage - it is not deemed as work related income, and liquidation would then only require capital gains taxes, with no medicare or social security taken out. I am not a tax lawyer, so I am sure everything I have stated is WAY out of date.
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