Need help understanding 0% capital gains tax in the 15% bracket

[CardsFan]

This will be my first year trying to manage income to be tax efficient. FIRE'd in February this year.

I have a substantial capital loss carryover from the sale of inherited property. I have been working it down, but it will probably take 2 more years, unless I take some additional gains this year.

When I run simulations for 2016, using Turbotax, it appears that the carry over losses are used first, so that I have no cap gains tax benefit by staying under the 15% limit. Dividends do appear to be remain untaxed in this scenario.

Has any one dealt with this before?

Thanks for any insight.

 

[Huston55]

We are in the same situation but with (it sounds like) smaller CG losses than you.

I'm just learning this too but, as I understand it:

1. Use long term CG losses to cover long term CGs first; $ for $.
2. Use your remaining headroom within the 15% tax bracket ($75,600+Std Ded+Exemption) to sell assets with LT CG. Do this based on your current estimate of 2016 taxable income.
3. Rinse & repeat each year.

There are some nuances like using LT CG losses to cover LT CGs first before using to cover ST CG and vice Versa but, I'm not there yet.


You may be whatever you resolve to be.

 

[COcheesehead]

You have capitol losses from the sale of a property? I didn't think those were possible to deduct.

 

[CardsFan]

You have capitol losses from the sale of a property? I didn't think those were possible to deduct.

The property was an unimproved lot. No buildings. At time of inheritance, it was appraised as a buildable lot (with a formal appraisal). When we tried to sell, 10 years later, the improvements required to get zoning approval severely reduced the value.

Everything I have found says this is a legitimate capital loss.

 

[CardsFan]

We are in the same situation but with (it sounds like) smaller CG losses than you.

I'm just learning this too but, as I understand it:

1. Use long term CG losses to cover long term CGs first; $ for $.
2. Use your remaining headroom within the 15% tax bracket ($75,600+Std Ded+Exemption) to sell assets with LT CG. Do this based on your current estimate of 2016 taxable income.
3. Rinse & repeat each year.

There are some nuances like using LT CG losses to cover LT CGs first before using to cover ST CG and vice Versa but, I'm not there yet.


You may be whatever you resolve to be.

Thanks, I thought that might be the answer. It probably makes sense to go ahead and use all of the carry over this year, and sell a little more to take advantage of the 0% cap gains, but stay under the limit.

FYI, ACA subsidies do not affect this, as I have a retiree plan.

 

[Sunset]

I think you are correct, capital loss carry over has to be used even before personal deduction.
It can count 3K against regular income, and of course against capital gains.

Can you harvest more capital gains by selling a stock and buy something similar (to avoid the wash rule, example sell VTI and buy SDY. ).

 

[CardsFan]

I think you are correct, capital loss carry over has to be used even before personal deduction.
It can count 3K against regular income, and of course against capital gains.

Can you harvest more capital gains by selling a stock and buy something similar (to avoid the wash rule, example sell VTI and buy SDY. ).

That is now the plan. According to this article by Kitces, it sounds like the wash rule does not apply to gains. he says you can buy back the same day.

https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/

 

[COcheesehead]

That is now the plan. According to this article by Kitces, it sounds like the wash rule does not apply to gains. he says you can buy back the same day.

https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/

I think you're right. The wash rule is for losses.

 

[Sunset]

I think you're right. The wash rule is for losses.

Yes of course, how silly of me.

 

[kaneohe]

You might want to compare results w/ tax software with your intuition.
Generally taxation of ordinary income is higher than taxation of CG within a specific income bracket. Using capital losses against capital gains would then result in less tax reduction than using against ordinary income. You do raise the basis of any new capital assets you buy so that compensates to some degree for sales in the future tho it is possible that you may not sell them or donate them so no tax would be incurred.