Low/no 2011/12 capital gains tax planning

[steelyman]

Recently, I was reviewing my finances with an eye towards leaving the working world in 2011. My situation will be a little unusual in 2012 because I anticipate having very little taxable income (that will change starting in 2013). I will not be receiving any such income until late in 2012.

Given the fact that the Bush-era tax cuts were extended through 2012, and one aspect is that the two lowest tax brackets will not owe any long-term capital gains tax (up to a limit), it makes sense for me to take advantage of that low-income year and realize gains on taxable stocks I've had for a while.

Has anyone else considered this? Any thoughts? Anything I may be missing here?

 

[LOL!]

Don't forget that your realized gains get added to AGI, so you have to be careful that you don't overdo this or you will get bumped into a higher tax bracket. You may want to use the low income year to also do some conversions to Roth IRA.

 

[bcinvest]

Sounds pretty solid. You can reset your basis even to the point that it may help you realize losses in subsequent years. There are some great tax calculators online that you can use to monitor your progress during the year.

 

[Animorph]

Good for Roth conversions also, if you can.

 

[haha]

Don't forget that your realized gains get added to AGI, so you have to be careful that you don't overdo this or you will get bumped into a higher tax bracket. You may want to use the low income year to also do some conversions to Roth IRA.

There was a good thread on this maybe 6 months ago, which I used to help me plan to realize some capital gains in 2010.

The key that I remember, and which did turn out to be true when I filled out my 2010 tax return, is to be careful of doing both capital gains and Roth conversions in the same tax year, as Roth conversions of any size will fill your 10 and 15% brackets, causing you to lose all your 0% capital gains. IOW, if all your ordinary income gives you room in those 10 and 15% brackets, your LTCG and eligible dividends up to the top of the 15% bracket will be taxed at 0, and any more LTCG qualified dividends, no matter how much, will only be taxed at 15%.

So for me at least, it was best to bunch the gain recognition in one year (this year) and do the conversion in 2010 but elect to recognize that income in 2011 and 2012. That way a lot of gain was untaxed.

Ha

 

[steelyman]

Thank you all for your feedback, it's helpful and you raise some good points to consider.

I will probably go after taxable gains only, keeping in mind the tax bracket bump mentioned. I won't be able to use all of them. I don't have any traditional IRAs to convert, and I have directed all employee contributions to the Roth version of the 401(k) since it was established.

I guess this just is a happy circumstance this year and next and don't want to "look a gift horse..."

 

[RockyMtn]

taking the cap gains at 0% is a no brainer assuming it doesn't vault you inadvertantly into a higher bracket where you end up paying the normal 20%.

Seems like you have a one time "get out of taxes jail" card so you need to do that.

Might also be a good idea to see if you can accelerate any of your expected 2013 income into 2012...assuming you have room under the cap to still get the 0% cap gains rate...cause the taxes be going up in 2013!

 

[walkinwood]

Did you use up all your capital losses from '08/'09.

 

[steelyman]

Did you use up all your capital losses from '08/'09.

That's a good question. As it happens, I currently am writing off a small amount of carried-over capital losses and have for a few years (believe it or not, these are still dot-com bombs that I fiercely avoided realizing until I decided I was really avoiding taking my medicine). I think they'll be dried up by the time it comes to file for the 2012 tax year (which is the one in question in my case). My real goal (which is probably obvious) is to reduce my income wayyyy down for '12, so your reminder is appropriate!

I don't actually have any '08/'09 losses, as I was buying (and still holding) during that period, which means it's all gains for those, given the market's advance. But I do have small losses elsewhere, which is why your reply is timely. The one bright spot about that '08/'09 nightmare is that '08 is the year my employer first offered a Roth employee plan, and I signed up immediately and maxed it out (as I'd been doing previously with the traditional option), so market gains from that point on are all gravy.