LT Cap Gains: effects on taxes and MAGI

[HadEnuff]

My "above the line" MAGI, for ACA purposes will be in the neighborhood of 42K for 2017.

I have an opportunity to harvest about 20K in gains from an after-tax account, and doing so will give me maybe a 3K LT Cap Gain.

How will this effect the "above the line" MAGI value for ACA?

Being it's LT, will it be taxed at all?

Over the years I have had very little money in after-tax accounts.

[Texas Proud]

Just do a quick run in your tax program....

First, how is a $20K gain only a $3K LTC gain? Do you have carryover losses that you want to use? If so, then I think my below answer is not correct...

From what I remember, it will reduce your ACA credit big time ($20K)... and if you have to pay tax on the gain that would be added on top...

But, I do not think you would have to pay cap gain tax...

[LOL!]

$3K in net capital gains is definitely "above the line." One can see that by looking at Form 1040.

Will you pay LTCG tax? That depends on what else is going on with your tax return which you did not post for us to look at.

[HadEnuff]

I should go back to basics here.

Say you invest 100K in a stock fund. After a year and a half the fund has increased by 20%, so now your 100K is worth 120K.
You want to rebalance by selling 20K of the fund to get back to 100k.
I assume you take the 20K out, and 20% of that is treated as Capital Gains. Is that correct?

Does the fact that you received a 1099 declaring Capital Gains from the fund (although you never saw it) and you paid tax on those Capital Gains, have on effect on the cost basis?

[Souschef]

Quote:

Originally Posted by HadEnuff I should go back to basics here. Say you invest 100K in a stock fund. After a year and a half the fund has increased by 20%, so now your 100K is worth 120K. You want to rebalance by selling 20K of the fund to get back to 100k. I assume you take the 20K out, and 20% of that is treated as Capital Gains. Is that correct? Does the fact that you received a 1099 declaring Capital Gains from the fund (although you never saw it) and you paid tax on those Capital Gains, have on effect on the cost basis?

Absolutely-your cost basis is now 120K. But, there is a difference between the fund increasing in value and you reinvesting any LTCG.
Example: You bought 100K in the fund and the fund is now worth 120K To rebalance, you sell 20K, and receive the cash. The current long-term capital gains tax rates are 0%, 15%, and 20%,depending on your AGI.
However, If the 20K had been reinvested and you paid the tax from a 1099, there would be no further tax due when you sell the 20K as your cost basis changed.

[LOL!]

Quote:

Originally Posted by HadEnuff Does the fact that you received a 1099 declaring Capital Gains from the fund (although you never saw it) and you paid tax on those Capital Gains, have on effect on the cost basis?

Of course you saw it. I'm not sure what you mean by this statement.

If you have $100K of shares that grow to $120K, the cost basis is still $100K.
If you sell $20K of your $120K, then that leaves you with $100K in the account, but ...

The $20K is return of capital and some realized capital gains. The percentage of return of capital is 100/120 = 83.33% and the realized capital gains is 16.67% ( not 20%). So the realized capital gains are $3,333 that goes above the line and you pay tax on (if there are no offsetting realized losses).

The $100K remaining in the account is $83,333 of cost basis and $16,667 of unrealized capital gains.

[mamadogmamacat]

I can only speak to the taxable question not ACA (my MAGI is too high for ACA nor are there any plans in my state acceptable to me anyway). The taxable question is related to your taxable income, not to your AGI. For example I have 10k of LT cap gains plus qualified dividends this year, my taxable income is only 21k (not including the 10k) so the 10k is taxed at 0%. A sweet deal indeed. Too bad my state income tax situation is not so sweet, at least not until I reach 62 when most retirement income will be sheltered. Have no idea what your state is like tax wise, but probably something you should check into.

