2012 Taxes: I'm Stupified...

[Midpack]

My first year full without work income so this morning I went to calculate estimated taxes due 1/15/2013 to avoid penalties (like every year), since over 83% of our dividends fall after the Q3 deadline. Figured I owe about $4K after DW's withholding and my small Q1 est tax pymt.

Before dutifully sending in a check to the US Treasury, I thought I'd see if having lower income might help. Using DW's last check, I ran our numbers through a quick-n-dirty 1040 spreadsheet online, and it said we have a refund due without Q4 est tax pymt.

Huh? That's impossible!

So I ran through TurboTax 2012 quickly, and it also said refund due.

HUH? No way!

DW's income and our dividends/gains are over the 15% threshold, but just below it ($70,700) after deductions/exemptions.

We've NEVER paid 0% on dividends or capital gains - EVER. To be honest, I never paid much attention to lower brackets. Everything I read today tells me it's true, but I still just can't believe it's right. "tax rate on qualified dividends to 0% for individuals in the 10% and 15% income tax brackets." Are you kidding?

I'm stupified. Brave new world. I must be missing something.

I may never go back to work after all, or strictly as a volunteer if I do...

But we'll owe state taxes, always do.

Yes this is FIRE related!

 

[REWahoo]

We've NEVER paid 0% on dividends or capital gains - EVER. To be honest, I never paid much attention to lower brackets. But everything I read today tells me it's true, but I still just can't believe it's right. "tax rate on qualified dividends to 0% for individuals in the 10% and 15% income tax brackets." Are you kidding?

I'm stupified. Brave new world. I must be missing something.

I may never go back to work after all, or strictly as a volunteer if I do...

I knew the light bulb would eventually come on...

 

[audreyh1]

NEVER[/B] paid 0% on dividends or capital gains - EVER. To be honest, I never paid much attention to lower brackets. Everything I read today tells me it's true, but I still just can't believe it's right. "tax rate on qualified dividends to 0% for individuals in the 10% and 15% income tax brackets." Are you kidding?

I'm stupified. Brave new world. I must be missing something.

That's correct. If you (jointly) make less than $70,700 in ordinary taxable after deductions/exemptions, then any amount of capital gains or qualified dividends, up to that amount, has no tax due. Amounts above that threshold are subject to the 15% tax rate.

A gift from 2008 I believe. It lowered my income taxes nicely in 2010 and 2011.

It is definitely a gift to retirees who receive little ordinary income and instead get most of their income from capital gains and qualified dividends. And to think I thought was going to be saying sayonara to this little gift.

 

[NW-Bound]

We've NEVER paid 0% on dividends or capital gains - EVER. To be honest, I never paid much attention to lower brackets. Everything I read today tells me it's true, but I still just can't believe it's right. "tax rate on qualified dividends to 0% for individuals in the 10% and 15% income tax brackets." Are you kidding?

My friend, my friend... You are even more tuned out of tax policies than I am, which is somewhat rare.

I reported in this forum that due to some posts here, I learned about that 0% tax on the $70K income bracket. And due to my stopping the part-time consulting work earlier this year, I had quite a bit of head room to sell some MFs and stocks and to reset their basis. Nice!

It also gave me an opportunity to shift some $$ to some foreign markets which pay better dividends. It is fortuitous that these markets have been underperforming compared to S&P500. So, I told myself that if I do not buy low, then when would I buy? Heh heh heh... Still got some money left, but will wait until the current frenzy subsides.

 

[audreyh1]

I reported in this forum that due to some posts here, I learned about that 0% tax on the $70K income bracket. And due to my stopping the part-time consulting work earlier this year, I had quite a bit of head room to sell some MFs and stocks and to reset their basis. Nice!

I learned about that little gift in April of 2009, when I discovered I have way overpaid estimated taxes for 2008 and we got a big refund. I had also used an out-of-date AMT exclusion value, not realizing it had been raised (at the last minute) for 2008.

I've tried not to make the mistake since!

 

[Meadbh]

I'm stupified. Brave new world. I must be missing something.

I may never go back to work after all, or strictly as a volunteer if I do...

With all the analysis that goes on here, I'm amazed that you're stupefied, but that is a very nice shock to get!

I have been running scenarios on various online tax calculators and am pleasantly surprised (but not stupefied) about my future contributions to Revenue Canada.

