How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Lane Your Own Question

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3739
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Type Your Tax Question Here...
Lane is online now
A new question is answered every 9 seconds

I am in the state of New jersey and I recently separated from

Resolved Question:

I am in the state of New jersey and I recently separated from my company. My financial advisor is recommending that I roll over my 401k and place my ESOP stocks in a separate account and take advantage of "net unrealized appreciation" My question is what are the tax implications of doing this in not selling and tax rate of what I would have to pay once I sell the stocks. They mentioned something about long terms capital gains.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Yes,when you distribute employer securities (stock in the company that was your employer) from your retirement plan you are only taxed on the basis (the cost of the investments as they went into the plan)...

Then when you sell the stock later, it will be taxed as capital gains (lower tax rate than the ordinary income rate). Ordinary income, by the way, is how any other dollars like mutual funds are taxed coming out of the plan.

And if you hold that stock for a year after you distribute you get the long term capital gains rate (again lower than ordinary income tax rates).

If you sell it in the first year, after you distribute, you have to pay SHORT TERM capital gains rates which are at the ordinary (higher) income tax rate.

Hope this helps

Lane


H

Customer: replied 1 year ago.

what are the tax rates in NJ? How are mutual funds taxed?

Expert:  Lane replied 1 year ago.

First, if you roll over the funds, to an IRA, them there's no tax.

The reason you want to take advantage of the NUA on the company stock is that you only have to pay tax on the basis.

That's why the adviser is telling you to rollover everything else .

Whatever you DO distribute from the plan (the stock basis and the the value of anything else)
is added to your income for that tax year.

Then everything but the NUA stock also will be penalized and additional 10%

Again this is why you should rollover everything but the NUA stock.

In terms of the amount, you'll have to tell me the following:

1. Your Income level this year (so Ill know what tax bracket you're in)

2. The amount of stock (dollar value)

3. The value of anything else that you DON'T roll over


In the mean time. Here are the NJ state I come tax tables

http://www.state.nj.us/treasury/taxation/pdf/current/taxtable.pdf


Let me know ...

Lane

Customer: replied 1 year ago.

Thanks for your help lane, I just received info from my companies financial advisor. here are the facts:


 


1. My stocks are currently in a 401K and not a NUA


2. I have the option to roll over the 401K into an IRA and place the stocks in a non-broker account on January 1 st because the stocks were accelerated in January is when I will be allowed to take advantage of NUA. Does this makes sense?


3. My fed gross income for this year is $85, 254.36


 


4. The dollar value on the stock is $107,710.26 and the cost basis is


$4,855.01


 


I plan on keeping some of the stock and selling about $35,000 of it to pay for my wedding ( no date set ) and to live on it if I do not find a job.


 


What do you advise to pay the least taxes? what would you do? Is their a way to pay the t


 


thanks, XXXXX XXXXX all very confusing for me.


 


thanks,


 


Tara


 


 


 

Expert:  Lane replied 1 year ago.



First of all CONGRATULATIONS! Being one of those married people myself, I recommend it highly. It's the most rewarding job you'll ever have. :)



OK, lets take it one step at a time.

(Don't worry we'll get there. We may just have to go back and forth a bit, since we can't really talk).




First lets try to get on the same page about NUA.

NUA isn't a type of account or investment. It's the special tax treatment that you get when you have company stock inside your 401(k).

EVERYTHING ELSE in the 401(k) - mutual funds, money market funds, fixed accounts, stocks of other companies, etc. - is taxed just like it was salary in the year that it comes out of that 401(k).

PLUS if you're under age 59 and 1/2, there's an ADDITIONAL 10% penalty tax on those dollars as they come out of the 401(k), because that is supposed to be retirement money.

But that stock (IF IT's STOCK IN THE COMPANY YOU WORKED FOR) gets that special tax treatment because of something called NUA (Net Unrealized Appreciation).When that XYZ company stock is distributed (comes out) of the 401(k), you only have to pay tax on the COST of the stock as is was put into the plan.

So, in your case you'll only have to pay ordinary income tax on $4,855.01, when you distribute it. Then if you hold it a year, you only have to pay capital gains taxes (lower than ordinary income taxes) on what you sell.



Now, again, the tax happens when the money is distributed (when it comes out of the 401(k)). So if you distribute anything in 2013, you'd pay the taxes in April of 2014.

BUT, anything that you ROLL OVER to an IRA is not taxed (It stays inside the shell, so to speak). 401(k)s and IRAs are not taxed, so when you do a rollover, that's a way of not having to pay tax (OR PENALTIES) on that early retirement distribution.

