Stock selling and buying - tax questions

I don’t know anything about the tax issues around buying and selling stock, except that they exist, and I’m in a bit of a situation.

I owe some money to the school I’m in (grad degree, almost done) and I need to pay them before I can register. It’s more money than I could easily get in the amount of time that I had, and my student loan money can’t come in until I pay it and register for classes. Well, way back when I was in high school, part of my college fund was used to purchase some stock. Since then, the stock has appreciated rather a lot (if I’m reading the charts right, I think it has split twice since then (2-for-1), so I should have four times the amount my parents bought for me, right?), and I figured that selling it would be a good way to get the money to pay my school. If my figurings are right, I should be using about a third to a quarter of the money to pay them.

I know that the amount of money I get from selling the stock is going to be income on my taxes, and I also know that I can get some kind of deduction for paying the school that portion that I owe them. I’d like to go back and re-purchase the same kind of stock with the leftover money, since it’s done so well in the last 10 years or so, but is that going to result in a big tax bill? I don’t make much money, and the total amount I’ll get for selling the stock should be around twice as much as my yearly income (part of the year, it’ll be part-time [if it makes any difference, the job withholds unusally large amounts of money for taxes]). The only alternatives I can come up with are to save some of the money to pay the taxes and put the rest back in the stock, to maybe put the money in some kind of retirement account instead (wouldn’t I get some kind of deduction for that?), or to just put all the money towards school right away (not take out loans for the rest of this year and/or pay back some of what I’ve already taken out) so that I can claim it all as deductions.

I’m not even sure if I’m making any sense with this, since I have only glimmerings of ideas of how this stuff might work. Can someone who knows more about this part of the finance world point me in generally the correct direction?

I can get part of it, but there are some details that might matter.

First, if they’re just ordinary run-of-the-mill stocks (not part of some specific government-created education fund), you’ll owe taxes on the difference between the price of the stock on the day it was purchased, and the price of the stock on the day it was sold. You’ll have to adjust for the splits: if it split 2-for-1 twice, the “purchase” price per share will be one quarter of what was actually paid for it. But that’s accounting details: basically you’ll owe on the difference between dollars paid and dollars received.

If you’ve owned the shares for several years, you’ll pay that at the lesser of your ordinary income tax rate or the capital gains rate.

The price of the stock isn’t fixed; the gain is the difference between what you paid and what you sold for. Just because it split twice doesn’t mean that the sale price is four times the purchase price – it’s probably much higher (stocks that aren’t doing well don’t often split). Splits are just a way to keep shares affordable; the stock will rise or fall based on, well, magic, even if if the stocks don’t split.

Oh, and the details part: it sounds like these stocks may have been a gift (i.e. purchased with someone else’s money, not yours). In that case, there may be other issues; I’ll wait to see if someone more knowledgeable comes by.

Oh, and you don’t have to sell it all at once; you can choose to sell only those shares necessary to cover the debt you want. That will keep the taxes down (especially if you’re going to get a deduction). If you sell them all, then buy most of them back again, you might or might not get hit with the taxes on all of it: google “wash sale” to find out the limits and such.

The money you get from selling the stock isn’t what you are taxed on, but the GAIN - that is the difference between the price you sold it for (less broker fees), and your “cost basis”. Normally, that means what you paid for it (plus broker fees), but there are events which adjust the basis. If you received the shares as a gift, there are other factors to consider in the basis:

If you’ve held the shares for over a year, it is also long term gain, which is taxed at a more favorable rate than your regular income (5% or 15%, depending on what your tax bracket is).

There is no reason you have to sell ALL the shares if you don’t want to. You can sell some of them to cover your expenses, and retain the rest. Your basis for the sale will be whatever fraction of the basis you sold, the rest being your basis when you dispose of the other shares.

Now, when you say that one has to pay tax on the gain, does that mean the gain counts as taxable income, or would one have to pay tax regardless of their income?

Its not counted as income but as a separate tax called a capital gains tax that has a few variables involved, one of which is income level. Long-term capital gains taxes are generally less than tax on the same amount of income so that is a good thing. You can read about long-term capital gains taxes here and how they are figured.

Ok, some additional info:

Not a gift - the college fund was basically the child support that I got until I was 18, and the shares were purchased with some of that. I was the one who wanted to buy them, my parents took some convincing.

As for not selling all of it, well, I’ve already done that (or rather, it’s being done for me). I only had ~2 weeks to take care of paying my school, and I didn’t want to do anything that might cause delays. I took my piece of paper that said “X shares” and “common stock” that had my name and my mother’s name on it (don’t even get me started about the name change and identity paperwork I took with me) and said something about a uniform transfer from a minor account to a financial advisor at the main bank branch downtown, and no mention was made of selling only part of it. The advisor has now sent the paper to, I think, the company to have it verified or something, which will supposedly be done by Monday, the selling will start on Tuesday and finish on Thursday. I suppose it’s too late to do anything about selling only part of it now.

Side note: Yes, I was in kind of a hurry about the whole thing - last Monday I found out my loan arrangements weren’t working out (one kind of loan couldn’t be used for the purpose I need it for, the other kind required a co-signer which I can’t come up with immediately…), I already had plans on Tuesday to go into the city, I talked to a guy at my bank (I work there, actually, as a teller) who said my car is too old to take out a loan against, and he gave me the finiancial advisor guy’s phone number, who said I could bring the paperwork in… it was the best idea I could come up with.

Ok, I’m trying to get this… I’ll be taxed at capital gains rate - 5% or 15%? So even accounting for selling it all and only paying the school with part of it, the most I could be taxed is 15% of the profit? I went to Shagnasty’s link and it looks like most of it will be at the 5% rate anyway, if the 2007 5% ceiling is similar to the 2006 5% ceiling.

Yes, the most you’re going to be taxed on this is 15% of the profit on the sale. Also, the rules for what educational expenses you can deduct from your taxable income are fairly complicated. I highly recommend gathering all of your financial papers and visiting a good tax preparer, or if you’re feeling up to the task, running it through TurboTax or the like. You’ve got plenty of time, though.

Also watch out when looking at stock charts w/r/t stock splits. The charts on Yahoo Finance and other sites are already adjusted for splits so don’t try to double or quadruple your gains because of them.

It’s probably not too late. Call the advisor first thing Monday morning. If it’s a stock that you would want to buy back, just sell enough to raise the money you need.