Tax questions, implications and strategies

[MikeC]

Here's the situation I find myself in: I maxed out my contributions to my SEP-IRA last year, but recently realized I wasn't actually eligible to contribute anything at all last year because I was no longer self-employed. So I thought I would just pull out my excess contribution and that would be that - but I was informed that I also have to pull out any earnings that I made on the erroneous deposits. Since I pretty much put it all into TSLA, I am worried that I will have to take out, in addition to my erroneous deposit, another 100-200% (or more?) of that money in earnings and I will be paying crazy short-term capital gains tax now. I am not sure how they will calculate the earnings, though.

Does anyone have suggestions to minimize the tax burden? I am buying a house so in a way it's good to have cash, but I hate to be paying 33% on such a large sum of money.

Update:

Actually, it looks like I can just transfer shares over to meet the requirement. I am thinking I can just hold on to the shares until they are a year old, then I can sell them at long-term gain tax rates.

 

[Auzie]

Here's the situation I find myself in: I maxed out my contributions to my SEP-IRA last year, but recently realized I wasn't actually eligible to contribute anything at all last year because I was no longer self-employed. So I thought I would just pull out my excess contribution and that would be that - but I was informed that I also have to pull out any earnings that I made on the erroneous deposits. Since I pretty much put it all into TSLA, I am worried that I will have to take out, in addition to my erroneous deposit, another 100-200% (or more?) of that money in earnings and I will be paying crazy short-term capital gains tax now. I am not sure how they will calculate the earnings, though.

Does anyone have suggestions to minimize the tax burden? I am buying a house so in a way it's good to have cash, but I hate to be paying 33% on such a large sum of money.

Update:

Actually, it looks like I can just transfer shares over to meet the requirement. I am thinking I can just hold on to the shares until they are a year old, then I can sell them at long-term gain tax rates.

A great problem to have, glad to have it too. :biggrin:My head is spinning with all these winnings

Tax liability is relevant consideration and I have to keep calculating how much cap.gains tax my potential sale might attract, vs keeping the shares even if I expect a drop in price. Few times tax considerations stopped me from any sale.

It helps to spread the sale over number of financial years, to minimize tax. So it might be wise to take some profits every year. There is a risk in not taking profits, so many times I failed to sell at the peak and over held the shares. I just think that this one is not at its peak yet.

 

[hcsharp]

Here's the situation I find myself in: I maxed out my contributions to my SEP-IRA last year, but recently realized I wasn't actually eligible to contribute anything at all last year because I was no longer self-employed. So I thought I would just pull out my excess contribution and that would be that - but I was informed that I also have to pull out any earnings that I made on the erroneous deposits. Since I pretty much put it all into TSLA, I am worried that I will have to take out, in addition to my erroneous deposit, another 100-200% (or more?) of that money in earnings and I will be paying crazy short-term capital gains tax now. I am not sure how they will calculate the earnings, though.

Does anyone have suggestions to minimize the tax burden? I am buying a house so in a way it's good to have cash, but I hate to be paying 33% on such a large sum of money.

Update:

Actually, it looks like I can just transfer shares over to meet the requirement. I am thinking I can just hold on to the shares until they are a year old, then I can sell them at long-term gain tax rates.

Don't forget that you can extend your return until Oct 15 which gives you until then to remove the excess contribution + earnings (that's only true of an SEP, not a traditional or Roth IRA). It may be long term by then but sadly I don't think it matters. I'm pretty sure it's still taxed as ordinary income.

I believe it's ordinary income whether they transfer the shares or sell them to return the excess contribution. It will help that the earnings are calculated as a percent of the entire SEP account. For example if your SEP was worth $200,000 before you contributed the TSLA excess-contribution of 20,000, then the 20k TSLA went up to 50k so the whole account is now worth 250k, you only have to pull out the original 20k plus 5k of the earnings in this example. Only the earnings will be taxable, but it is ordinary income regardless of whether you kept the stock long-term or not. In addition to ordinary income tax, you will also have to pay a 10% penalty on the earnings if you were not 59 1/2 by the end of 2013.

Another option is to leave it in there and pay the 6% excess contrib penalty per year. You can then generate some self employment income this year and future years to mop up the excess that is carried forward each year until it's gone. That will be a lot less tax than ordinary income plus 10% penalty. Hope this helps.

 

[AudubonB]

I think this should cause some to scratch their heads - we'll see:

Proposition: IF a Model S original owner DID NOT take either the $7,500 rebate or any fraction thereof....

does that mean that a purchaser of the vehicle in the second-hand market might be able to do so? And if that's the case, what sort of paper trace must be followed in order to do so?


This is not an hypothetical question. For some very valid reasons, I did not take the rebate. Although I am not looking to sell, it would be extremely useful to know the answer.

 

[Beavis]

I think this should cause some to scratch their heads - we'll see:

Proposition: IF a Model S original owner DID NOT take either the $7,500 rebate or any fraction thereof....

does that mean that a purchaser of the vehicle in the second-hand market might be able to do so? And if that's the case, what sort of paper trace must be followed in order to do so?


This is not an hypothetical question. For some very valid reasons, I did not take the rebate. Although I am not looking to sell, it would be extremely useful to know the answer.

The answer is not a head scratcher. The credit is only available to the buyer of a new car.