 

[brewer12345]

I have a stupid question about the 0% cap gains rate. If you are in the 15% bracket, can you have unlimited tax free cap gains, or only enough to get you up to the top of the 15% bracket?

 

[Lisa99]

I guess I missed that nugget of wisdom the first time around as well.

Knowing that the tax rate is 0 caused me to question whether I should be funding 401k less (up to the matching) and putting more into Vanguard. I posted my question to the FIRE and Money forum.

 

[audreyh1]

I have a stupid question about the 0% cap gains rate. If you are in the 15% bracket, can you have unlimited tax free cap gains, or only enough to get you up to the top of the 15% bracket?

Only up to the top of the 15% tax bracket

No unlimited tax free cap gains nirvana.................

And at some point, capital gains and qualified dividends start to run into the AMT exclusion which starts applying AMT tax rates to ordinary income [but only that income above the 15% tax bracket threshold].

 

[audreyh1]

I guess I missed that nugget of wisdom the first time around as well.

Knowing that the tax rate is 0 caused me to question whether I should be funding 401k less (up to the matching) and putting more into Vanguard. I posted my question to the FIRE and Money forum.

It does make things a bit easier tax-wise for folks living off their taxable investments, as opposed to withdrawing from an IRA or 401K which is treated as ordinary income.

 

[pb4uski]

....I'm stupified. Brave new world. I must be missing something.

I may never go back to work after all, or strictly as a volunteer if I do...

But we'll owe state taxes, always do.

Yes this is FIRE related!

Now I'm surprised!!

You seem so much on top of things and this 0% capital gains rate has been written about so much on these forums I am surprised this is a revelation to you. But yes, as long as your taxable income stays in the 15% tax bracket, when taxes are calculated the rate applied to qualified dividends and capital gains is 0%.

It seems so odd to have 0 federal tax but having to pay state income taxes on the same exact gains.

That is why I have been selling funds in my taxable accounts and buying back similar funds - I get to step up the tax basis of my taxable investments at 0 cost. While it seemed like a good idea at the time given that capital gains rates might increase, now that the 0% capital gains tax rate has been made permanent I might have been better off doing a Roth conversion.

 

[Midpack]

You seem so much on top of things and this 0% capital gains rate has been written about so much on these forums I am surprised this is a revelation to you. But yes, as long as your taxable income stays in the 15% tax bracket, when taxes are calculated the rate applied to qualified dividends and capital gains is 0%.

Having not been anywhere near the 15% bracket for more than 36 years, it just didn't register. We "got to pay" tons in taxes last year as always, even though I only had 6 months income having retired midyear.

Though others may criticize me for saying it, I feel like I'm cheating to pay so little in taxes. But I assume our political leaders will fix that soon enough...

 

[pb4uski]

...Though others may criticize me for saying it, I feel like I'm cheating to pay so little in taxes. But I assume our political leaders will fix that soon enough...

I won't criticize you at all - I feel the same way. Our income (mostly qualified dividends and discretionary capital gains) in our first year being retired was about $90k in 2012 and our taxable income was in the 15% bracket and my federal income tax is 0. Fine with me but I'm not sure if it makes a lot of sense given the deficits and debt situations.

 

[MichaelB]

I may never go back to work after all, or strictly as a volunteer if I do...

Still not sure? What more do you need?

Though others may criticize me for saying it, I feel like I'm cheating to pay so little in taxes. But I assume our political leaders will fix that soon enough...

I also had that funny feeling at first, but believe me, it is one of those things you get used to very quickly. You're not cheating, it's designed that way, so enjoy it.

 

[audreyh1]

This is a good example of why retirees tend to overestimate expenses from taxes when they retire. Not only are you no longer paying FICA taxes, but once you no longer draw a salary, your income taxes tend to drop quite a bit too even if you are earning quite a bit of investment income.

But, it's probably better to overestimate tax expenses and then get a pleasant surprise once you do retire.....

 

[nun]

Part of my push to pay off my mortgage prior to ER was so that I could minimize my need for income and thus lower my taxes. My budget is for $36k a year and I plan to use my deductions and exemptions to do IRA to ROTH roll overs up to the 15% limit.....0% capital gains are an added plus. So if I need $36k to spend and I take the standard deductions and have one exemption for 2012 I can roll over $9100 and still stay in the 15% tax bracket. Obviously this will take some careful bookkeeping as you have to do the IRA to ROTH rollovers by Dec 31st.

