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Long term capital gains and qualified dividends and 0% taxation
Old 01-12-2013, 10:46 AM   #1
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Long term capital gains and qualified dividends and 0% taxation

Current tax law gives ERs a chance at a bargain rate of 0% on long term capital gains and qualified dividends, within the 15% bracket for ordinary income. For a single person in 2013 that is roughly a taxable income of <$36,250.

It appears to me that although this may be possible, for a single person it is not going to be easy. In my case, 70% or more of my assets are taxable. I am 71. When I add my modest SS and RMDs to income from a royalty trust, REIT, and several MLPs, some interest from old CDs that still have a return, and expected qualified divs, I am going to be pretty much out of 15% bracket. This means I will do only strategic stock sales- ie. if I think the gain may not last. In this case, the tax on the sale is merely a cost of saving the gain. Doesn’t seem that a planned program of taking gains to reduce the potential tax is going to happen. I think it might work fine for someone who can get a much earlier start, or who does not have some legacy taxable investments that would be very taxspensive to sell.

Also, the mlps and royalty trusts shelter more of their income when new in the portfolio, but as the assets get depreciated down, more income starts falling into various taxable categories, much of it ordinary income. Most of mine are getting some age on them, and I never will know until it is too late to sell other appreciated stock if I have any room (in the 15% bracket) or not. My guess is that in a year or so, no more room will even be possible.

I am not good at the search function here- I think RE Wahoo can find anything that has ever been posted- but not me. Anyway, I think there was a very helpful discussion a few years ago about how if you have long term capital gains, and you get ordinary income or do a Roth conversion that produces enough ordinary income to push capital gains or qual divs out the top of that 15% bracket, in effect those capital gains that now fall in the 25% bracket are going to be taxed at not 0%, not at 15%, but at 30%.
I am afraid I had only a dim understanding, but it was enough to convince me. I think the key is that where previously you had ltcg in the 15% bracket being taxed at 0%, now that space is occupied by ord income being taxed at 15%, and the ltcgs that formerly occupied that space in the 15% bracket are now pushed into the 25% bracket, also being taxed at 15%. So you have some amount x of ordinary income (say from a conversion) costing .15x in tax, and amount x of ltcg displaced by the conversion, also being taxed at 15%. So that conversion x is costing 30% in tax.
Is this crazy?

So based on this understanding, it looks like I will not have any more Roth conversions, even though I had planned over time to convert every last penny. And no programmed capital gain harvesting, unless the business seems seriosly broken.


Can people please comment? Have I misunderstood something?

(Reposted from SS thread where I think it did not belong.)


Ha
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Old 01-12-2013, 11:35 AM   #2
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Yes, you have it right. rIRA conversion and taxes is a short thread that has a chart that can help make it easier to picture how each $1 you convert over the 15% bracket is not only taxed at 15%, but pushes $1 of previously untaxed dividend or LTCG into a 15% tax, for an effective 30% rate.

Actually the first $8700 + exemptions and deductions (but not counting divs and LTCGs) is taxed at 10%, plus another 15% for any divs or cap gains you push above the overall 15% line, so you will have some at a 25% effective rate, not 30%. In fact I've thought about converting to that point on purpose, figuring I might be over the 15% bracket in income alone once I'm collecting a small pension and taking RMDs, but I haven't convinced myself that's the right move yet.
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Old 01-12-2013, 11:37 AM   #3
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And the easiest way to see this is to use simple numbers in a tax program like turbo tax, or just learn how the Qualified Dividend and Capital Gains Worksheet works and run numbers in that.
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Old 01-12-2013, 11:54 AM   #4
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Running Bum, thanks for your comments and the link. A very important insight I believe.

Ha
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Old 01-12-2013, 02:06 PM   #5
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Ha,
Two rays of hope for you:
-- As you probably already know, it's possible that much of your SS benefits won't be taxed. Using TurboTax or another program to "dry run" your situation would give you the best answer, but here is an online calculator that claims to tell how much of your SS benefits are taxable, and how much ($$) they'll add to your taxes. (I haven't tested it, don't know if it is accurate)
-- The changes to the way brokers and mutual fund companies are having to keep track of your cost basis if you choose the "specific ID" method may open up new opportunities to tax-loss harvest if you've previously been lazy (like me) and used the "Average Cost" basis instead. This is all very easy and convenient now. If a stock, ETF, or mutual fund has a bad year, doing this could let you capture some losses with a few clicks of the mouse and thereby sell more appreciated assets that year while staying under the ceiling of the 15% bracket. More on that in this post and others in that thread.
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Old 01-12-2013, 03:03 PM   #6
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Increase your deductions.
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Old 01-12-2013, 04:01 PM   #7
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Thus it can pay to invest tax-efficiently in a taxable account in order to avoid income except for LTCG and qualified dividends and return of capital. So no MLPs, no REITs, no Bonds, no CDs, no royalty trusts in a taxable account. If you want 'em, put them in a tax-advantaged account.

And try to complete most Roth conversions before starting SS at age 70. Too late for that I suppose, but maybe others can be mindful.
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Old 01-12-2013, 04:15 PM   #8
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For folks who quit their "real" job and downshift to something less stressful before ready to FIRE, off-the-books cash income gigs will probably be even more appealing now. In addition to avoiding the taxes on the income, this would provide more "headroom" to convert tIRAs to Roths, to start 72t deductions in tIRAs (to reduce later RMDs) and for 0%CG in their taxable accounts, all before starting SS.

