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Old 06-06-2013, 09:09 AM   #21
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It didn't seem like there was enough detail on the first theoretical case to agree/disagree. And while they may have avoided taxes in the theoretical year, they may only be delaying taxes on the non-muni portion of their portfolio (arguably at higher rates in the future), though again that's hard to know with so little detail.

The individual and corporate tax code in the US is far too complex, needs to be simplified considerably, though I am not holding my breath until when/if we ever have public campaign financing (not holding my breath on that either).
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Old 06-06-2013, 09:11 AM   #22
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Originally Posted by haha View Post
Here's another one.

I do not believe this. I am single like this widow, have no earned income, no pension, modest social security, and sub $10,000 RMDs. Yet this year I expect to pay about $5000 federal tax as per Turbo-Tax, having taken some considerable tax losses that I got from badly timed gold equity investments though my overall trading has been positive. I've filed single since 2007, and 2007 through 2012 my average annual FIT paid was $7168.

I think the only way this wealthy widow could pay this low tax is have huge NOLs, and likely also huge capital gain losses. I could pay very low taxes too if I just saw to it that I lost money all the time. The other possible explanation is pure fabrication.

If anyone has actually accomplished this, please tell me how.

Ha
I tend to agree with Ha. Would really like to see a "real" return to know how this is achieved, especially with the AMT side of things.
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Old 06-06-2013, 10:25 AM   #23
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Hmm, I'm going to get hit with a big tax bill next year.

My speculation in HPQ made me $37k in short term capital gains this year. I'll also have about $8k in dividends by the end of the year. This is in my taxable brokerage account.

I don't have anything that I want to sell for a capital loss. So, it is what it is. It can be hard to pay low taxes when you are making a profit.
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Old 06-06-2013, 11:46 AM   #24
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I tend to agree with Ha. Would really like to see a "real" return to know how this is achieved, especially with the AMT side of things.
How about 10K SS, 40K LTCG/QDIV, 120K muni interest?
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Old 06-06-2013, 11:56 AM   #25
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For 401K/IRA/SS I agree that one cannot avoid taxes on those assuming they are over the deductions/exemptions threshold. As for AMT, the AMT code explictly seperates out Capital Gains and Qualified Dividends for the 15%/0% rate before then applying the AMT 26%/28% on the remaining income. So if a person has lots of Munis, Qualified Dividends and then some other income that are below various deductions the tax.
That's why the "pays zero tax" doesn't ring true. If you have social security income, you'll probably be paying the AMT rate on 85% of it from dollar zero even if the rest of your income is from qualified dividends. Even though you don't pay AMT rates on qualified dividends, the total income (excluding muni income) determines when you start paying AMT and most deductions like property taxes don't apply under the AMT rules. And you also have to be careful the type of muni income to avoid AMT taxes on muni income as well.

But, I agree it can be quite low.
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Old 06-06-2013, 12:09 PM   #26
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Relying on municipal interest has been good move for some years. But in my book, the credit risk added to the rate risk is too large to make this a comfortable retired person portfolio.

I've given up on making interest rate predictions, but duration is risk, period- and if you don't have duration with munis you won't have income. I guess if someone has $10,000,000 in intermediate term municipals she could have both reasonable duration and reasonable income. But if you had that much money, wouldn't you want more income?

Ha
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Old 06-06-2013, 12:24 PM   #27
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How about 10K SS, 40K LTCG/QDIV, 120K muni interest?
Assuming filing jointly:

This is not high enough SS to push into AMT - as long as the muni bonds owned aren't subject to AMT, and some are.

Note that muni income does count against your taxable threshold for social security income, but as long as the SS income is below ~34K, 50% of it taxable should have you in the 0% tax bracket as far as I can determine. Something like that anyway.

But once your ordinary taxable income plus LTCG/QDIV exceeds $80.8K, you'll start paying AMT rates on the ordinary income portion, including the taxable portion of the SS income, I expect. No AMT deductions either (except for charity and mortgage interest I think).

As long as most of your income is from munis, you're OK.

It's the high cap-gain rate income that causes taxes to rise on whatever ordinary income is taxable. Once it crosses $80.8K (just for the cap gains rate income), you'll probably start paying AMT rates on part of the ordinary income. And by then any cap gains income above $72.5K less ordinary taxable income is already subject to 15% cap gains tax.

The thresholds are much lower on AMT for a single filer. They are getting pretty close in the above scenario as far as I know - $51,900 for 2013.
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Old 06-06-2013, 12:50 PM   #28
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How about 10K SS, 40K LTCG/QDIV, 120K muni interest?
Assuming filing single (widow case):

In this case, taxes will be paid on part of the capital gains since the threshold is $36.25K for cap gains plus taxable income. So whatever combined after deductions exceeds that.

This is not high enough SS to push into AMT - as long as the muni bonds owned aren't subject to AMT, and some are.

Note that muni income does count against your taxable threshold for social security income, but as long as the SS income is below ~17K, 50% of it taxable should have you in the 0% tax bracket as far as I can determine. Something like that anyway.

Once LTCG/QDIV income crosses $51.9K, you'll probably start paying AMT rates on part of the ordinary income (half the SS in this case). And by then any cap gains income above $36.25K less ordinary taxable income is already subject to 15% cap gains tax.
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Old 06-06-2013, 01:47 PM   #29
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Originally Posted by Midpack View Post

The individual and corporate tax code in the US is far too complex, needs to be simplified considerably, though I am not holding my breath until when/if we ever have public campaign financing (not holding my breath on that either).
IIRC, Apple was a very recent example of what is wrong with our complicated tax code. I believe that the CEO of Apple recently testified that Apple's Federal return resulted in a two foot high pile of paper. Apple also used some clever positioning to avoid paying taxes, apparently legal, but probably not what was intended.
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Old 06-06-2013, 01:47 PM   #30
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Muni interest will also be taken into the calculation for ACA (ObamaCare) so while a person might not be paying a direct tax to the Federal government for it, it will hit you with ACA. Especially for the examples given above where there is significant muni income.
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Old 06-06-2013, 02:53 PM   #31
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Originally Posted by haha View Post
Here's another one.