[HadEnuff]

Quote:

Originally Posted by LOL! Of course you saw it. I'm not sure what you mean by this statement. If you have $100K of shares that grow to $120K, the cost basis is still $100K. If you sell $20K of your $120K, then that leaves you with $100K in the account, but ... The $20K is return of capital and some realized capital gains. The percentage of return of capital is 100/120 = 83.33% and the realized capital gains is 16.67% ( not 20%). So the realized capital gains are $3,333 that goes above the line and you pay tax on (if there are no offsetting realized losses). The $100K remaining in the account is $83,333 of cost basis and $16,667 of unrealized capital gains.

OK, I'm making a mess of this.

I went back and took a look at my2016 1099 for the fund and there was no CG distribution.
There was a 1680 "ordinary" dividend and a 1560 "qualified" dividend.
What is the difference between and ordinary and a qualified dividend.
No money was taken out of the fund. The dividends were reported on my taxes.

[RunningBum]

I think HadEnuff is talking about two events:


The fund declared a cap gains distribution. He says he didn't see it so I assume that means he reinvested it. This is a taxable event, and the amount of that raises the basis. So if it was a $2000 distribution, the basis is now $102,000 if he reinvested it.


Second event, he sold $20,000 worth of stock. If the purchase was done in the last few years (since 2011?) the mutual fund must provide you with the basis cost of the sale. The amount will depend on whether you use avg cost, FIFO, or specific ID, but it's roughly LOL's math, but with the increased basis.


Assuming I'm understanding the situation correctly.

[HadEnuff]

Quote:

Originally Posted by RunningBum I think HadEnuff is talking about two events: The fund declared a cap gains distribution. He says he didn't see it so I assume that means he reinvested it. This is a taxable event, and the amount of that raises the basis. So if it was a $2000 distribution, the basis is now $102,000 if he reinvested it. Second event, he sold $20,000 worth of stock. If the purchase was done in the last few years (since 2011?) the mutual fund must provide you with the basis cost of the sale. The amount will depend on whether you use avg cost, FIFO, or specific ID, but it's roughly LOL's math, but with the increased basis. Assuming I'm understanding the situation correctly.

thanks RunningBum. As I corrected in the post before yours, the 1099 did not list a CG, but rather, Ordinary and Qualified Dividends. I have not taken the 20K out yet, as I am trying to learn what the tax consequences would be, if I were to do that.

[mamadogmamacat]

qualified dividends get the same favorable tax treatment as LT cap gains. Looks like almost all your dividends on this particular 1099 were qualified, so that is good. Check out IRS pub 550 for the detailed definition, which I cant remember off hand. Of course it all depends on your taxable income as to what percent the qualified dividends are taxed at.

[RunningBum]

Quote:

Originally Posted by HadEnuff thanks RunningBum. As I corrected in the post before yours, the 1099 did not list a CG, but rather, Ordinary and Qualified Dividends. I have not taken the 20K out yet, as I am trying to learn what the tax consequences would be, if I were to do that.

Same effect for reinvesting dividends, it increases your basis. It's like you got the cash, making it a capital event, and choose to buy the same fund with that money, only they did it in one step. for you.

Qualified dividends are like LTCGs, with a 0 or 15% (or greater for high income people) rate. Ordinary dividends are taxed as regular income.

[HadEnuff]

1680 "ordinary" dividend and a 1560 "qualified" dividend, in 2016.
if CG or Qualified Dividends are not taxed, due to my taxable income level, do they still raise the cost basis?

Upon redeeming the 20K, is it my choice to decide if I use FIFO, or cost averaging to determine cost basis?

[Texas Proud]

Quote:

Originally Posted by HadEnuff 1680 "ordinary" dividend and a 1560 "qualified" dividend, in 2016. if CG or Qualified Dividends are not taxed, due to my taxable income level, do they still raise the cost basis? Upon redeeming the 20K, is it my choice to decide if I use FIFO, or cost averaging to determine cost basis?

yes they do...


So, from the mish-mash of posts, this is what I think you are saying...

You invested $100,000 in a MF...
Last year you got a 1099 with $1,680 in divis....

if this is all that has happened, then you basis is $101,680....


