NUA and 0% long term capital gains rate
Tax Question re NUA in employer stock.
My question is specific to the expiring 0% long term capital gains rate for 2011 and 2012 for those in the 15% marginal income tax braket. Assume someone is married filing jointly, and will have taxable income of $40,000 in calendar year 2011 and 2012.
They have $400,000 of employer stock in their 401k with a basis of $40,000. They are 62 years old. They transfer all of the employer stock into a non-qualified brokerage account in 2011, and then wait until 2012 to sell the stock to take advantage of the net unrealized appreciation of the company stock.
My assumption is that $40,000 will be added to their income for 2011, leaving them with approximately $80,000 in taxable income and a marginal rate of 25%.
For 2012, will all of the gains be taxed at 0% as they are in the 15% Marginal bracket, and thus a 0% LTCG bracket, or will only $19,000 be at the 0% rate and the remaining $341,000 will be at the 15% marginal tax rate? I need a citation from the IRS or a private letter ruling to confirm this if possible.
What would be perfect is if the entire amount of the gain stayed at the 0% rate due to the 15% marginal bracket, but I cannot confirm that anywhere yet. I appreciate any help you might be able to offer.
Permalink Submitted by Alan Spross on Tue, 2011-11-08 19:05
Only the part of the LT gain up to the top of the 15% bracket will carry the -0- rate (19k in your example). The rate for the additional gains will be 15% federal. You could confirm this simply by running the example through the Sch D tax worksheet found on page D-10 of the 2010 1040 Inst booklet. Any state income taxes would be in addition.
You are correct that in the year of the lump sum distribution, the 40,000 cost basis will add to their taxable income with the result being that a portion will be exposed to the 25% bracket.
Also, note that any SS benefits received in years when the NUA stock is sold can be made taxable by cap gain income, even if part of that income is taxed at -0-. A large gain will result in 85% of SS income received being included in their AGI and taxable income. This is also true of the taxable cost basis income this year if they collect any SS this year.