Broker Check

Apple Stock is Low-Hanging Fruit for College Costs

by Howard Hook, CFP®, CPA

As published in The Times of Trenton's business column, Biz Brain, March 4, 2012

Q. Many years ago I purchased Apple stock that's now worth $90,000. Within a year or two, I would like to sell shares to help pay for college for my children. The oldest will start college in September 2013. The shares are in a brokerage account so I'm concerned about taxes when I sell. What is the best way to minimize taxes? My plan is to sell only as needed with all gains going directly towards college. I want to proceed so my kids get the most money possible.

A. Don't let taxes run your life. Your goal for this money – to pay college bills – is more important. But first, the tax consequences. Your stock, when you sell, is subject to capital gains tax rates.

“If you sold a capital asset that you have held for more than one year, the federal tax is either zero or 15 percent,” said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown. “Which tax rate you pay depends on what your marginal tax rate is without the long term capital gain included. For a married couple with $70,700 in taxable income, the capital gains rate is zero. Same goes for singles with taxable income of $35,350,” Kiely said. “Life doesn't get better than a tax rate of zero. If your taxable income is higher than those amounts, the capital gains tax is 15 percent. If you add that to the 5 percent New Jersey tax, you'd pay 20 percent in total taxes on any gains. I look at this as the government lets you keep 80 percent of your gain. There is a very real chance that the Bush tax cuts will expire at the end of 2012, noting that if Congress does nothing, the cuts will expire automatically. If that happens, couples with less than $60,700 in taxable income will have a federal capital gains rate of 15 percent, and couples with more income will have a 20 percent capital gains tax,” Kiely said.

“Couples with less than $70,700 in taxable income will see their capital gains tax go from zero to 15 percent,” he said. “That's a serious increase. While you said you planned to sell only as needed, you might want to consider selling all you will need now to lock Apple's high stock price and face lower capital gains taxes,” Kiely said.

“One strategy to minimize taxes would be to sell any losing stocks you have so you can offset gains, in effect reducing the taxes owed,” said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

Hook said it would be wise to worry less about taxes and more about preserving the money you've accumulated for this nearterm goal. “Unfortunately, the only answer is to sell the stock now and don't worry about any future appreciation you may have given up prior to needing to spend the money,” he said. “Financial goals with time frames of 5 to 7 years or less, let alone next September in your case, are best met with funds from a money market.” Hook said the stock market is too volatile to risk those earmarked funds.

“Reluctance to sell an investment is one of the biggest mistakes investors make,” he said.