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Capital Gains question
Old 02-24-2018, 07:24 AM   #1
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Capital Gains question

So, as DW and I near our much anticipated ER launch I have a question about capital gains/interest/dividends. I've always been a bit confused about how this will work when we no longer draw a paycheck.

While working we have moved money around within the taxable account once a year to maintain our asset allocation. In some years (this past year for sure), doing so triggered a tax event that made both our eyes bulge (we had a good 2017 year as far as salaries and bonuses were concerned).

Once we retire we will spend down only the taxable account each year until around age 66. Currently we are 51 and 48.

So the hypothetical scenario would be:

Income need $85,000. No other taxable income other than capitals gains and interest/dividends on investments. No part time jobs/no rentals, etc.

If the capital gains triggered by selling off stock funds within the taxable account were $30K and our interest/div were $15K for the year, how much tax would we owe?

In the end I assume we would want our taxable income to fall below the adjusted income threshold, I think its around $77K for couples filing jointly, to avoid paying any tax on capital gains. I'm wondering how the 2018 $24K standard deduction, child credit and so forth play into this. We have one daughter.

Sorry for rambling, I'm just interested in knowing how much money we would need to draw from taxable savings to have $85K to spend when the dust settles given the above hypothetical scenario.

Taxes have always confused us

Thanks all
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Old 02-24-2018, 07:29 AM   #2
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Best way to answer your question is to run your hypothetical retirement income through one of the online tax calculators to see what taxes you'd owe.
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Old 02-24-2018, 07:53 AM   #3
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Tax treatment is different on long and short term capital gains, you didn't mention what you would have. Tax treatment is also different on interest vs dividends vs ordinary dividends. Take time to educate yourself on the tax treatment for these as the time spent will pay dividends (non-taxable of course) to help you manage your income and taxes.

You didn't mention your health coverage but if ACA and with subsidy you'll also want to manage your income against that upper level (MAGI of approx $64,000) or you'll find a unpleasant tax consequence.

As suggested you should use one of the available tax calculators.
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Old 02-24-2018, 08:22 AM   #4
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Say your taxable income was $45K MFJ. Well no tax on the $30K of long term cap gains. Your dividends, if unqualified, are less than the $24K standard deduction. If qualified, fall under the cap gains threshold. So the no tax there either. The answer is $0 tax.

Are you receiving capital gains distributions from mutual funds? Well you have to add that to your taxable income as well.
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Old 02-24-2018, 10:17 AM   #5
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So, if it were me...I just did my taxes. I'd run some basic numbers through the same for last year and assume it would be slightly better as the tax brackets are 3% less. Having 1 child vs. the new standard deduction is almost a wash from my calcs.

You sound like you're in a good place IMO...
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Old 02-24-2018, 10:23 AM   #6
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OP - Please educate yourself on the difference between Long Term Capital Gains and Short Term Capital Gains.

I try to only sell stocks after holding them for over a year, so I pay the lower Long Term Capital Gain tax bill.
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Old 02-24-2018, 01:16 PM   #7
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Quote:
Originally Posted by syd03 View Post
So, as DW and I near our much anticipated ER launch I have a question about capital gains/interest/dividends. I've always been a bit confused about how this will work when we no longer draw a paycheck.

While working we have moved money around within the taxable account once a year to maintain our asset allocation. In some years (this past year for sure), doing so triggered a tax event that made both our eyes bulge (we had a good 2017 year as far as salaries and bonuses were concerned).

Once we retire we will spend down only the taxable account each year until around age 66. Currently we are 51 and 48.

So the hypothetical scenario would be:

Income need $85,000. No other taxable income other than capitals gains and interest/dividends on investments. No part time jobs/no rentals, etc.

If the capital gains triggered by selling off stock funds within the taxable account were $30K and our interest/div were $15K for the year, how much tax would we owe?

In the end I assume we would want our taxable income to fall below the adjusted income threshold, I think its around $77K for couples filing jointly, to avoid paying any tax on capital gains. I'm wondering how the 2018 $24K standard deduction, child credit and so forth play into this. We have one daughter.

Sorry for rambling, I'm just interested in knowing how much money we would need to draw from taxable savings to have $85K to spend when the dust settles given the above hypothetical scenario.

Taxes have always confused us

Thanks all
You are right that the threshold for 0% LTCG/qualified dividends is $77k. Add the $24k of standard deductions to that an a MFJ couple could have as much as $101k of LTCG/qualified dividends in a year and pay $0 in tax. Cool, eh?

So let's say that you are taking the $85k that you need to spend out of taxable accounts and that results in $50k of LTCG (you can select what lots are being sold to manage sales to result in LTCG)... and on top of that you have $30k of qualied dividends and $10k of interest. Your total income would be $90k, but your taxable income would be $66k ($90k income - standard deduction of $24k). That $66k would break down to $0 of ordinary income since $10k of interest is less than the standard deduction and $66k of preferenced income which has a 0% tax rate so your federal tax would be $0!

However, you might get as much as $1,400 of child tax credit that is refundable if your child is under 17 at the end of the year.

