Family Update
My daughter, Senay, is back from the University of Florida for the summer, and the whole house feels it. The brothers are thrilled to have her home. The past week has looked something like this: ping pong tournaments in the basement, workouts, afternoons sunbathing, sports on TV, and enough Publix runs to keep the snack situation well under control. It is exactly the kind of summer a family is supposed to have.
We also have Hemingway, our ragdoll cat, who has strong opinions about personal space, mainly that it should not exist. The moment Dalanee sits down, he materializes, poofy and shedding and completely unbothered by the concept of boundaries. My wife calls him an aggressive cuddler, which is accurate. He is basically a walking allergy attack wrapped in fur. But his stubborn, relentless affection has a way of showing up exactly when she needs it most, and for that we are grateful for him.
Joe called me in March.
He had just finished his taxes, and there was a $3,000 bill he couldn't explain. He couldn't remember taking a big withdrawal. He hadn't done anything unusual. He just... owed $3,000, and nobody had warned him.
I told him the truth: "Joe, you've made a lot of money in this account, and you sold some positions to get some cash. I'm sorry. There's nothing I can do about it."
He was quiet for a second. Then he asked me to explain.
Joe has a non-qualified investment account, which is just a regular brokerage account outside of an IRA or 401(k). When we sell a position that has grown, it triggers capital gains taxes. And because the stock market has had a remarkable run over the past decade, almost everything in that account has appreciated significantly. Selling anything means reporting a gain, and reporting a gain means a potential tax bill.
Here's the part that catches people off guard: unlike a retirement account, there is no mechanism to withhold taxes from a non-qualified account. With an IRA withdrawal, we can set aside a percentage right at the source. With a non-qualified account, that option doesn't exist. The money lands in your account untouched, and the tax bill shows up months later when you file. That gap between the transaction and the bill is where the confusion starts.
How much you owe depends on where your income lands.
If you and your spouse have a combined taxable income under roughly $96,000, your long-term capital gains rate is zero. Some of my clients are in this bracket and don't realize it, which means they've been worrying about a bill that was never coming.
Above that threshold, the rate moves to 15% for most people. If your income exceeds roughly $533,000, it climbs to around 23.8% when you include the net investment income tax. And these are hard cutoffs, not gradual slopes. One dollar over the line and the higher rate applies.
Once I walked Joe through all of this, his frustration shifted. The $3,000 wasn't a mistake or a penalty. It was the natural consequence of his account performing well for a long time.
"So the better my account does," he said, "the more I might owe?"
"That's exactly right," I told him.
He thought about that for a moment.
"Okay," he said. "I can live with that."
Be Blessed,
Dave