Sale of NUA Stock
Would appreciate help in confirming number of shares that must be sold to eliminate total NUA of $206,851, if current market price is $79.83/share and cost basis is $8.535/share. Specifically, is correct formula as follows:
Total Sales Revenue: (2,901.34 shares x $79.83) = $231,614
Less: Total Cost Basis: (2,901.34 shares x $8.535) = (24,763)
Equals: Total NUA (taxed at LTCG rate) = $206,851
This final query arises because an advisor–in response to our question– had simply divided the total NUA by the market price per share to calculate that 2,591.14 shares should be sold [which, after deduction of basis, would not generate the full NUA]. On the other hand, maybe he’s right, and no basis deduction is required (it would be nice to avoid selling some 310 shares!)? Thanks in advance for any comments.
Permalink Submitted by Alan Spross on Fri, 2009-01-02 00:45
It sounds like your formula is correct, and the advisor is wrong because each share retains a cost basis component.
However, I want to be sure I have this in the right context. Have these NUA shares already been transferred to a taxable account? Does 206,851 represent a target of some sort, since this number apparently is only part of the total NUA available?
Permalink Submitted by BARTON MASSEY on Fri, 2009-01-02 16:56
Alan: In response to your queries:
1. Yes. In LSD taken in March 2000, all shares were transferred by my former employer (I had retired in 1990) directly to a new taxable JTWROS brokerage account at Fidelity. All dividends received since LSD have been taxable and fully reinvested in the stock, and there have been no sales. The only change since LSD was in March 2006, when all shares were retitled in my wife’s name alone and transferred to a new taxable a/c in her sole name at Fidelity, where they are today.
2. The 206,851 is the total original NUA taken at LSD, as confirmed to me in the 1099-R (Box 6) issued for year 2000. At LSD, per-share numbers were FMV 76.02, cost basis 17.07 and NUA 58.95 on 3,509 shares. In 2001, a 2:1 stock split halved the per-share numbers (to FMV 38.01, basis 8.535, NUA 29.475), but I assumed the total NUA amount remained unchanged at 206,851. So, using the CURRENT market value per share (79.83) and the split-adjusted basis (8.535), I back-calculated the number of shares (2,901.34) needed to generate the original total NUA.
An “advisor” friend (who probably is not very familiar with NUA) suggested just using the number of shares (2,591.14 at current mkt.) needed to reach the full NUA amount (thereby treating the basis as zero). And comparing the number of shares that have to be sold in the 2 cases (w and w/o basis), I had some small hope that he may be right. The anomoly seems to be “the lower the basis, the fewer the number of shares that must be sold.”
Thanks very much again for your thoughtfulness in spending time on a matter that perhaps has already been fully treated in past forum messages (although I was not able to find a match in my research). Sincerely, Bart
Permalink Submitted by charles lore on Fri, 2009-01-02 19:05
At a current price of 79.83 the per share breakdown is :
original basis 8.535
nua 29.475
subsequent apprec. 41.82
For each share you sell you reallize 29.475 nua at 15% LT Gain and if 1 yr + 1 day from subsequent purchase then ltg on this as well. THus if you want to realize all the nua you must sell all the shares.
If your wife were to die she would get a step up to 50.355 ( fmv less nua)
or 79.83 – 29.475.. The nua would be IRD
Alan does thiis look correct to you?
Permalink Submitted by Alan Spross on Fri, 2009-01-02 19:54
Yes.
Chuck is correct. 7,018 shares will have to be sold to wipe out the NUA. Each of those shares has a cost basis, NUA component and LTCG component broken down as Chuck stated. While the NUA and the LTGC are taxed at the same rate, you need to continue to track the breakdown because the NUA is IRD as does not get a step up upon death.
There are also many shares purchased by dividend reinvestment that have a cost basis based on the reinvestment date, no NUA, and a LT gain for most of the early purchases. Those reinvested in the past year are short term, probably a ST loss. These shares were all purchased after the LSD and under FIFO, the NUA shares would be deemed the first to be sold………except that entails selling 7,018 to fully eliminate any NUA considerations.
Permalink Submitted by BARTON MASSEY on Sun, 2009-01-04 18:52
Alan and Chuck:
Thanks very much to both of you for your generous and expert responses, and — importantly — for the clear explanations that accompanied your discussions! Right from the beginning in year 2000, when I took my LSD and elected the NUA route, I had thought that the NUA amount itself was the target on which to pay the LTCG tax: ergo, the higher the stock price went, the fewer the number of shares that needed to be sold to eliminate the whole NUA deal. Now, because Alan is absolutely correct in his final email paragraph, I’ll have to check on whether I can sell post-LSD shares on a LIFO basis. Again, I’m most grateful for your assistance. Best Wishes, Bart
Permalink Submitted by Alan Spross on Mon, 2009-01-05 00:22
Bart,
You can sell the post LSD shares first securing the documentation the IRS requires you to get from the broker indicating that you requested certain or all of those shares to be sold. You need to get the broker’s acknowledgement in writing that this is what you requested. The latest few shares may well provide you with a cap loss, but of course will not reduce your NUA in the pre LSD split adjusted shares.
Of course, diversification is more important than tax benefits in these situations, but selling the newer shares will help with diversification AND generate lower cap gain taxes.