Is it a wise decision to sell my ESPP stock based on this situation?

Question

My wife lost her job in the middle of 2013 and has been unemployed since then. I have about $7000 of company stock. I am planning to pay my car off using that money but I am not sure if this is the right situation to sell.

I am thinking that if I sell the stock before December 2013, I may pay less tax as my wife's income from past 6 months is zero and I can save some money in the tax.

I am not sure if the tax on the profit made by the stock sale is going to be a flat 35%, or will it be considered as my income and tax will be calculated based on which tax bracket I fall in?

Any help will be highly appreciated.

Answer 1

ESPP tax treatment is complicated.

If you received a discount on the purchase of your stock, that discount is taxable as ordinary income when you sell the stock.

Any profit about the market value when the stock was purchased is taxed based upon the holding period of the stock. If you have held the stock less than a year, the profit is taxed at your marginal tax rate (ie taxed as ordinary income). If the stock is held for more than a year, it is taxed at a special capital gains tax rate, which ranges from 0-20% depending on your marginal tax rate (most people pay 15%).

Answer 2

Eric is right regarding the tax, i.e. ordinary income on discount, cap gain treatment on profit whether long term or short.

I would not let the tax tail wag the investing dog. If you would be a holder of the stock, hold on, if not, sell. You are considering a 10-15% delta on the profit to make the decision.

Now. I hear you say your wife hasn't worked which potentially puts you in a lower bracket this year. I wrote Topping off your bracket with a Roth Conversion which would help your tax situation long term. Simply put, you convert enough Traditional IRA (or 401(k) money) to use up some of the current bracket you are in, but not hit the next. This may not apply to you, depending on whether you have retirement funds to do this. Note - The cited article offers numbers for a single person, but illustrates the concept. See the tax table for the marginal rates that would apply to you.