NUA and long term capital gains recognition

Submitted by Michael Neuenschwander on Mon, 2018-08-27 21:57

Client (Married filing joint) plans on doing a NUA transaction this year (2018) and holding the stock until at least next year. He will recognize ~ $200,000 of income in doing the NUA, but in the next couple of years, he can hold his taxable income down by living off of after-tax funds (bank, non ira accounts, etc.). How much capital gain can he recognize and still take advantage of the 0% capital gains rate?

I know the long term capital gains rate is 0% if your taxable income remains in the 12% tax bracket (up to $77,400 in 2018). Can the capital gain itself (assuming they have nil other income) put them out of the 12% tax bracket? (ie. they could recognize up to a $77,000 capital gain (plus the standard deduction?) and it would all be tax free? But if they recognized a $200,000 capital gain (assuming no other income), the capital gain would be enough to cause them to move out of the 12% tax bracket and thus cause 15% tax on the whole capital gain?

Put another way is your taxable income for calculating whether you pay tax on capital gains inclusive or exclusive of the gain itself?



Submitted by Alan - IRA critic on Tue, 2018-08-28 00:08

  • The cap gain rate thresholds no longer coincide with the ordinary income bracket thresholds (unless Congress makes a technical correction). Therefore, the 15% LT cap gain rate starts at 77,201, not 77,401. In your example, the first 24,000 of income is offset by the new standard deduction,  and if there is no other income than LT CGs and qualified dividends, the first 77,200 of income above the std deduction will be non taxable, and then the rate will be 15% up to 479,001. Amounts that become taxable do not result in gains otherwise taxed at 0 becoming taxable. 
  • Note that if any NUA shares are sold in the first year after distribution, any additional gains are taxed at the ordinary income (ST gain) rate.  Any loss just reduces the amount of NUA and LT gain. 
  • Generally speaking, NUA is usually not an advantage if the cost basis is more than 25% of FMV unless client needs to sell shares for near term living costs.  The other challenge is that diversification needs should trump tax benefits, and that might create a need to sell shares sooner rather than later.
  • NUA can be used on only some of the shares, with the rest rolled over to an IRA and sold. Shares rolled over will eliminate the ordinary income on the cost basis of those shares.
  • If client happens to have made after tax contributions to the plan, depending on plan accounting that after tax amount could either be rolled to a Roth IRA tax free in a split rollover, or used to reduce the taxable cost basis of the NUA shares.  

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