That's why it makes sense to roll over everything BUT the company stock. You'll only have to pay taxes on the basis of the stock and everything else stays in the IRA and there's no tax.



So, now that I know we're talking about distributing something in January (the stock) I need to know how much money you think you'll make NEXT year. Because the rate you charged in taxes will be dependent on your 2013 tax bracket.

This may turn out to be a real blessing, because this year the 85000 or so would have put you in a relatively high tax bracket.

Let me know ...










Customer: replied 1 year ago.

Thanks Again Lane,


 


This seems a little clearer now. I am not sure how much I will make next year because, I am unemployed now. I am shooting for 100K plus or I may just freelance. Is this a salary range, I should stay in in order to benefit?


 


Cheers,,


 


Tara

Expert:  Lane replied 1 year ago.

Sounds like we're on the same page.

As we said, the esop stock basis is taxed at ordinary income when it comes out of the plan ...

... then the NUA (that net UNREALIZED appreciation... the difference between what you sell it for and the basis - that will have already been taxed when you take it out in January) is only taxed at capital gains rates.

Now we're back to the short term vs long term capital gains thing.

If you hold the stock for a year it is taxed at long-term capital gains rates. If you're watching the news what happens next year is being HOTLY contested. Right now, if current law were to remain, the long term capital gain tax rate would be 10% for taxpayers in the 15% tax bracket and below and it would rise to 20% for those in higher brackets.

HOWEVER if you sell some of the stock within the 1st year that would be a short term capital gain, which is taxed at ordinary income rates ... and once again that issue is up in the air right now.



So ... here are the income tax brackets for the three most likely scenarios:

What will happen if no compromise is reached, and the Bush Era cuts expire:

$0 to $35,500 15%
$35,500 to $86,000 28%
$86,000 to $179,400 31%
$179,400 to $390,050 36%
Amounts over$390,050 39.6%



What will happen under the current Obama budget proposal for 2013

$0 to $8,750 10%
$8,750 to $35,500 15%
$35,500 to $86,000 25%
$86,000 to $179,400 28%
$179,400 to $199,350 33%
$199,350 to $390,050 36%
Income over $390,050 39.6%


What will happen if the Bush Era cuts are extended as is.

$0 to $8,750 10%
$8,750 to $35,500 15%
$35,500 to $86,000 25%
$86,000 to $179,400 28%
$179,400 to $199,350 33%
$199,350 to $390,050 33%
Income over $390,050 35%


Again, the reason these are important is that if you sell the esop stock within the first year, which is what I think you're saying (to pay for the wedding) then you'll pay you're marginal rate (because that stock will be taxed on top of whatever income you have for the year).


So...

If you earn 85,000 again next year then the stock that you sell (if you sell it within one year) will be taxed at your ordinary income tax bracket which (if you'll look above)at either 28% or 25% depending on what happens.

So on $35,000 that would be $9,800 or $8,750 respectively.

And at 85,000, if you hold the stock for year (which would mean not selling until January 2014 if you cant pull it out of the plan until January) then you would be taxed at the lower long term capital gains rates of either 20% or 15% depending on what happens.

Which would be $7,000 and $5,250 respectively.



But as you can see from looking at the brackets and associated rates above, if all you were trying to do was lower the taxes paid on the sale of the stocks the less money you make the better.


Let me know if this makes sense

Lane


Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3739
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Thanks Lane,


 


Your response was wonderful and clear. I now understand it.

Expert:  Lane replied 1 year ago.

You are very welcome.

And thank you for the feedback and bonus.

Enjoy the fruits of your work.

You deserve it.





To ask for me again, just say “For NPVAdvisor” at the beginning of you question OR enter it here:

http://www.justanswer.com/finance/expert-npvadvisor/

…pleasure working with you!

Lane


Customer: replied 1 year ago.

Hi Lane,


 


Its a new year and I was wondering how the tax laws have changed for 2013 for NUA. I am currently collecting unemployment and am still unemployed. I was thinking of doing the following and want to know how things have changed.


 


First some facts:


my cost basis is 4,861.29


 


the amount of my stocks if I were to sell all of them would be : $128,840.00


 


my finance advisor is saying I could put a portion on my stock in a non-qualifying brokerage account but I would have to pay on my cost basis. is this true? how much would it be?


 


then- if I sell my stocks, I would get charged capital gains upon receiving the money- I don't plan on cashing out all of it only a portion of it. how have the laws changed and what do you recommend doing?