 

[MikeC]

Don't forget that you can extend your return until Oct 15 which gives you until then to remove the excess contribution + earnings (that's only true of an SEP, not a traditional or Roth IRA). It may be long term by then but sadly I don't think it matters. I'm pretty sure it's still taxed as ordinary income.

I believe it's ordinary income whether they transfer the shares or sell them to return the excess contribution. It will help that the earnings are calculated as a percent of the entire SEP account. For example if your SEP was worth $200,000 before you contributed the TSLA excess-contribution of 20,000, then the 20k TSLA went up to 50k so the whole account is now worth 250k, you only have to pull out the original 20k plus 5k of the earnings in this example. Only the earnings will be taxable, but it is ordinary income regardless of whether you kept the stock long-term or not. In addition to ordinary income tax, you will also have to pay a 10% penalty on the earnings if you were not 59 1/2 by the end of 2013.

Another option is to leave it in there and pay the 6% excess contrib penalty per year. You can then generate some self employment income this year and future years to mop up the excess that is carried forward each year until it's gone. That will be a lot less tax than ordinary income plus 10% penalty. Hope this helps.

Thanks, I was hoping you might respond. I am confused why I would be taxed 10% as this is not a disbursement but a correction to an inappropriate deposit. It seems like as long as I withdraw the amount plus earnings before April 15, I shouldn't be penalized. I think it should be treated as if the initial deposit (and subsequent earnings) have been in my regular investment acct the whole time, but I'm not sure.

 

[hcsharp]

Thanks, I was hoping you might respond. I am confused why I would be taxed 10% as this is not a disbursement but a correction to an inappropriate deposit. It seems like as long as I withdraw the amount plus earnings before April 15, I shouldn't be penalized. I think it should be treated as if the initial deposit (and subsequent earnings) have been in my regular investment acct the whole time, but I'm not sure.

Only the earnings are subject to the 10% additional tax. And only if you were not yet 59.5 years old in 2013. I don't know why they made it that way. Don't try to make sense of tax law. You'll just go crazy.

 

[MikeC]

Only the earnings are subject to the 10% additional tax. And only if you were not yet 59.5 years old in 2013. I don't know why they made it that way. Don't try to make sense of tax law. You'll just go crazy.

So I'm going to be taxed 43%!? (33% bracket + 10%)

 

[Auzie]

So I'm going to be taxed 43%!? (33% bracket + 10%)

Ouch ouch ouch. I feel you pain. But look at the bright side, you have a vin number.:biggrin:

 

[hcsharp]

So I'm going to be taxed 43%!? (33% bracket + 10%)

It's worse than that. You live in California! :tongue:

 

[justdoit]

Don't know if this has been discussed before, but I'm trying to figure out if taxes for creating a spread are different. For example, if I have a Jan 16 LEAP call $200 strike and I don't want to sell it b/c I'll have to pay short term taxes. Then if I sell a Jan 16 $250 call as protection and close that out when I think things have settled down, I should only be taxed for any profits in this trade correct? This shouldn't affect my $200 call.

I feel like I've seen somewhere that if you create a spread on a call then the 1 yr clock for long term capital gains resets.

 

[anon]

I feel like I've seen somewhere that if you create a spread on a call then the 1 yr clock for long term capital gains resets.

That is correct - the capital gain resets if the existing position is not already long term. One way around this is if you own sufficient stock, then selling qualified covered calls (expiring at least 30 days in the future, but no more than 1 year) against it is ok.

 

[InTheShadows]

How would the taxes be for taking early withdrawal from an ira? Would it always be considered short term or could it be considered long term? The reason I am asking is if it's always long term then the 10% tax penalty for early withdrawal could be better than paying short term gains depending on your tax bracket right?

For example, if you make 398k filing jointly your tax rate would be 33%. If you held your stocks in an ira and they are taxed at the long term rate you would have to pay 15%+10% tax penalty. Thus coming out ahead. Is this right?

 

[Auzie]

How would the taxes be for taking early withdrawal from an ira? Would it always be considered short term or could it be considered long term? The reason I am asking is if it's always long term then the 10% tax penalty for early withdrawal could be better than paying short term gains depending on your tax bracket right?

For example, if you make 398k filing jointly your tax rate would be 33%. If you held your stocks in an ira and they are taxed at the long term rate you would have to pay 15%+10% tax penalty. Thus coming out ahead. Is this right?

Not sure that I understand your question, but I will give it a go as there seem to be no others interested in this relevant topic.

US regulations for IRA accounts are different from Australian regulations but I assume that the underlying guiding principles would be the same. The differences would be in details, like the level of tax rates for particular events.

In your statement 'if you make 398k filing jointly your tax rate would be 33%' I assume you mean that you hold the shares in a private account, jointly with your spouse. If that is correct, then the transfer of your shares from private to ira account would be considered contribution. Contributions are regulated by IRA. The cap in US seems to be very low,

• $5,500 if you are age 49 or younger,
• $6,500 if you are age 50 or older

In Australia, contribution cap is $25k/year for under 60yo. Any excess contributions to retirement account that exceeds $25k/y are taxed at the highest tax rate, approx. 45%, so it really makes little or no sense to make excess contributions.

If your shares are held in IRA account, it seems that you can defer paying tax. That is some advantage.

My main point is that it may be impossible or not cost effective to transfer shares from private to ira acount. You may be stuck with your gains. :smile:

 

[MikeC]

I think your traditional IRA will always be taxed as earnings (in this case 33%). Early withdrawal would be another 10%. Roth IRA earnings would be untaxed.