Capital Gains Tax

[Immi]

I have self-prepared my taxes for 25 years with TurboTax; but this year we’ve been presented with a (good) situation that I need help with: Years ago, my wife was given a 1% share of stock in her company as it was growing. When it sold in 2015, she was paid out $642,000 as her share. The income from our two W2s is $205,000, with a tax liability (MFJ) of $39,000. When I add this 642K amount as a long term capital gain, the total tax liability jumps to $191,000. In other words, capital gains tax on the $642K is $152K! I was shocked, because I thought capital gains tax was 15%, or $96,000! Upon careful investigation and research I discovered that we went into a higher tax bracket for the capital gains, as well as attracting the 3.8% Medicare surtax, and also Alternative Minimum Tax. Is this correct, and is there any way to lower this tax burden?

 

[LdiJ]

I have self-prepared my taxes for 25 years with TurboTax; but this year we’ve been presented with a (good) situation that I need help with: Years ago, my wife was given a 1% share of stock in her company as it was growing. When it sold in 2015, she was paid out $642,000 as her share. The income from our two W2s is $205,000, with a tax liability (MFJ) of $39,000. When I add this 642K amount as a long term capital gain, the total tax liability jumps to $191,000. In other words, capital gains tax on the $642K is $152K! I was shocked, because I thought capital gains tax was 15%, or $96,000! Upon careful investigation and research I discovered that we went into a higher tax bracket for the capital gains, as well as attracting the 3.8% Medicare surtax, and also Alternative Minimum Tax. Is this correct, and is there any way to lower this tax burden?

Yes, its correct, and no there is no way to lower it now. If you had used this opportunity to sell off underperforming investments that you might have had to help offset the capital gain that would have been helpful, but its too late now.

It would not hurt however, to have your return reviewed by a professional this year. On its face everything seems correct but there may be something there that we cannot see because we cannot see your return.

This honestly however is something that you should have asked for professional advice about BEFORE your wife ever received the money.

 

[tranquility]

my wife was given a 1% share of stock in her company as it was growing

What does this mean? Did you pay any taxes on this "gift" to an employee? It should have been taxed when received and you should have some basis on it. (Unless, as I suspect it was, an option. Then we can get into a couple of more questions.) It won't really change the real problem, but it is better than a poke in the eye with a sharp stick.

 

[LdiJ]

What does this mean? Did you pay any taxes on this "gift" to an employee? It should have been taxed when received and you should have some basis on it. (Unless, as I suspect it was, an option. Then we can get into a couple of more questions.) It won't really change the real problem, but it is better than a poke in the eye with a sharp stick.

I suspect it wasn't worth much when she was given it. It likely would have been included in her W2 and gone relatively unnoticed.

 

[OHRoadwarrior]

You could always try to figure taxes based on married filing separately to see if that helps.

 

[LdiJ]

You could always try to figure taxes based on married filing separately to see if that helps.

That is highly unlikely to help. The tax brackets are much narrower.