 


what are the new rates and charges , I should be aware of?


 


I am also willing to pay you again for this answer.


 


Thanks- Tara Bossert

Expert:  Lane replied 1 year ago.

Hi Lane,


Hi Tara, I'll answer in boldface, to try to keep it clear.


Its a new year and I was wondering how the tax laws have changed for 2013 for NUA. I am currently collecting unemployment and am still unemployed. I was thinking of doing the following and want to know how things have changed.


Actually the NUA rules haven't changed at all. There IS a higher capital gains tax in place for those making over $250,000, but if you're still unemployed that shouldn't apply here.


First some facts:


my cost basis is 4,861.29


 


the amount of my stocks if I were to sell all of them would be : $128,840.00


 


my finance advisor is saying I could put a portion on my stock in a non-qualifying brokerage account but I would have to pay on my cost basis. is this true? how much would it be?

 

OK. Normally, when you take money out of a 401(k) it is taxed as ordinary income and there's a penalty of an additional 10% (the 10% penalty doesn't apply if you've left the company, and left at age 55 or later).

 

So, for example, in that situation, if you had 10,000 of income from employment or any place else, and then you pulled 50,000 from your 401(k) that year, you would have 60,000 of regular taxable income ... and would be taxed ordinary income tax rates on it (AND there would be an extra 10% on the distribution amount if you weren't aged 55 by the time you left the company)


BUT THERES AN EXCEPTION TO THAT for COMPANY STOCK IN A 401(K).

For company stock pulled from a 401(k), you only pay regular income tax (plus any extra 10% penalty for distributing before separation from service after age 55) on the basis.

So, when you pull it from the 401(k) and move it to a NON-QUALIFIED brokerage account, you only have taxes on that $4,861.29.

 


then- if I sell my stocks, I would get charged capital gains upon receiving the money- I don't plan on cashing out all of it only a portion of it. how have the laws changed and what do you recommend doing?


Then, only once you sell that stock, do you pay taxes on the rest (and as you know, you only pay capital gains taxes on that).

 

And yes, I would DEFINITELY recommend doing that ... and ding that with ALL of the amount that is company stock.

 

If you roll the stock to a QUALIFIED brokerage account (which would be a brokerage IRA) like I think I remember that you WILL be doing with the mutual fund portion of your 401(k), ... then although you're not taxed at THAT time, you lose the opportunity for the special NUA treatment forever on that company stock.

 

If you roll it to an IRA, like you are with the rest of it, then it will ALL be taxed as ordinary income, as you DO pull it from the IRA.

 


what are the new rates and charges , I should be aware of?

 

Again, nothing has changed that will affect you here. The tax brackets I gave you above for well above what you'll be dealing with have not changed (as a product of the "fiscal cliff deal").


The special treatment of capital gains at those tax brackets for those under 250,000 of income have stayed the same as well.

 


I am also willing to pay you again for this answer.

 

 

The last piece of advice would be, again, ...

 

(1) to move ALL of the COMPANY STOCK to the non-qualified account (you'll only have to pay regular income tax plus 10% penalty if you left before age 55 on that small amount of 4,861.29). That locks-in the NUA treatment for when you actually sell those shares

 

BUT

 

(2) Don't sell all of the stock this year if you can help it. Now that you will have locked in the special NUA treatment on that gain, you'll only pay capital gains taxes on the stock gain AS you sell it.

 

 


Thanks- Tara Bossert

 

Hope this helps,

 

And thanks for coming back to me!

 

Lane

 

 

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3739
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Hi Tara

I hope all that was clear.


Just to recap:

(1) Nothing has changed, in terms of your situation. THe fiscal cliff deal ended up keeping things that would affect your decision the same.


(2) My advice WOULD BE to move ALL of the COMPANY STOCK to the non-qualified account (you'll only have to pay regular income tax plus 10% penalty if you left before age 55 on that small amount of 4,861.29). That locks-in the NUA treatment for when you actually sell those shares


(3) BUT don't sell all of the stock this year if you can help it. By moving it to the non-qualified account from the 401(k), you will have locked in the special NUA treatment on that gain, you'll only pay capital gains taxes on the stock gain AS you sell it, whenever you sell it.


Thanks again
Lane
Expert:  Lane replied 1 year ago.


Thanks Tara,

Let me know if you need anything else here.

and Good Luck!

Lane
Customer: replied 8 months ago.

Hi Lane,


 


I am back and finally got a job and am ready to sell those stocks and need your advice on how much I will get taxed and owe before selling , so I can hold it back and also how much I can sell without being screwed.


