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Old 03-01-2013, 07:42 PM   #21
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OK did a little research and found that CG are taxed based on Ordinary Income tax bracket. If retired with no Ordinary Income (defined as wages, salaries, tips, commissions, bonuses, and other types of compensation from employment, interest, or dividends), am I to understanding that you could theoretically sell out on the entire 400K LTCG and pay no tax on it?
No, run some numbers through the IRS worksheet "Qualified Dividends and Capital Gains Worksheet" and you'll see this isn't true.
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Old 03-01-2013, 07:55 PM   #22
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I am one of those who had invested money wiped out by the collapse of GM and the eventual government took over of the company. I lost about $40000 in that debacle. I had no capital gain to offset that by at that time, so I took tax deduction of capital loss of $3000 a year and carried that forward. I still have $25000 left in capital loss from GM after tax year 2012. But once you started taking the yearly deduction, can you still offset the remaining against other LTCG that you have, now that I am in ER and has to start to mobilize them. So let say I have $60000 of capital gain in my other investments, and no long has ordinary income, can I use the remaining $25000 I lost with GM and reduce my total capital gain to $35000, and then draw that out at the no tax level now that I have no earned income from working? Or once you elected to deduct the loss yearly, you can only go on deducting $3000 a year instead of taking the lump sum to offset a gain? Thanks.
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Old 03-01-2013, 08:08 PM   #23
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Yes, take a look at Schedule D. You enter the entire capital loss carryover from the previous year --not just $3K-- and combine it with any gains or losses in the current year. If you still have a loss greater than $3K after all that, the loss over $3K is carried over to the following year.
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Old 03-01-2013, 08:09 PM   #24
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I am one of those who had invested money wiped out by the collapse of GM and the eventual government took over of the company. I lost about $40000 in that debacle. I had no capital gain to offset that by at that time, so I took tax deduction of capital loss of $3000 a year and carried that forward. I still have $25000 left in capital loss from GM. But once you started taking the yearly deduction, can you still offset the remaing against other LTCG that you have, now that I am in ER and has to start to mobolize them. So let say I have $60000 of capital gain in my other investments, and no long has ordinary income, can I use the remaining $25000 I lost with GM and reduce my total capital gain to $35000, and then draw that out at the no tax level now that I have no earned income from working? Or once you elected to deduct the loss yearly, you can only go on deducting $3000 a year instead of taking the lump sum to offset a gain? Thanks.
Yes, you can use the carryover capital loss against current capital gains.
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Old 03-01-2013, 08:16 PM   #25
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Yes, you can use the carryover capital loss against current capital gains.
Thank you Khufu and RunningBum. I did not know if I had started yearly deduction, I am stuck on that one path. Thanks for clearing that up for me.
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Old 03-01-2013, 08:49 PM   #26
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Bondi - the others are 100% correct. The entire remaining carry over is available to offset gains in the "current" year. In fact, the forms do not provide otherwise.
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Old 03-02-2013, 12:04 AM   #27
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As the original poster, I should have explained the math. Capital gains are taxed at 0% if you are in the 15% income tax bracket. If I have $90 in MAGI, and have about $20k in the standard deduction and exemptions, my taxable income is around $70k, which is the top of the 15% tax bracket. So no tax on LTCG. However, if I pull from the taxable IRA's up to 90k, I pay 15% tax (marginal rate). My thought is to use the cap gains first, pay no tax, then start pulling the deferred money. All the while my SS payments get larger, providing me with a form of long term care insurance - instead of paying irrationally high premiums to insurance companies.

Everyone's situation is different depending on how much you have in these buckets. But the point is, there are ways to pay little to no tax after ER, so make sure you check it out. Where else are you going to get this kind of guaranteed return?

One other misnomer - "only invest in Roth IRA's, as taxes are certain to go up in the future". 47% of American's pay no federal income tax at all. Taxes only go up in the upper brackets.
The math is really quite simple for a married couple both under age 65.

