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 Post subject: Tax implications for selling off bonds
PostPosted: Tue Nov 27, 2012 12:58 pm 

Joined: Tue Jun 12, 2012 4:34 pm
Posts: 474
About 18 months or so ago, the hubby and I opened up an intermediate-term bond fund with our bank (USAA). We don't put much into the fund (about $100/mo) and the money has no specific purpose other than to introduce us both to non-retirement investing in a way that takes into account the hubby's extreme risk aversion and my desire to extend our learning about investing through practice.

We've encountered a situation with the hubby's schooling that may require us to purchase a second motorized means of transportation. (Hubby's getting into his major-specific classes next term, all of which are hosted at the campus downtown rather than the campus a few miles from our house.) We're considering the option of using the funds we have in the intermediate-term bonds for this expense, but am not sure of the tax implications if we liquidate a portion of that account. The amount of money we're talking about liquidating is ~$1.5k. Any ideas what we can expect with respect to taxes if we take this route?


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 Post subject: Re: Tax implications for selling off bonds
PostPosted: Tue Nov 27, 2012 8:27 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1131
Location: Illinois
If you liquidate $1,500 it would be:

1,500 - your basis (whatever the shares cost when you bought them) = your gain (or loss)

your gain * tax rate (likely 15% for those shares of the fund held more than 1 year, and your regular tax rate for those held less) = tax


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 Post subject: Re: Tax implications for selling off bonds
PostPosted: Tue Nov 27, 2012 8:36 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5293
With a bond fund you have received dividends, probably monthly, since you purchased. You owe regular income taxes on those dividends just like on your paycheck except that they might be "qualified" and therefore taxed at a lower rate.

When you sell you will pay capital gains taxes on the profit you have made. If you originally put in $2000 and you get $2300 when you sell, you owe capital gains taxes on the difference ($2300-$2000=$300). If you have held the shares for more than a year the maximum rate you pay on those is 15% even if your tax rate is higher. (This is FISCAL CLIFF stuff). Your rate could be lower.

If you wait until after December 31 and the fiscal cliff is not avoided you will pay at a higher rate.

If you have held for less than 1 year your taxes on the gains will basically be at your income tax rate.

If you reinvested dividends like most people do, you owe taxes on them but they change your tax basis so the capital gains taxes you owe would be less.

The whole situation is actually not terribly complicated (especially for an engineer) but it's very difficult to explain all the ins and outs in a post. It's probably not enough to change your decision about how to use the money. If buying huuby a car is a good use of funds, do it and don't worry about taxes.


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 Post subject: Re: Tax implications for selling off bonds
PostPosted: Tue Nov 27, 2012 8:50 pm 

Joined: Tue Jun 12, 2012 4:34 pm
Posts: 474
Thanks, Bpgui and DH. That makes sense. I do get a 1099 (?) each year listing the dividends I have to claim on my taxes. I was unclear on how the capital gains worked, so I appreciate your answers. Honestly, it's such a small amount of money that the tax hit will be negligible. I really just want to make sure I understand correctly how it works.


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 Post subject: Re: Tax implications for selling off bonds
PostPosted: Tue Nov 27, 2012 10:32 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5293
alohabear wrote:
Thanks, Bpgui and DH. That makes sense. I do get a 1099 (?) each year listing the dividends I have to claim on my taxes. I was unclear on how the capital gains worked, so I appreciate your answers. Honestly, it's such a small amount of money that the tax hit will be negligible. I really just want to make sure I understand correctly how it works.


In practice most bond funds rarely generate capital gains, especially intermediate and short term funds. But recently those type of funds, especially the intermediate have made capital gains.

But really, it should not be a big amount of money and you only pay it because you made a profit anyway. So enjoy!


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 Post subject: Re: Tax implications for selling off bonds
PostPosted: Wed Dec 05, 2012 9:39 am 

Joined: Tue Jun 12, 2012 4:34 pm
Posts: 474
In an interesting turn of events, the hubby (who at one time could have been described as "the spender" in our relationship) has decided that he really doesn't want to touch the funds in our bond account, as he is amazed at how much it's grown (relative to the amount we've put in) and wants to keep it growing. :clap:

So we've come to plan B. We've worked out a car sharing schedule with our one car and we're going to give it a try next semester. In the meantime, we'll save up for a down payment on a n/u car, and if the car sharing becomes too painful or disruptive for either of us, then we'll bring our one-car-family experiment to an end. (Hey, it's had a good run; 8 years and counting.)


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