Combat Tax Exclusion Zone, IRAs, and Capital Gains Tax

[Pajaro]

I will deploy to a combat zone for 12 months beginning in July 2020 and am looking for advice on how to maximize the financial benefits of the situation (I have to focus on something to keep my sanity). My two big questions:

1) For the biggest bang, does it make any difference when I contribute to my ROTH IRA, or do I need to wait until I get to the combat zone to make the contribution? I don't see where it makes any difference, but some way older threads on the subject make it look like it's best to wait until I deploy. That way I'm putting tax free money into the ROTH IRA which will be tax free when I take it out. However, $6,000 is going into the ROTH IRA regardless of whether or not it was taxed. I will have $6,000 in taxable income in January 2020. If I put it into a ROTH IRA, how would the outcome be any different than if I waited until the original $6,000 was tax free?

2) Am I thinking correctly about how this could help me with capital gains tax?

As an O-6 with 22 years of service, my salary in 2020 will be roughly $11,000 per month ($132,000 for the year). My wife has no income from work. During the deployment, I will not pay income tax on the first $7,700 of income each month (that's the officer tax free cap because it's the maximum enlisted salary). $132,000 - ($7,700 x 6 months) = taxable income of $85,800. The standard deduction in 2020 for married filing jointly is $24,400, so now my taxable income is $85,800 - $24,400 = $61,400.

Long term capital gains tax is 0% for taxable incomes less than $78,950. If my understanding is correct, I could have $17,550 in capital gains ($78,950 - $61,400) and pay zero capital gains tax. Do I understand this correctly?

Of course, I'm going to invest $10,000 in the Savings Deposit Program and get the guaranteed 10% annual return!

Thanks for the help! Pajaro

 

[SecondCor521]

1. Is there any special deployment credit associated with contributing to the Roth IRA? I don't think so. If the threads you've read are implying that it's better to put $6K of your tax-free earnings when you deploy in July than it is to put $6K of your taxable earnings in January, I think that is wrong. It shouldn't matter which $6K you put in because money is fungible. Most here would suggest putting the money in in January (or as soon as you have it) so that more growth is sheltered inside the Roth.

2. Yes, you're thinking about it correctly. You can google "capital gain harvesting" for plenty of information on the subject. However, do note that the numbers will get better in 2020 because the standard deduction for MFJ in 2020 will rise to $24,800, and the top of the 0% capital gains tax rate will rise to $80,000 in 2020.

Also note that the capital gains need to be long term. Short term capital gains are taxed as ordinary income.

Finally, you should consider if you have any other sources of income that will add to your taxable income and reduce the amount of capital gains you can harvest.

HTH.

 

[Pajaro]

Thanks for the confirmation. That's great news on the MFJ standard deduction and the new top limit for 0% capital gains tax! I appreciate the help.
Pajaro