Help with quick tax question.

[bw5972]

Should I realize LTCG in my taxable account before year end? I'd like to have little or no Federal taxes due as I have not filed any quarterly estimates.

Detail for 2017
Age 58
Earned income = 0
Dividend income = 12,000
Mort Int Deduct = 5,600
Property Tax = 3,600
Realized STCG = -8400
Realized LTCG = 12,400

I have about 50,000 in unrealized long term gains in a taxable account.
My CPA has left the business so I am looking for input on the best action to take between now and year end.

Thanks

 

[pb4uski]

Absolutely.

Top of 15% tax bracket is $37,950 and you are at $2,750 based on your OP so you could realize up to $35,200 in gains and pay $0 in tax.

YMMV so verify it with Taxcaster before proceeding but I'm pretty sure that is right.

ETA: I assume that you are single since you didn't indicate that you were married... if married there is even better news.

 

[RunningBum]

Yes, definitely. If you have a traditional IRA I would convert at least as much as you can do tax free (up to the amount of deductions and exemptions). Personally I'd convert in the 10% bracket as well, but if you really don't want any taxes, stop at 0. You could make a 4th quarter estimated payment with no issues since you can show that's when your income came, with form 2210.


After you've converted, top off your 15% bracket with the free LTCGs. You didn't say if you are single or married. That changes the top of the bracket.

 

[bw5972]

Yes, definitely. If you have a traditional IRA I would convert at least as much as you can do tax free (up to the amount of deductions and exemptions). Personally I'd convert in the 10% bracket as well, but if you really don't want any taxes, stop at 0. You could make a 4th quarter estimated payment with no issues since you can show that's when your income came, with form 2210.


After you've converted, top off your 15% bracket with the free LTCGs. You didn't say if you are single or married. That changes the top of the bracket.

I am not married and have no ACA subsidy concerns (Megacorp retiree plan until 65). As I will not draw from IRA until at least age 62, I have a few years to better plan and implement a ROTH conversion strategy, just want to end 2017 well.

 

[pb4uski]

+1 on if OP choses Roth conversions over gains trading that they can just compute the tax and pay estimate before Jan 15, 2018 and file Form 2210 using the annual installment method and have no penalty or interest.

 

[frayne]

What is your filing status, single, married, head of household ?

 

[bw5972]

What is your filing status, single, married, head of household ?

Single, I am not married and have no ACA subsidy concerns (Megacorp retiree plan until 65). As I will not draw from IRA until at least age 62, I have a few years to better plan and implement a ROTH conversion strategy, just want to end 2017 well.

 

[RunningBum]

It's certainly up to you, but I truly doubt that with any strategy you come up with later, you'll regret converting at 0% today. That's the last I'll say.

 

[frayne]

It's certainly up to you, but I truly doubt that with any strategy you come up with later, you'll regret converting at 0% today. That's the last I'll say.

+1

 

[LOL!]

You have plenty of time to buy tax software tonight and figure out how to use it.

You may want to do Roth conversions to the top of the 15% marginal income tax bracket and pay some tax. Not doing so may cost you quite a lot in future taxes.

 

[pb4uski]

^^^^ This is what I have been doing the last 5 years. I've converted a little over $250k and paid ~7.5% in federal tax.... I figure that once SS starts I'll be paying 15% or 25% so I'm saving 7.5-17.5% by doing Roth conversions now while I can...... and while I also have substantial capital gains I am realizing them over time as well as I sell taxable investment to fund living expenses.

For me capital gains are a double edged sword.... on one hand I love them because who wouldn't love 0% but OTOH the reduce the amount of low-cost Roth conversions that I can do... bad!

 

[yidal8]

It's certainly up to you, but I truly doubt that with any strategy you come up with later, you'll regret converting at 0% today. That's the last I'll say.

Sorry, but don't understand this: what is meant by "0% today"? When converting, don't I pay tax on selling my traditional IRA based on my tax bracket?

Same if realizing LTCG to move into Roth: don't I pay the 15% flat tax on those gains?

 

[pb4uski]

If your ordinary income (excluding qualified dividends and LTCG) before Roth conversions is less than deductions and exemptions then a portion of your Roth conversions ends up not taxed (effectively at 0%) because it is absorbed by deductions and exemptions. A small portion of mine are.

There is no such thing as realizing LTCG to move into Roth... you can only convert (transfer) money from a tIRA to a Roth (or make contributions if you have earned income which is not the OP's situation).

If you realize LTCG in a taxable account then capital gains tax is 0% or 15% depending on your level of taxable income/tax bracket.

 

[RunningBum]

Sorry, but don't understand this: what is meant by "0% today"? When converting, don't I pay tax on selling my traditional IRA based on my tax bracket?

Any income offset by HSA contributions, exemptions, deductions, etc is free from tax. If you converted the exact amount of those offsets, your taxable income is 0, thus 0% tax. It makes no sense to me to defer this until you come up with an overall strategy. You should take the free conversion anytime you can as you'll never beat 0% on a Roth conversion. Whether you should continue it into the 10% or 15% bracket warrants more study, but when SS benefits start, and pensions for some, it moves most people into the 15% (12% soon, I guess) bracket. Taking advantage of at least the 10% bracket seems like a smart thing for most but it depends on how much tIRA you have to convert. If you only have a little bit, you might be able to do it all at 0% over a few years.

Same if realizing LTCG to move into Roth: don't I pay the 15% flat tax on those gains?

I don't know what you mean by "realizing LTCG to move into Roth" as those aren't related things. You convert from a tIRA into a Roth. Realizing LTCGs is separate. Since I covered Roth conversion above, I'll explain LTCGs.

If you income including dividends and LTCGs less deductions, exemptions, etc, keep you in the 15% bracket (soon to be 12%), qualified dividends and LTCGs are not taxed. Model it in a tax program or taxcaster to see for yourself. Look at the Qualified Dividends and Capital Gains Tax Worksheet if you want to see the mechanics behind it.

 

[yidal8]

OK, thanks.