Tax evasion is wrong, but folks will be tempted.
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Old 01-12-2013, 05:01 PM   #9
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Pardon my ignorance but how do you keep CDs out of taxable accounts and in tax advantaged accounts?

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Originally Posted by LOL!
Thus it can pay to invest tax-efficiently in a taxable account in order to avoid income except for LTCG and qualified dividends and return of capital. So no MLPs, no REITs, no Bonds, no CDs, no royalty trusts in a taxable account. If you want 'em, put them in a tax-advantaged account.

And try to complete most Roth conversions before starting SS at age 70. Too late for that I suppose, but maybe others can be mindful.
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Old 01-12-2013, 05:46 PM   #10
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Pardon my ignorance but how do you keep CDs out of taxable accounts and in tax advantaged accounts?
You buy them in your tax-advantaged accounts and do not buy them in your taxable accounts. Every IRA vendor I have ever had allowed me to purchase CDs. Nowadays, it's click-click-click, "You have a CD!", but in the old days you would call somebody up or walk into the bank where you had your IRA.
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Old 01-12-2013, 08:20 PM   #11
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It occurred to me that the tax bracket for a single person does not seem to leave that much room, yet for a married couple at $90K (including exemptions and standard deduction) it is enough to keep me happy. I wonder why that is so.

Perhaps it's because a couple can live for so much less than 2X of what the single person needs?

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Increase your deductions.
I wish I had big mortgages on my homes. Too late now, as no bank will make loan to people like me without an "income stream", as discussed in another thread.
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Old 01-12-2013, 08:57 PM   #12
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Originally Posted by NW-Bound View Post
It occurred to me that the tax bracket for a single person does not seem to leave that much room, yet for a married couple at $90K (including exemptions and standard deduction) it is enough to keep me happy. I wonder why that is so.

Perhaps it's because a couple can live for so much less than 2X of what the single person needs?
That's my guess. Single people may spend a little more day in, day out, since to do anything with another human requires leaving your house, or having someone over. And certain expenses like heat and light and cable and even family cell-phone plans likely don't add much for a couple over a single, once the marriage is down to just the couple. Single people must spend more on average in coffee houses and bars.

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Old 01-13-2013, 08:26 AM   #13
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Single people must spend more on average in coffee houses and bars.

Ha
Which I think helps explain why marrieds live longer.
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Old 01-13-2013, 08:29 AM   #14
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I wish I had big mortgages on my homes. Too late now, as no bank will make loan to people like me without an "income stream", as discussed in another thread.
Give appreciated assets to charity & save the Fed & any state taxes, avoid the cap gains tax, & make more room in the 0% cap gains bracket with the deductions. Still doesn't cover all the cost, but sure makes your charitable giving a lot less expensive.
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Old 01-13-2013, 09:39 AM   #15
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Which I think helps explain why marrieds live longer.
It's not really longer, it just seems like it...
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Old 01-13-2013, 09:42 AM   #16
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Give appreciated assets to charity & save the Fed & any state taxes, avoid the cap gains tax, & make more room in the 0% cap gains bracket with the deductions. Still doesn't cover all the cost, but sure makes your charitable giving a lot less expensive.
What deductions ? even when I had a mortgage I just barely got over the standard limit. I've never had any deductions that amounted to anything.
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Old 01-13-2013, 10:21 AM   #17
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Pardon my ignorance but how do you keep CDs out of taxable accounts and in tax advantaged accounts?
OB, this thread has some information on the subject.
Vanguard CD's?

I can also vouch for the accuracy of LOL!'s reply. I have my checking account at one of the big national banks. A few years ago, they increased the minimum balance of total funds required to maintain free checking. I chose to meet the requirement by moving some IRA funds over to the bank.

I went into the bank, filled out a form for a trustee-to-trustee transfer of the necessary amount of IRA funds held in a MMA at either Schwab or Fidelity. In a second form, I directed that the cash received at Big Bank should be used to purchase a CD within the new IRA account. Easy.
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Old 01-13-2013, 05:18 PM   #18
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What deductions ? even when I had a mortgage I just barely got over the standard limit. I've never had any deductions that amounted to anything.
Back when the mortgage interest was in the double digit range, or even later at 7-8% range, it was not difficult to get over the standard deduction. With the interest as low as it is now, one needs a larger home, or two homes, to get something. Silly of course, if one spends money on RE merely to get some deductions.

Recently, I have been mulling the idea that if I had mortgages, at these low rates it would not be a bad thing, as it opens up some options under our screwy tax laws. Someone was saying something about the coming Obamacare subsidy may be favorable to people with less income too.

Arghh... I did not mean to turn this into another mortgage thread.
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Old 01-13-2013, 05:45 PM   #19
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Recently, I have been mulling the idea that if I had mortgages, at these low rates it would not be a bad thing, as it opens up some options under our screwy tax laws. Someone was saying something about the coming Obamacare subsidy may be favorable to people with less income too.
Sorry--a mortgage deduction won't help you qualify for PPACA health insurance subsidies. Those subsidies are based on MAGI, apparently with inclusion of SS benefits (and foreign interest, etc). More in this thread.
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