IN 2013 SD $12,200, 2 exemptions $7800 = $20,000 of completely tax-free income of any kind. Top of 15% bracket $72,500 on top of that for a total of $92,500 (total tax is $11768, on ordinary income, or ZERO on long term capital gains.) Of course other deductions or credits would change that.
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Old 03-02-2013, 12:18 AM   #28
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I am one of those who had invested money wiped out by the collapse of GM and the eventual government took over of the company. I lost about $40000 in that debacle. I had no capital gain to offset that by at that time, so I took tax deduction of capital loss of $3000 a year and carried that forward. I still have $25000 left in capital loss from GM after tax year 2012. But once you started taking the yearly deduction, can you still offset the remaining against other LTCG that you have, now that I am in ER and has to start to mobilize them. So let say I have $60000 of capital gain in my other investments, and no long has ordinary income, can I use the remaining $25000 I lost with GM and reduce my total capital gain to $35000, and then draw that out at the no tax level now that I have no earned income from working? Or once you elected to deduct the loss yearly, you can only go on deducting $3000 a year instead of taking the lump sum to offset a gain? Thanks.
Yes, the total loss will carry forward and you can deduct the full amount of any capital gains against it -- however, you need to understand one thing about his strategy.

You will be using what I assume are long term capital gains in what would be considered a short term manner - in other words they will be going against ordinary income, and you will be losing the chance to do what others are talking about here -- that is paying zero tax on $92k of long term gains. Certainly you will still be paying zero tax, but will be losing the advantage of using it later for the strategy talked about here.

The only thing I can suggest is to take any short term capital gains that you have in the first years, or just try to hold off for a few years, rolling down the loss at the slow pace of $3000 a year, pushing out these LTCG as far as you can.

It may not be practical, but it is a way to improve your returns.

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Old 03-02-2013, 12:23 AM   #29
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I don't have that much in CG's, so I'm pretty much starting with Roth conversions instead. All depends on how much you have and where, I think. Pretty much the same, except some early income is mixed CG's and Roth conversion "income". Later on, during RMD's if you still have IRA funds, it's a mix of traditional IRA withdrawals and Roth withdrawals to stay in the 15% bracket.
Just don't use up all your IRA money and put it in a Roth -- remember by the time a married couple is over 65, they are looking at closer to $30k of tax free money that can be taken out of the IRA, due to the standard deduction and exemptions and their inflation adjustment every year.

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Old 03-02-2013, 01:10 AM   #30
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FinancialDave

I am single and do not have that much capital gain. that I cannot get them all out at no LTCG by delaying taking SS until I am 70. So instead of offsetting the LTCG with capital loss I had with GM. I should save the capital loss I had to offset $3000 worth of ordinary income each year or against future gain in CG through the investments I am still holding in retirement. Is that what you are suggesting? I think that may be a good idea. Thanks for the input.
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Old 03-02-2013, 06:14 AM   #31
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bondi, I suggest you fill out a tax return and see how your money gets taxed.

For instance if you sell $100,000 of mutual fund shares, your capital gain is not $100,000 and your income does not go up by $100,000. You paid something for those shares and that is your basis or capital that you invested. Return of capital is not income and is thus tax-free. So suppose you paid $70,000 for those shares that you sold for $100,000. Your capital gain would be $30,000. That $30,000 in capital gain from that sale would be offset by any carryover loss that you still had from previous years and any tax-loss harvesting from the current year.

Plus you still get to take an additional $3000 of the carryover loss and apply it to ordinary income such as dividends or IRA conversions or IRA withdrawals.

Thus, even with plenty of money to pay your expenses, you may have no taxable income. And no taxable income means no taxes.
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Old 03-02-2013, 08:23 AM   #32
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wow, great thread, the light bulb about LTCG just went on for me.

I don't see the significance of the following statement, seems like qualified dividends are same as LTCG so why make the change?

"Strategy: To the extent that is practical, I will postion my taxable portfolio to "reduce" dividend income starting next year".
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Old 03-02-2013, 08:53 AM   #33
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While qualified dividends get the same tax rate as LTCG, that is really their only similarity.