Since you live in a state with a state income tax you may still have that.
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Old 02-24-2018, 01:39 PM   #8
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lead (pb) is right — that’s why we “tax gained harvested “ the last couple of years before we start the Roth conversions... we pull money with no/low federal tax , reset portfolio level for potential tax loss harvesting in future ( making sure not to get into wash sale rules).

if done well, using a combo of long-term gain harvesting, IRA withdrawals, sales of bonds (with their low capital gains), use Roth funds (if really, really needed) ... one can pay a really low effective tax rate (federal) but would need to account for any state tax. {since we don’t use ACA, I haven’t looked into what guide rails you need to stay within for that}
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Old 02-24-2018, 02:38 PM   #9
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This is perfect. A big thanks to all who replied! Makes much more sense to us now. In fact we're excited about the prospects of a nice zero, potentially..

Syd
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Old 02-24-2018, 03:17 PM   #10
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It gets better.

If you still have some headroom between the taxable income after taking out what you need to live on ($66 in the example I used above) and the top of $77k you can fill that with Roth conversions and pay no or little tax depending on your situation.

So, to continue the example above, you could add $11k of Roth conversions to boost your taxable income from $66k to $77k and your ordinary income would increase from $10k to $21k... still under the $24k of itemized deductions... so your total tax will still be $0 but you have moved $11k out of your tIRA into a Roth and paid no tax on it at all! That $11k will grow tax free until you withdraw it.
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Old 02-24-2018, 03:25 PM   #11
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You keep your taxable income down with non-taxable interest/dividends; i.e., muni bonds, vs. taxable ones. More room for cap gains at zero percent rate.
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Old 02-24-2018, 03:43 PM   #12
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I use a different approach... all bonds in tax-deferred accounts so only interest in taxable account is from online savings account... cash component of AA and that is only $1-2k a year. Rest of taxable account income is all dividends... and mostly (85%) qualified dividends.
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Old 02-24-2018, 04:39 PM   #13
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I use a different approach... all bonds in tax-deferred accounts so only interest in taxable account is from online savings account... cash component of AA and that is only $1-2k a year. Rest of taxable account income is all dividends... and mostly (85%) qualified dividends.
while you're looking up all this, look at capital gains carry over losses. This are useful too when you have some.

Also, with health insurance, look at HSA compatible plans. You can bank/invest the HSA contributions and deduct the contributions from your income.
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Old 02-24-2018, 05:03 PM   #14
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I guess that I prefer to avoid losses... I don't have a single purchase lot with an unrealized loss... not even close.

But I agree that if you have losses by all means, harvest them and use them to offset ordinary income or gains.
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Old 02-24-2018, 05:15 PM   #15
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Kitces has a nice article with a few graphics explaining the 0% LTCG and QDIVs. The tax brackets, rates, and deductions have changed, but the bar charts do a pretty good job illustrating the situation for income, LTCG, QDIVs, and deductions.

https://www.kitces.com/blog/understa...p-up-in-basis/

Seems like you get the picture. As I was approaching ER, the Boggleheads post below opened my eyes to the tax opportunities in ER. A bit of rambling and debate, but you might find the results informative w/r to spending needs vs reported income. It's a whole new ball game in ER without the regular paycheck, enjoy.

https://www.bogleheads.org/forum/viewtopic.php?t=87471
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Old 02-24-2018, 05:16 PM   #16
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I guess that I prefer to avoid losses... I don't have a single purchase lot with an unrealized loss... not even close.

But I agree that if you have losses by all means, harvest them and use them to offset ordinary income or gains.
Neither do I now. I RE in 2015 and reconfigured some of my investments. Some of the gyrations in 2015 and early 2016 provided opportunity to capture some losses. Remember late Aug 2015 (about the 24th) when we got the China dip and the market froze at the opening. Oil falling apart. I'm still subtracting 3k a year off income.
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Old 02-25-2018, 06:53 AM   #17
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It gets better.

If you still have some headroom between the taxable income after taking out what you need to live on ($66 in the example I used above) and the top of $77k you can fill that with Roth conversions and pay no or little tax depending on your situation.

So, to continue the example above, you could add $11k of Roth conversions to boost your taxable income from $66k to $77k and your ordinary income would increase from $10k to $21k... still under the $24k of itemized deductions... so your total tax will still be $0 but you have moved $11k out of your tIRA into a Roth and paid no tax on it at all! That $11k will grow tax free until you withdraw it.
pb,

How do you suggest we might consider taking our annual $85K? All at once, quarterly, monthly? If only once, is there a time during the calendar year which is best?

Most $ is with Vanguard and T Rowe. I imagine either company would set up some type of auto direct deposit into a checking account at regular intervals. Any insight you could share would be much appreciated.

Syd
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Old 02-25-2018, 04:42 PM   #18
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I'm not sure the timing of when you take the $85k out makes much difference. Easiest way might be annually or some sort of automatic withdrawal.

What I do is have a couple of years withdrawals in an online savings account that is part of my taxable retirement funds. I have a monthly automatic transfer to the local credit union account that I use to pay bills. Then when I rebalance in December, I sell stocks to replenish the online savings account and draft out my taxes and do a Roth conversion to top it up to the $77k. After the first time it is a piece of cake.
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