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Hypothetically, if I were about to cash out 1 million from the long-term stock investment (holding for at least 5 years), what is the best way to pay less tax?

Let's say if I quit my job, will that help? Since I will not get any W2 or get very small amount of income like 20K, and my ordinary tax rate less than 15 percent so that I will pay 0 tax on long-term investment capital gain.

Does that make sense or I am totally wrong? Many thanks!

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    The best way is to not cash it out all at once. Why are you planning to do that? – BrenBarn Feb 10 '15 at 3:53
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    You are totally wrong, why would you think you pay zero tax on a $1 mil capital gain just because you have no W2 income? – EkoostikMartin Feb 10 '15 at 16:35
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    I think he is hoping to move to a lower tax bracket, but with $1M in income, that strategy would be pointless. (Correction: The GAIN wouldn't be $1M, but probably enough to still make it pointless) – JohnFx Feb 10 '15 at 21:06
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The capital gain is counted as part of your income. So with a million capital gain you will be in a high tax bracket, and have to pay the corresponding capital gains tax rate on the million.

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    You will also forego the income you would have made from working, which is virtually certain to be considerably more than you'd save on taxes. So unless you actually WANT not to work (that is, early retirement or extended vacation), don't quit. – jamesqf Feb 10 '15 at 5:19
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Reducing your income by 20k is guaranteed to lower your tax bill by less than 20k (because there are no tax rates greater than 100%). Your goal shouldn't be to minimize taxes but to maximize total net income.

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The capital gains is counted towards your income. If you cash out 1 Million dollars, you have a 1 Million dollar income for that year, which puts you at the 39.6% tax bracket. However, because that 1 Million dollars is all long term capital gains, you will only have to pay 20% of it in long term capital gains taxes.

The best you can do is to cash the 1 Million dollars through several years instead of just all at once. This will put in a lower tax bracket and thus will pay lower capital gains tax.

  • Slight quibble. If cashes out $1M in investments, almost certainly not all of that is capital gains.Not that it likely makes a difference. – JohnFx Feb 10 '15 at 21:10
  • @JohnFx You are right, I just chose to leave that out for simplicity. – AxiomaticNexus Feb 10 '15 at 23:10

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