Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Combat Tax Exclusion Zone, IRAs, and Capital Gains Tax
Old 12-09-2019, 09:46 PM   #1
Recycles dryer sheets
Pajaro's Avatar
 
Join Date: Sep 2010
Location: Montgomery
Posts: 72
Combat Tax Exclusion Zone, IRAs, and Capital Gains Tax

I will deploy to a combat zone for 12 months beginning in July 2020 and am looking for advice on how to maximize the financial benefits of the situation (I have to focus on something to keep my sanity). My two big questions:

1) For the biggest bang, does it make any difference when I contribute to my ROTH IRA, or do I need to wait until I get to the combat zone to make the contribution? I don't see where it makes any difference, but some way older threads on the subject make it look like it's best to wait until I deploy. That way I'm putting tax free money into the ROTH IRA which will be tax free when I take it out. However, $6,000 is going into the ROTH IRA regardless of whether or not it was taxed. I will have $6,000 in taxable income in January 2020. If I put it into a ROTH IRA, how would the outcome be any different than if I waited until the original $6,000 was tax free?

2) Am I thinking correctly about how this could help me with capital gains tax?

As an O-6 with 22 years of service, my salary in 2020 will be roughly $11,000 per month ($132,000 for the year). My wife has no income from work. During the deployment, I will not pay income tax on the first $7,700 of income each month (that's the officer tax free cap because it's the maximum enlisted salary). $132,000 - ($7,700 x 6 months) = taxable income of $85,800. The standard deduction in 2020 for married filing jointly is $24,400, so now my taxable income is $85,800 - $24,400 = $61,400.

Long term capital gains tax is 0% for taxable incomes less than $78,950. If my understanding is correct, I could have $17,550 in capital gains ($78,950 - $61,400) and pay zero capital gains tax. Do I understand this correctly?

Of course, I'm going to invest $10,000 in the Savings Deposit Program and get the guaranteed 10% annual return!

Thanks for the help! Pajaro
__________________

Pajaro is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-09-2019, 10:27 PM   #2
Thinks s/he gets paid by the post
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 3,922
1. Is there any special deployment credit associated with contributing to the Roth IRA? I don't think so. If the threads you've read are implying that it's better to put $6K of your tax-free earnings when you deploy in July than it is to put $6K of your taxable earnings in January, I think that is wrong. It shouldn't matter which $6K you put in because money is fungible. Most here would suggest putting the money in in January (or as soon as you have it) so that more growth is sheltered inside the Roth.

2. Yes, you're thinking about it correctly. You can google "capital gain harvesting" for plenty of information on the subject. However, do note that the numbers will get better in 2020 because the standard deduction for MFJ in 2020 will rise to $24,800, and the top of the 0% capital gains tax rate will rise to $80,000 in 2020.

Also note that the capital gains need to be long term. Short term capital gains are taxed as ordinary income.

Finally, you should consider if you have any other sources of income that will add to your taxable income and reduce the amount of capital gains you can harvest.

HTH.
__________________

__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 12-10-2019, 03:08 PM   #3
Recycles dryer sheets
Pajaro's Avatar
 
Join Date: Sep 2010
Location: Montgomery
Posts: 72
Thanks for the confirmation. That's great news on the MFJ standard deduction and the new top limit for 0% capital gains tax! I appreciate the help.
Pajaro
Pajaro is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Capital Gains, Income Tax, Property Tax and Mortgage Interest Deductions nico08 FIRE and Money 11 11-14-2013 05:53 PM
AMT and the Zero Capital Gains Tax in 2008? moperry Hi, I am... 10 03-06-2009 10:09 PM
Rebalancing? Deploying to a combat zone in 2008? Here's a tax trick... Nords Young Dreamers 0 06-26-2008 07:17 PM
Question on tax basis and capital gains on stock sale gettingthere FIRE and Money 15 02-09-2008 10:04 AM

» Quick Links

 
All times are GMT -6. The time now is 06:01 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2020, vBulletin Solutions, Inc.
×