Question

Joe Tucker is the sole shareholder of Tucker Parts Inc. The corporation is cash rich, and Joe wishes to sell his stock to Bill Corker, who has limited funds. The parties proceeds are as follows:

a. Joe sells 40 percent of his stock to bill for $50,000 payble over 10 years.

b. Tucker Parts redeems the remaining 60 percent of Joe's stock for $75,000 in cash.

What are the tax consequences to Joe?

Does it make any difference if the two steps are reversed?

Answer 1

Selling stocks will likely affect your tax bill. Whether you earned a capital gain, a capital loss, or only earned dividends on your investments, you still may owe money come tax season.

If you work with a financial adviser, he or she should be able to briefly explain the tax information for you, but it is still your responsibility to have the correct paperwork on hand and to educate yourself on taxes owed.

If you are using an online brokerage site, then you need to keep all receipts for the purchase and the sales of the stocks. Remember, it’s always better to be prepared come tax season.

Those profits are known as capital gains, and the tax is called the capital gains tax. ... One exception: If you hold a stock for less than a year before you sell it, you'll have to pay your regular income tax rate on that “short-term” gain. That's higher than the capital gains tax for most people.

It's 15% if you are in a 25% or higher tax bracket and only 5% if you are in the 15% or lower tax bracket. Profits from stocks held for less than a year are taxed at your ordinary income tax rate. Ordinary dividends earned on your stock holdings aretaxed at regular income tax rates, not at capital gains rates.

A tax-deferred account is an investment account such as a 401(k), 403(b), or traditional IRA, just to name a few examples. In these accounts, your contributions may be tax-deductible, but your qualified withdrawals will typically count as income. Meanwhile, a Roth account is tax-free; you can't get a tax deduction for contributing, but all of your qualified withdrawals won't count as income and therefore will not be taxed.

With any of these accounts, you will not be responsible for paying tax on capital gains, or dividends for that matter, so long as you keep the money in the account. The drawback is that these are retirement accounts, and you generally have to leave your money alone until you turn 59-1/2 years old, but there are exceptions. If you're interested in tax-advantaged investing options, here are some in-depth articles about IRAs and 401(k) accounts to help you determine the best way to save and invest for your future. To compare the features of standard investment accounts and retirement accounts offered by different brokers, visit our online broker tool.