 


When 2013 is done , I will have made $57,000 gross. Should I sell they stocks before the end of 2013 because I will be making more in 2014. I wanted to sell around 60-70k work of my NUA stocks, but am wondering about the tax rates in not waiting for 2014 for long term tax as mentioned above. How much do you recommend selling for 2013? In order to pay less taxes as possible.



For 2014 my salary is $90,000 or 120K gross ( i am not sure about my bonus).



This will be my last question on this subject, promise!



Thanks so much Lane



Tara

Expert:  Lane replied 8 months ago.

Hi Tara!

It's really close, but it looks like for both this year AND next your you'll be in the 15% capital gains bracket (given the numbers you just gave me)

Capital gains rates are based on your tax bracket (which is based on taxable income income).

Here are the rates:


For a single filer

Tax rate

C.Gain rate

taxable income from $0 to $8,925,

10%

0%

taxable income over $8,925 to $36,250

15%

0%

taxable income over $36,250 to $87,850

25%

15%

on taxable income over $87,850 to $183,250

28%

15%

on taxable income over $183,250 to $398,350

33%

15%

 

on taxable income over $398,350 to $400,000

35%

15%

 

on taxable income over $400,000

39.6%

20%

 


And note that this is TAXABLE income, so if your standard (or itemized deductions, whichever is higher) plus exemptions plus other deductions like contributions TO a 401(k), etc ... take your TAXAble income below 36, 250 your ccapital gains rate is actually ZERO ... BUT you have add the amount of the capital gain to that, almost certainly taking you back into the taxable income bracket of 25%

And at taxable income BETWEEN 36,250 and 87850 (which puts you in that 25% ORDINARY income bracket), the capital gains rate will be 15%).

The if you'll look back at the table, ... taxable income between 36,250 and 400,000 (encompassing the 25%, 28% and 35% bracket ALL tax capital gains at 15%.

So the only strategy for keeping some of the capital gain a zero rate (no capital gains) would be to look hard at your TAXABLE income for this year and see if you can get ANY of that capital gain taxed stock sale added and still keep your TAXABLE income under $36250.



So MOST LIKELY, depending what this year ends up looking like, whether you sell the stock this year OR next year, it will be taxed at a 15% capital gain rate.

Now. the decision just becomes when do I want to sell it and put back that 15% ... this year or next (again, qualified with the possibility that you can get the TOTAL taxable income below 36,25, INCLUDING the amount of stock sold)


Make sense?

Lane

Customer: replied 8 months ago.

So it does not matter if I hold it for a year because of the NUA?

Expert:  Lane replied 8 months ago.

 

That's right, because the time that you're assumed to have held the NUA stock is since the plan bought them, not since you pulled from the plan.

 

 

See this: At the time of sale, the NUA is taxed at the long-term capital gains rate even if the stock is held for one year or less after the time of distribution.

 

For appreciated stock, the cost basis of the securities distributed to you could be quite low, leaving you with a significant gain that is taxed at the long-term capital gains rate instead of the ordinary income rate.

 

Now, the share price change between the time you take the distribution and when you sell it ... THAT part may be short term gain (or loss). ... but the difference between basis and the value when you distributed from the plan is ALWAYS LONG TERM gain.

 

 

 

Lane

Expert:  Lane replied 8 months ago.


Just to make sure I'm being clear.... here's an example.

Your company tells you that your basis in the stock is $5,000.

You distribute $100,000 from the plan on June 30th 2011.



You'll pay ordinary income tax on $5,000, and if you sell the stock the that same day, the 95,000 will be taxed as long term capital gain (assuming no change in the stock's price)

IF, however, you did the same thing and waited a month before you sold and there was a $1000 increase in the value of the stock, then you'd still have the $5,000 ordinary income tax, 95,000 of long term capital gain but there WOULD be a short-term gain on the $1000 of appreciation between when you distributed and when you sold.

So, yes, the only way to absolutely guarantee LONG TERM GAIN treatment on the whole sale would be to wait a year after distributing ... but the difference between basis, and the value on the day you distribute it to the regular taxable account, is locked in as long term gain, even if you do it in less than a year.


Lane



Positive feedback is appreciated. It's the only way we get credit for the work. But, again, if you have more questions on this, come back here so you won't be charged for another question.


Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3739
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 8 months ago.


Thanks so much Tara!

Let me know if I can help further...

Lane

On any NEW questions, you can always go here: Lane and enter your questions in the box.

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.