 

[Amethyst]

You guys make me jealous that my retirement income will be from a fully-taxable DB pension!

Amethyst

 

[Alan]

You guys make me jealous that my retirement income will be from a fully-taxable DB pension!

Amethyst

I'm in the same situation but I'm certainly not jealous. I like my DB pensions

 

[travelover]

I wonder if Warren Buffet has heard about this.

 

[NW-Bound]

You guys make me jealous that my retirement income will be from a fully-taxable DB pension!

Amethyst

I saw that you came to this forum in Dec 2008. Surely, you remember how these guys that you were envious of were shaking in their boots as their portfolios got decimated in the Great Recession. No, my lady, the grass is not really greener.

Actually, many of the non-pensioners on this forum are living off their 401k or IRAs, and have to pay taxes when they make a withdrawal. I have enough after-tax money to last me a few years, but that will eventually get depleted and I will have to join the tax-paying unkempt masses.

Hey, before anybody calls me arrogant, just remember that the after-tax money is already taxed. I was not good at finding tax shelters for that money. And then, only the gains on it are tax-free for the "poor people" who get less than $70K/yr income from their after-tax investment.

 

[steelyman]

That is why I have been selling funds in my taxable accounts and buying back similar funds - I get to step up the tax basis of my taxable investments at 0 cost. While it seemed like a good idea at the time given that capital gains rates might increase, now that the 0% capital gains tax rate has been made permanent I might have been better off doing a Roth conversion.

You and I were doing the same thing at the end of last year, but I am glad I took the gains, even though not all will be at 0% tax. It was weird having coffee one morning and seeing all these sales happen then boom! stocks bought back at a lower price within a half hour because of "cliff" freakout.

But I retained the stocks with a new basis so didn't miss out on rallies like today. I'm good with that.

 

[gcgang]

I wonder if Warren Buffet has heard about this.

Talk about feeling like you are cheating the system. Ole Warren pays 0% tax on his $40billion BECAUSE HE NEVER SELLS anything. Well, at least Warren will pay his fair share to our Federal Tax system when he dies. Oh wait, he is going to take advantage of the unlimited Charitable deduction, and never pay ANY SHARE, let alone his "fair share". Warren $40,000,000,000, US Tax system $0. But he can give advice about how much other people should pay in Federal Taxes. And people give credence to his advice. Warren Buffet, THE BIGGEST HYPOCRITE IN THE WORLD!!!!!

Don't ever feel guilty about not paying tax because you are in the 15% bracket, unless you start lobbying for higher tax rates for others.

 

[GalaxyBoy]

I also only recently learned of this nice little freebie, so I tax-gain harvested some of a well-performing fund in my taxable account which, although it's been doing well over the years, doesn't fit into my current investment policy statement. I held off on selling more, but now that it appears this has been made permanent I think I'll sell some more, then so on year after year until it's all re-allocated.

I only wish I had learned of it last year. Oh, well. It's only been since DW ER'ed that we've been in the lower tax bracket, which has only been the last two tax years. Bear in mind that the rule is based on taxable income, not AGI, which is unusual.

Since wash sale rules only apply to losses is there any reason not to tax gain harvest every year by selling a portion of a well-performing fund until the gain hits the top of the 15% bracket, then buying it right back? Trading costs aside, that is.

[edit - I now see the answer above, sorry]

 

[samclem]

While it seemed like a good idea at the time given that capital gains rates might increase, now that the 0% capital gains tax rate has been made permanent I might have been better off doing a Roth conversion.

As we saw just this week in DC, policies can change quickly. I'm remaining flexible by not putting all my bets on the continuation of the Roth rules (I doubt they'll tax the withdrawals, but I could see the withdrawals, or some percent of 'em, as counting when computing tax rates on other income (incl SS), or for qualifying for various subsidies, etc). A mix of tIRA, Roth IRA, and after-tax accounts gives the best flexibility to reduce taxes or capture the flow of benefits to be rained down on particular favored subsets of the populace in future years.

 

[NW-Bound]

I also had that funny feeling at first, but believe me, it is one of those things you get used to very quickly. You're not cheating, it's designed that way, so enjoy it.

Yes, people do get used to a granted privilege very quickly, and soon it becomes a birthright. Then, no politician dares take it away, until the situation turns into something desperate. That's how many countries get into trouble.