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Old 11-28-2014, 01:23 PM   #41
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Not true. LTCG will put you in the 25% tax bracket, causing a bump up in the LTCG rate from 0% to 15%. The 0% rate applies only to taxpayers in the 10% and 15% brackets. If you exceed those brackets, some LTCG get taxed at 15%. I would encourage you to run this through tax software yourself, because I do so every year and always get the same result. Last year, for example, my schedule D gains were included in form 1040 on line 13 and were one of the items added together to produce AGI on line 37. But I had carefully calculated what my AGI would be and adjusted my realized LTCG to conform, so I stayed just slightly below the AGI that would have put me into the 25% tax bracket and all of my gains were taxed at 0%.
I give up. I'll just encourage anyone looking to control their cap gains or income from Roth conversion to run scenarios in a tax program, paying special attention to how the QD & CG tax worksheet works to understand when CGs become taxed at 15%. It's especially important for Roth conversions because when you go over the 15% bucket, it causes the additional conversion to be taxed at 15%, and also pushes the same amount of LTCG to be taxed at 15%.
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Old 11-28-2014, 01:43 PM   #42
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I'll just encourage anyone looking to control their cap gains or income from Roth conversion to run scenarios in a tax program, paying special attention to how the QD & CG tax worksheet works to understand when CGs become taxed at 15%.
Sure, running different scenarios and understanding the QD/CG worksheet is a tremendous boost to one's understanding of the tax laws. It should convince anyone who is familiar with it to realize that LTCG are taxed at 0% as long as taxable income remains in the 15% bracket, after which the LTCG rate jumps to 15%. Looking specifically at the QD/CG worksheet, whether one exceeds the 15% tax bracket is determined by the number entered on line 8, which is the top of the 15% bracket for various filing statuses. If that amount is larger than taxable income from form 1040, line 43, then all LTCG are taxed at 0%, which is QD/CG worksheet line 11. If your taxable income has strayed into the 25% bracket, the calculations continue past line 11, and you will eventually report some LTCG on the QD/CG worksheet line 20. That's the amount that gets taxed at 15%.

Believe me, I know that worksheet well. I have to use it every year, both when I'm filing tax returns and when I'm doing year end tax planning.
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Old 11-28-2014, 02:27 PM   #43
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Sure, running different scenarios and understanding the QD/CG worksheet is a tremendous boost to one's understanding of the tax laws. It should convince anyone who is familiar with it to realize that LTCG are taxed at 0% as long as taxable income remains in the 15% bracket, after which the LTCG rate jumps to 15%. Looking specifically at the QD/CG worksheet, whether one exceeds the 15% tax bracket is determined by the number entered on line 8, which is the top of the 15% bracket for various filing statuses. If that amount is larger than taxable income from form 1040, line 43, then all LTCG are taxed at 0%, which is QD/CG worksheet line 11. If your taxable income has strayed into the 25% bracket, the calculations continue past line 11, and you will eventually report some LTCG on the QD/CG worksheet line 20. That's the amount that gets taxed at 15%.

Believe me, I know that worksheet well. I have to use it every year, both when I'm filing tax returns and when I'm doing year end tax planning.
OK, just to see if we're on the same page but saying it differently.

If all income combined exceeds the 15% bucket, divs and/or LTCG overflow and the part that overflows is taxed at 15% rather than 0%. We seem to agree here.

But the tax bracket is still 15% for the other income, line 8, which is line 43 less LTGT and qualified dividends, assuming we are still talking about someone with some CGs still taxed at 0% and some pushed into 15% (edit to say 15%, not 25%). Nothing is in the 25% bracket. This is where I'm not sure we're in agreement.
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Old 11-28-2014, 02:42 PM   #44
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OK, just to see if we're on the same page but saying it differently.

If all income combined exceeds the 15% bucket, divs and/or LTCG overflow and the part that overflows is taxed at 15% rather than 0%. We seem to agree here.