If the value of the fund is $120,000 and you plan to sell $20,000 then.... two things can happen... according to if you can do specific sale or not...

If you cannot do specific sale, then you are selling $20K with a gain of $20,000 X ($120,000/$101,680) - $20,000 or $3,603 gain...

If you can do specific, you then need to see if selling that divi is cheaper than selling the original investment...


HOWEVER!!! Why not go to your MF site and take a look at what gain you will get... I have only been with Fidelity and Vanguard for many years, but I KNOW that both sites will give you gain info on all investments... very simple... no questions to people on a forum to know what is going to happen...

[LOL!]

Quote:

Originally Posted by HadEnuff OK, I'm making a mess of this. I went back and took a look at my2016 1099 for the fund and there was no CG distribution. There was a 1680 "ordinary" dividend and a 1560 "qualified" dividend. What is the difference between and ordinary and a qualified dividend. No money was taken out of the fund. The dividends were reported on my taxes.

So you are looking at a 1099-DIV. There are explanations of 1099-DIV on the web. For instance: https://personal.vanguard.com/pdf/1099DIV_012017.pdf

Note that part of the $1680 ordinary dividend is the $1560. So you got $1680 in ordinary dividends of which $1560 was a qualified ordinary dividend and $120 was a non-qualified ordinary dividend [and/or short-term cap gain distribution, see next post].

If no money was taken out, then I assume (which could be wrong) that the $1680 was used to buy more shares. That means you bought more shares. Those new shares that you bought with the $1680 paid to you have a cost basis of $1680.

[meierlde]

Quote:

Originally Posted by LOL! So you are looking at a 1099-DIV. There are explanations of 1099-DIV on the web. For instance: https://personal.vanguard.com/pdf/1099DIV_012017.pdf Note that part of the $1680 ordinary dividend is the $1560. So you got $1680 in ordinary dividends of which $1560 was a qualified ordinary dividend and $120 was a non-qualified ordinary dividend. If no money was taken out, then I assume (which could be wrong) that the $1680 was used to buy more shares. That means you bought more shares. Those new shares that you bought with the $1680 paid to you have a cost basis of $1680.

Note that many MFs report short term capital gains as non qualified dividends (since they are taxed at the same rate)

[LOL!]

Quote:

Originally Posted by HadEnuff 1680 "ordinary" dividend and a 1560 "qualified" dividend, in 2016. if CG or Qualified Dividends are not taxed, due to my taxable income level, do they still raise the cost basis? Upon redeeming the 20K, is it my choice to decide if I use FIFO, or cost averaging to determine cost basis?

People are kept confused by the terminology used with mutual funds. I have seen some confusion in this thread. Your cost basis is what you paid for shares whether you bought shares with a check or ACH contribution or whether you bought shares with a distribution of dividends or a distribution of capital gains.

Here is a hint: Never think of a dividend or other distribution as anything but money that came out of your account and went into your pocket. Even if you automatically reinvested the distribution, it came out of your account, went into your pocket, then it came out of your pocket and you used it to buy more shares. That's what automatic reinvestment does.

Note that automatic reinvestment does NOT increase your cost basis in the shares you already owned. It just gives you new shares with their own cost basis. The total cost basis of all your shares is the sum of those two numbers.

Unfortunately, FIFO is NOT a cost basis method. It is a way of identifying shares to sell. Mutual funds can have average basis per share and specific basis per share. FIFO (first-in-first-out) is required to be used when you have chosen to use average basis. If you have not chosen to use average basis, then you may also still specify that the first shares you bought are the shares to be sold. And if you do not specify, the IRS will assume FIFO. However, if you use the cost basis method of Specific Identification, then you can specify other shares to be sold which may be to your tax advantage.

I've typed too much, so I'll stop.

[HadEnuff]

Thanks, everyone.

I have some work to do. MF is with VAng. so tomorrow I'll get on the site and follow your very good suggestions.

Thanks again!