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2014 federal income tax puzzle
Old 04-09-2014, 11:58 PM   #1
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2014 federal income tax puzzle

I am going to present something that most of you will likely find foolish, but I've been at investing along time, and I am set in my ways. So please make suggestions other than "buy and hold dummy Haha"

I'm a single taxpayer who takes the standard deduction. (Paid cash for my condo) No state taxes in my state. My taxable income without capital gains has been quite low. I have adequate cash flow anyway, due to MLP and royalty trust positions.

My mandatory ordinary income from SS and RMDs is about $33,000. I will have about $8000 in qualified dividends. My taxable income from MLPs and royalty trusts is hard for me to forecast, but I think it be <= $5000. I've already realized $42,000 in ltcg this year. I have no losses in my inventory, other than a some option expirations which I netted against the ltcg-s. So far, my taxes will be low and I perhaps will not push myself into higher Medicare fees, but it will be close.

I'm thinking of just giving up on trying to stay below the Medicare hurdle of $85,000, since I may have breached it already. I have another $45,000 of ltcg that I am considering taking. At this point I will likely have $95,000-$100,000 agi. I'll try to stay below the next Medicare premium jump at agi of $107,000.,
Will this trip anything other than higher Medicare premiums? I know there are other gotchas, but I have never tried to learn them because my income has been comfortably below the levels. What if I go up to agi of $125,000-$130,000? I know this will get me higher Medicare premiums, but anything else?

Can LTCGs create AMT taxation? How about other issues?

I will appreciate any help, because this is largely terra incognita to me. This is not a hypothetical musing, it is something that I am strongly considering doing within the next month or so.

Ha
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Old 04-10-2014, 12:18 AM   #2
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"Can LTCGs create AMT taxation?"
"How about other issues?"

Yes they can. I remember when I ERed in late 2008 I cashed out my company stock using NUA (Net Unrealized Appreciation) and had a LTCG of about $300k which went along with minimal other income (about $30k in wages and $5k in other investment income). This huge LTCG triggered all kinds of things I had never seen before in my tax returns. These included the AMT, a partial phaseout in my itemized deduction, and a partial phaseout of my personal exemption. The AMT applied only to my non-LTCG income, as the max tax rate on LTCG was 15%.
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Old 04-10-2014, 01:40 AM   #3
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I entered your numbers in TaxCaster 2013:

Single.
I did to know exactly how much of the $33K in base income was SS and how much was RMDs, so I assumed $20K from SS and $13K from RMDs.
I entered $5K in taxable interests (from the MLPs), $8K in qualified dividends.
Standard deduction.

TaxCaster says that you would start triggering the AMT at around $190K in LTCGs. But it also says that you would start triggering "additional taxes" at around $160K in LTCGs.
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Old 04-10-2014, 08:19 AM   #4
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TaxCaster says that you would start triggering the AMT at around $190K in LTCGs. But it also says that you would start triggering "additional taxes" at around $160K in LTCGs.
additional taxes may be this?
Questions and Answers on the Net Investment Income Tax
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Old 04-10-2014, 08:23 AM   #5
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Quote:
Originally Posted by haha View Post
.....Will this trip anything other than higher Medicare premiums? I know there are other gotchas, but I have never tried to learn them because my income has been comfortably below the levels. What if I go up to agi of $125,000-$130,000? I know this will get me higher Medicare premiums, but anything else?

Can LTCGs create AMT taxation? How about other issues?

I will appreciate any help, because this is largely terra incognita to me. This is not a hypothetical musing, it is something that I am strongly considering doing within the next month or so.

Ha
Why not take a copy of your 2013 tax return, plug in your 2014 numbers and add in some LTCGs and see what the result is? If AMT bites you, a proforma 2014 return should tell you within reason.

At worst, you can play and see how much discretionary LTCG you can take without having a bigger tax bite.
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Old 04-10-2014, 08:56 AM   #6
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Quote:
Originally Posted by FIREd View Post
I entered your numbers in TaxCaster 2013:

Single.
I did to know exactly how much of the $33K in base income was SS and how much was RMDs, so I assumed $20K from SS and $13K from RMDs.
I entered $5K in taxable interests (from the MLPs), $8K in qualified dividends.
Standard deduction.

TaxCaster says that you would start triggering the AMT at around $190K in LTCGs. But it also says that you would start triggering "additional taxes" at around $160K in LTCGs.
I gave only the taxable amount of SS, so my figure was net of the knockdown. It was the amount of ordinary income that gets summed into AGI.

Thanks for your analysis.

Ha
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Old 04-10-2014, 10:50 AM   #7
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You are probably right, the additional tax seems to get triggered at around $200K for a single taxpayer, like the NIIT would.
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Old 04-10-2014, 02:41 PM   #8
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I know you aren't in CA, but I was unpleasantly shocked and penalized by the size of my State tax bill when I realized some significant long term gains :-(
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Old 04-12-2014, 07:58 PM   #9
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Originally Posted by haha View Post
I have another $45,000 of ltcg that I am considering taking. At this point I will likely have $95,000-$100,000 agi. I'll try to stay below the next Medicare premium jump at agi of $107,000.,
Will this trip anything other than higher Medicare premiums? I know there are other gotchas, but I have never tried to learn them because my income has been comfortably below the levels. What if I go up to agi of $125,000-$130,000? I know this will get me higher Medicare premiums, but anything else?

Can LTCGs create AMT taxation? How about other issues?
Have you looked into selling LEAP covered call options that expire in 2015? That would possibly create a small amount of gains in the current year, but have the official stock sale (and bulk of the capital gains) realized in 2015 when they would likely be exercised - and when you likely won't have the same taxable gains you've already realized this year.
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Old 04-13-2014, 10:50 AM   #10
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Have you looked into selling LEAP covered call options that expire in 2015? That would possibly create a small amount of gains in the current year, but have the official stock sale (and bulk of the capital gains) realized in 2015 when they would likely be exercised - and when you likely won't have the same taxable gains you've already realized this year.
As a follow-up...wrapping up my taxes this morning, I see where TD Ameritrade took a covered call option that I wrote in 2012 - and was exercised in 2013 - and automatically added the option proceeds (from 2012) and added it to my stock sale in 2013. The option proceeds were not reported to the IRS in 2012, but lumped in with the stock sale when the option was exercised in 2013....so depending on which broker you have, if you do a covered call that's deep in the money (basically, guaranteeing that you'll get it called away in 2015, barring 2009 deja vu), you would have both the option premium and the stock capital gain count for 2015 taxes, while allowing you to lock in your profits now and get the option proceeds now as well.
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Old 04-13-2014, 12:50 PM   #11
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I gave only the taxable amount of SS, so my figure was net of the knockdown. It was the amount of ordinary income that gets summed into AGI.

Thanks for your analysis.

Ha
I may not be interpreting what you wrote correctly. I am sure you know that the % of SS income that is taxable changes as your income from other sources changes, upto a limit (I think max 85% of SS can be taxable).

As others have suggested, it is best to do scenario analysis using tax software since so many different trigger points come into play.
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