I do not believe this. I am single like this widow, have no earned income, no pension, modest social security, and sub $10,000 RMDs. Yet this year I expect to pay about $5000 federal tax as per Turbo-Tax, having taken some considerable tax losses that I got from badly timed gold equity investments though my overall trading has been positive. I've filed single since 2007, and 2007 through 2012 my average annual FIT paid was $7168.

I think the only way this wealthy widow could pay this low tax is have huge NOLs, and likely also huge capital gain losses. I could pay very low taxes too if I just saw to it that I lost money all the time. The other possible explanation is pure fabrication.

If anyone has actually accomplished this, please tell me how.

Ha
5k seems high but I am not a pro. What is your SS? Do you get a lot of CD interest?
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Old 06-06-2013, 02:55 PM   #32
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People forget that in order to have that dividend income, the original "earned" income was " taxed at ordinary income rates the FIRST time.

They also forget the dividend rate whether by design or not, was a way to encourage further investment of this already once taxed money, so that the government continued to "share" in it. Granted to a lesser degree but they still get a piece of it.

I don't agree that dividend income should be taxed at ordinary income rates. It doesn't really matter what I think however, since the government will do what it wants to do. But just like with everything else, if they change it, there may be "unintended" consequences perhaps.
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Old 06-06-2013, 02:56 PM   #33
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Apple also used some clever positioning to avoid paying taxes, apparently legal, but probably not what was intended.
Not to be too cynical, but complex tax codes that legally allow deductions and "tax expenditures" to narrow groups is exactly what campaign contributions buy. That's why they're never addressed despite populist support, they just add new ones and increase complexity. Campaign finance is at the root of many of our policy issues...often making debates on issues irrelevant.
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Old 06-06-2013, 03:24 PM   #34
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Not to be too cynical, but complex tax codes that legally allow deductions and "tax expenditures" to narrow groups is exactly what campaign contributions buy. That's why they're never addressed despite populist support, they just add new ones and increase complexity. Campaign finance is at the root of many of our policy issues...often making debates on issues irrelevant.

Bingo, the tax code will only change with respect to complexity due to the lobbying groups who want to keep as convoluted and complex as possible.

We will never see a more simple tax code than what it is at present.
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Old 06-06-2013, 03:29 PM   #35
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IIRC, Apple was a very recent example of what is wrong with our complicated tax code. I believe that the CEO of Apple recently testified that Apple's Federal return resulted in a two foot high pile of paper. Apple also used some clever positioning to avoid paying taxes, apparently legal, but probably not what was intended.
Who is to determine the 'intent'? These are numbers, it's not like 'love' or 'fair' - they can and should be defined in unequivocal terms.

If the rules are so complex and ill defined, what can one expect? I put the blame on the rule-makers.

One simple example, AFAIK, regarding wash sales, the term ' substantially identical ' has never been defined. That's crazy - it either is or it isn't. The rule makers failed.

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Old 06-06-2013, 04:55 PM   #36
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Hmm, I'm going to get hit with a big tax bill next year.

My speculation in HPQ made me $37k in short term capital gains this year. I'll also have about $8k in dividends by the end of the year. This is in my taxable brokerage account.

I don't have anything that I want to sell for a capital loss. So, it is what it is. It can be hard to pay low taxes when you are making a profit.
If you have the liquidity to do so, couldn't you buy a position in the stock that you have the capital loss in and then sell the first lot, which crystallizes the loss but doesn't change your overall investment position (assuming SID method)?
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Old 06-06-2013, 05:20 PM   #37
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I'm skeptical of the claims in the article. Unfortunately, there is insufficient detail to confirm the claims. However, if I enter the income of the Case I Wisconsin couple and the $30k of deductions of the headline case, I get $8,059 in tax on $135k of income (since the $75k of muni-income is tax exempt).

While $8k of tax on over $200k of income is a very modest tax rate, it is a heck of a lot more than the minimal tax amounts cited in the article and, as others have mentioned, also ignores the income given up by investing in munis vs taxable bonds.

If I further assume $113k of taxable bond income in place of the $75k of muni income, the tax would be $29k more so the munis are probably a wash after state income taxes.

I used Taxbrain® | 2012 FREE Tax Calculator
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Old 06-06-2013, 05:23 PM   #38
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5k seems high but I am not a pro. What is your SS? Do you get a lot of CD interest?
+1 If I enter $10k of pension income and $40k of SS for a single with standard deduction the tax is only $276.

per Taxbrain® | 2012 FREE Tax Calculator
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Old 06-06-2013, 05:24 PM   #39
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Well donations should be what one feels conformtable with and not some mandated amount or else what is the difference between that and a tax. Our income is around $1 million and our donations is around $9K so I guess we are far worse than this person using your standards.
Since you shared...

Some people don't want tax dollars to be used to help unfortunate people and expect charities to handle it. It concerns me when people who donate little (comparatively speaking) to charities AND don't want to pay taxes.

I respect people who strive to pay 10% of their gain in money and time to help others. If you never heard the parable of the "widow's mite", it is addressed reasonably well on Wiki.

Everyone has their own moral compass and fortunately, we have the ability to get our compasses re-calibrated as long as we are on the earth.

Be well.
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Old 06-06-2013, 05:29 PM   #40
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10% is very unusual in my experience - in fact, virtually unheard of. Congratulations on your generosity.

See Charitable Giving Statistics | NPTrust
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