Benefits of lower income vs tax gain harvesting

[Curmudgeon]

My story: RE'd in 2016, investments of ~2.3M, 2 kids in or approaching college.

My current 'real' AGI, from investments, is ~35K in dividends and CG distributions.

I have a diversification problem, in that I'm sitting on 230K in stock from my previous employer. I've been meaning to diversify out of this, but it was hard to do when part of my compensation had been stock/options. Now that my income is way down, my plan had been to sell off as much of this stock as I could in a given year and still keep my AGI below the ~75K tax bracket, in order to avoid LTCG taxes. It would probably take me 3-4 years to do this.

But, it seems there are benefits to having lower AGI:
1) Bigger ACA subsidy - for however long those last.
2) Because FAFSA takes into account assets, my kids qualify for 0 financial aid. However, I just realized that since I'm a displaced worker (my employer actually laid me off a couple months before I hit retirement age, the clever bastards!) I don't have to claim ANY assets on FAFSA, if my income is below 50K. My kids are pretty smart, so might qualify for some aid? Not really sure what's out there, since I've always assumed 0 need-based scholarships for us.

So, now I'm wondering if it makes more sense to skip the diversification, and try to reap any benefits that I can from a low income.

Are there other benefits to keeping AGI below 40-50K that I should consider?
Any other strategies for diversification that will exclude claiming cap gains? Or should I even worry about diversifying out of a position that is "only" ~10% of my total investments?

 

[brucethebroker]

The IRA savers credit is available for joint AGI of $62,000 or less. Sliding scale of 10, 20 or 50% of your contribution up to $1,000 in credit, each, for married couples.

"In order to figure out what kind of credit you are eligible to receive, you will have to fill out IRS form 8880 (PDF), as the credit phases out at certain income levels."

 

[bingybear]

A lot of moving parts. From you comments it sounds like married filing jointly, no idea the number of dependents. These move around the numbers as well and your state ACA plan may have different cliff than others. So you need to work your numbers.

As for diversification... remember a stock LU (Lucent)? I remember many people throwing their 401k in it. It got up to $84... these guys knew it would never end. Then 50.. and 25.. and 10... and 5... and finally 50 cents. You know your company better than I do.

As for up to the top of the 15% bracket.... look at which is better for you... that or just below the PTC cliff.

This year I'm thinking for me is better to be just below the cliff. Others like to go far below the cliff. The last two years were heavily on cobra where the insurance was less expensive than ACA... but not less then if I did ACA below the cliff. I rolled TIRA to Roth up to the top of the 15% bracket. It may not maximize the local (this year) situation. But I'm hoping it will reduce some taxes down the road.

I never filled out a FAFSA. One of my kids got a full ride + and the other got scholarship for most of the cost. Both based on merit. No economic input for either of the kids used. So yes there are ways to get aid without fudging the finances.

You need to run your numbers. The PTC cliff can be significantly different from place to place.

Oh... also look into funding an HSA if you get a compatible plan. You can save some $ and invest them... which reduces your income.

 

[bingybear]

The IRA savers credit is available for joint AGI of $62,000 or less. Sliding scale of 10, 20 or 50% of your contribution up to $1,000 in credit, each, for married couples.

"In order to figure out what kind of credit you are eligible to receive, you will have to fill out IRS form 8880 (PDF), as the credit phases out at certain income levels."

I believe you need earned income to get this credit.

 

[Svensk Anga]

You might sell selectively those shares that have the highest basis/minimum gains to maximize the diversification benefits of any tax/credit costs you incur.

 

[walkinwood]

I think diversification trumps getting a few bucks from ACA subsidies. 10% of the portfolio in one company stock would make me nervous.

 

[DrRoy]

You might sell selectively those shares that have the highest basis/minimum gains to maximize the diversification benefits of any tax/credit costs you incur.

I think diversification trumps getting a few bucks from ACA subsidies. 10% of the portfolio in one company stock would make me nervous.

+1

You should not leave more than 10% in one stock. 5% would be better.

 

[Philliefan33]

While there might be more need-based aid if you keep your income low, much of this aid may be in the form of loans. Depending on your philosophy regarding funding college, it might not be worth chasing.

 

[GTFan]

I believe you need earned income to get this credit.

No it's just AGI so other stuff like interest, SE and rental income would be included - the real problem with the Savers credit for ERs is that it only offsets tax owed, i.e. it's not refundable if you owe no tax. And if all you have are gains and divs in the 0% bracket you owe no tax and so no credit for you.

Of course it was targeted towards folks that earn income and therefore pay tax, but if you have non-investment income less than $20k you don't pay tax (for MFJ filers).