But the tax bracket is still 15% for the other income, line 8, which is line 43 less LTGT and qualified dividends, assuming we are still talking about someone with some CGs still taxed at 0% and some pushed into 25%. Nothing is in the 25% bracket. This is where I'm not sure we're in agreement.
I think we are basically in agreement, which is actually something I've thought ever since this discussion began. Straying into the 25% tax bracket affects the tax on LTCG, not on ordinary income (unless of course the ordinary income itself exceeds the top of the 15% bracket).

The puzzling thing to me is why you ever convinced yourself that I was saying anything different. Looking over my posts in this thread, I never even came close to saying that even a single dollar of income gets taxed at a 25% rate, yet you seem to have convinced yourself that I was asserting this. Perhaps we have a different understanding of the definition of "tax bracket". To me (and I believe to the IRS as well) it's simply a comparison of your taxable income on form 1040, line 43, with an upper bound. If you're above the top of the 15% bracket, you're in the 25% bracket. That has nothing to do with the actual tax you'll pay, which is determined strictly by going through the tax forms and figuring out your liability.
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Old 11-28-2014, 03:13 PM   #45
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From my perspective, if nothing is taxed at 25%, then you aren't in the 25% bracket, and conversely, if you are in the 25% bracket, then some income is taxed at 25%. We are just looking at this differently in terminology. The numbers are the same.
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Old 11-28-2014, 04:40 PM   #46
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I give up. I'll just encourage anyone looking to control their cap gains or income from Roth conversion to run scenarios in a tax program, paying special attention to how the QD & CG tax worksheet works to understand when CGs become taxed at 15%. It's especially important for Roth conversions because when you go over the 15% bucket, it causes the additional conversion to be taxed at 15%, and also pushes the same amount of LTCG to be taxed at 15%.
You are correct. I have a 2013 pro forma return where the TI is exactly $72,500 (top of the 15% tax bracket). If I then add $1,000 of ordinary income in the form of more Roth conversions, the tax increases by $300 (30%). Interestingly, if I add $1,000 of LTCG, then the tax only increases by $100 (10%).
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Old 11-28-2014, 05:59 PM   #47
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Informative

To extend a bit on saving taxes thought....If you retire at 55 and have 62k or less 0% taxed dividends or capital gains. And you are capable to supply any other money you need from cash. Lets say another 38k a year.

Then you can live on 100k a year, pay no federal taxes and collect Health Insurance subsidies . In the way you collect from Federal Government.

No you won't qualify for subsidies or even ACA, the long term gains may not be taxed, but they show up in your MAGI, which is what is used.


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Old 11-28-2014, 06:19 PM   #48
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No you won't qualify for subsidies or even ACA, the long term gains may not be taxed, but they show up in your MAGI, which is what is used.
Sure you will. 62K is the subsidy level for married couples. The other 38K is not income in that example. It's cash that was there before, or maybe from selling a 38K investment that had a 38K basis.
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Old 11-28-2014, 06:22 PM   #49
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Sure you will. 62K is the subsidy level for married couples. The other 38K is not income in that example. It's cash that was there before, or maybe from selling a 38K investment that had a 38K basis.

From the original quote I took the 100k as income, and at 62k, that's not much of a subsidy, but at least it gives you an option


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Old 11-28-2014, 06:30 PM   #50
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OK, just to see if we're on the same page but saying it differently.

.
Glad you guys got that all sorted out.......peacefully too
Just to let you know there's at least 2 folks in the world who use that 25% bracket terminology for taxable income......just for the purposes of determining whether some of the LTCG/QDIV are subject to 15% taxation and not necessarily meaning any income gets subject to that 25% rate.

In the real world, it is very easy to misunderstand mere words describing the taxation of LTCG/QDIV so it is definitely very useful to use specific numerical examples in conjunction with the picture of LTCG/QDIV floating on top of ordinary income before deciding you have a disagreement.
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