One gets dividends every year and really has no control over when they are paid. In contrast, one has to sell shares to realize a cap gain or loss, so one has control of when that happens.

Also cap gains are offset by cap losses. And there is no limit on the offset that one can use. If one has $500,000 in net losses from 2008-2009, then that can be used until you die to offset realized cap gains going forward.

Dividends (and other ordinary income) are only offset to the extent that one has an excess of net cap losses and only up to $3,000 max a year. The rest of the net cap loss gets carried forward to the next tax year. So if one has $30,000 of dividend income annually, then only $3,000 of that can possibly be offset by a net cap loss.

Furthermore, there is a big difference between unqualified "dividend income" and "qualified dividend income" in tax rates. Bonds, bond funds, and REITs pay out unqualified dividend income that is taxed at one's marginal income tax rate. QDI gets the special lower rate. So reducing unqualified dividend income by not having CDs, savings accounts, taxable bond funds, REITs, and actively-managed mutual funds in a taxable account can save one a chunk of change on their tax return.

Also one can choose stock mutual funds thay pay out 100% qualified dividends instead of 75% qualified dividends, too. For instance, we have noticed that Vanguard index funds tend to pay out a higher percentage of qualified dividend income than Schwab index funds for the same index. In other words, not all index funds are created equal.

So I think one should strive to have no income on the top half of Schedule B and all income on the bottom half of Schedule B should be qualified.
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Old 03-02-2013, 11:17 AM   #34
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Just don't use up all your IRA money and put it in a Roth -- remember by the time a married couple is over 65, they are looking at closer to $30k of tax free money that can be taken out of the IRA, due to the standard deduction and exemptions and their inflation adjustment every year.

fd
Yep. It'll just keep me below the 25% bracket long term.
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Old 03-02-2013, 01:38 PM   #35
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wow, great thread, the light bulb about LTCG just went on for me.

I don't see the significance of the following statement, seems like qualified dividends are same as LTCG so why make the change?

"Strategy: To the extent that is practical, I will postion my taxable portfolio to "reduce" dividend income starting next year".
Just a caution, never sell investments just to satisfy some tax strategy.

I track what I call a HershCohen Dividend portfolio I saw on Wealthtrack over a year ago. This portfolio of 19 stocks is up 10.6% as of 2/28/13 and up 22.75% over the last 12 months and 3 year almost 17% per year.

Remember, qualified dividends are treated just like LTCG.

Think of the significance this way -- the dividends are an extra income stream that gets preferential tax treatment -- this income is by the way guaranteed (not in the future of course, but at least after each dividend is paid) - very DIFFERENT than long term gains that build up for 20 years and then are all lost in a week because of some company shenanigans. So sometimes current income is better than future income that may or may not come about.

If you could use some of the current income to pay your current bills this would free up other money being taxed at your marginal rate that you may be able to but in an IRA thus commanding a bigger tax break. This not only lowers your current taxable income, but gets more money into your retirement account, via the IRA deductibility.

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Old 03-02-2013, 06:50 PM   #36
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Remember, qualified dividends are treated just like LTCG.

fd
I thought qualified dividends were taxed at 15% for everyone, except high income taxpayers (over $450,000 - joint return). But LTCG receive a 0 tax rate if you are in the 15% tax bracket (or lower). Is this not correct?
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Old 03-02-2013, 07:04 PM   #37
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I thought qualified dividends were taxed at 15% for everyone, except high income taxpayers (over $450,000 - joint return). But LTCG receive a 0 tax rate if you are in the 15% tax bracket (or lower). Is this not correct?
I think qualified dividends also get the 0% rate. It's one of the things you have to watch for when trying to hit the top of the 15% tax bracket.
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Old 03-02-2013, 07:48 PM   #38
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I think qualified dividends also get the 0% rate. It's one of the things you have to watch for when trying to hit the top of the 15% tax bracket.
That's correct. You can see this for yourself on the IRS form "Qualified Dividends and Capital Gains Worksheet".
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