Zero Tax Capital Gains Strategy

[aim-high]

A very informative article from Kitces on how to keep your capital gains taxes at 0% and get an step-up in basis every year for those whose situation fits - low income, modest capital gains.

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

 

[eta2020]

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.

 

[ggbutcher]

Ha! Finally, a treatise on applying the graduated LTCG that I can understand... Thanks, aim...

 

[aim-high]

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.

I'm in the process of setting up that kind of situation, but I'll be 48 / 49.

 

[nwsteve]

Thanks for this link. Kitces explanation with the "stack" diagrams really helped my understanding. I had kinda figured out most of the "dark magic" of the 0 bracket cap gain but never appreciated the IRS's treatment of ordinary income being used first to fill up lowest brackets. Kitces graphics really make the mechanics crystal clear.
Thanks again
Nwsteve

 

[daylatedollarshort]

This is a interesting blog post on the subject:

Never Pay Taxes Again | Go Curry Cracker!

Excerpt:

"So how do we eliminate taxes? All we need to do is follow 4 simple rules:

• Choose leisure over work
• Live well for less
• Leverage ROTH IRA Conversions
• Harvest Capital Losses AND Capital Gains"

I actually work part-time and have a totally different tax and cost of living situation, but I thought it was an interesting post nonetheless.

 

[eta2020]

I'm in the process of setting up that kind of situation, but I'll be 48 / 49.

That makes two of us.

And then once I cross 65 I don't need medical insurance subsidies so math changes a bit and one can start pulling money from IRAs and 401ks.

 

[pb4uski]

I did this in my first year of retirement... harvested a bunch of gains and reinvested in the same securities.... not quite the same because of Vanguard's stupid frequent trading rules but effectively the same because certain proportions of the 500 index and extended market funds are equal to the total stock market fund.

However the bad surprise is while my federal tax was a big old goose egg, I did write a good sized check to the state as capital gains are not exempt from state income taxes.

I still harvest tax free gains, but more to support living expenses and pay taxes on roth conversions, which I now prioritize over capital gains harvesting to try to reduce the time i spend in the 25% tax bracket once I turn 70.

 

[sengsational]

Am I correct in saying that if someone, ehem, has a large long term capital loss carry over, the zero percent capital gain idea is not so very interesting? When I say "large" I mean in relation to gains that could be harvested.

 

[harley]

I've been doing this for the most part for the past 8 years. I have a modest income, a lot of cash, still carrying over losses from 2008/9, been strategically selling and rebuying individual stocks, harvesting losses to balance the gains, and doing Roth conversions up to the max of the 15% bracket, while paying practically nothing in Federal taxes. It's been great, and really pisses off my buddy who is still employed and is paying in one of the upper brackets. All it takes is knowledge of how the taxes are implemented, and the lack of income to create the space to work in.

I'm not sure how long I'll be able to do this, at least to the same extent. I've been DCAing into the market for the past few years, decreasing my cash stash. To make up for that I've diversified into rental RE, which is pumping up my income nearer to the top of the bracket (for DW and I). I've actually reset most of my basis' on my big winners, so I'm going to spend the rest of my bracket space to continue to do Roth conversions.

It's been such a great deal I've been waiting for the gov't to close it up. But while it's available I'm going to use it.


Edit: At the end of the article Kitces says there's no reason to harvest losses, but sometimes it's just a good way to get rid of investments that you don't want anymore, while creating more room for Roth conversions.

 

[harley]

Am I correct in saying that if someone, ehem, has a large long term capital loss carry over, the zero percent capital gain idea is not so very interesting? When I say "large" I mean in relation to gains that could be harvested.

No, I don't think that's right. Just because you have a large carryover doesn't mean you have to use it. I've been claiming the basic $3K against my regular income, but other than that have just been balancing gains and harvested losses from the current year. I consider them separate pools of money. My losses from a couple of UITs I was forced to sell at the bottom will allow me to offset $3K for probably another 7-8 years (not sure exactly), but other than that I don't take it into consideration at tax time.

 

[LOL!]

Am I correct in saying that if someone, ehem, has a large long term capital loss carry over, the zero percent capital gain idea is not so very interesting? When I say "large" I mean in relation to gains that could be harvested.

I don't think that's quite correct. One should be able to realize enough gains to zero-out the carryover loss anytime they want and get into tax-gain harvesting. In practice, one will want to be doing Roth conversions while living off of return of capital and realized gains offset by the carryover loss. That means one will be in a better situation than the Ritholtz blog up until one uses up the carryover loss.

So the 0% LT cap gains tax rate should always be in one's mind if one has a large carryover loss.

 

[kaneohe]

Am I correct in saying that if someone, ehem, has a large long term capital loss carry over, the zero percent capital gain idea is not so very interesting? When I say "large" I mean in relation to gains that could be harvested.

Just be aware that if (w/o the loss carryover) you would otherwise be in the 15% bracket or below and could do tax gain harvesting and pay 0% on LTCG,
w/ the loss carryover, you will need to use up some of those losses to balance out the gains which, in some sense, "wastes" them since they will be used up and unavailable in the future to offset ordinary income (typically at a higher tax rate).

 

[LOL!]

Dying early also wastes them in a sense, so don't try to take them to your grave or urn.

Besides, you can usually get more where they came from.

 

[karluk]

Am I correct in saying that if someone, ehem, has a large long term capital loss carry over, the zero percent capital gain idea is not so very interesting? When I say "large" I mean in relation to gains that could be harvested.

In my view, taxpayers with a large capital loss carryover should prioritize Roth conversions over capital gains harvesting. The Roth conversions are a useful tool to get the taxpayer to the top of the 15% bracket while also stretching out the number of years the capital loss carryover can be used for a $3,000 deduction against ordinary income.

This strategy has limitations, of course. At some point the taxpayer will probably need the money raised by selling taxable stock funds, either for living expenses or to pay taxes on the Roth conversions. But $3,000 in capital loss carryover is definitely more effective when used to reduce ordinary income by $3,000 than when it is used to offset $3,000 in newly realized capital gains.

 

[haha]

Unless I am misunderstanding something, isn't being pleased by huge losses that seems to stretch on forever similar to being pleased about buying an expensive car to depreciate in your real or phony business?

In any case, the tax effect represents money you have already burned.

Ha

 

[harley]

Unless I am misunderstanding something, isn't being pleased by huge losses that seems to stretch on forever similar to being pleased about buying an expensive car to depreciate in your real or phony business?

In any case, the tax effect represents money you have already burned.

Not sure about others, but I'm far from pleased. However, thanks to my FA at the time, as well as my own ignorance, I was in a couple of time limited investments that automatically sold in 2009. This created the (to me, huge) losses. I agree, money already burned. So looking at the current tax advantage of having them is akin to making weak, semi-bitter lemonade from lemons. Making the best of a bad situation.

 

[LOL!]

Actually it is not the same as a depreciating car because if one had not sold the equities for a loss, they would have returned to pre-loss values and had gains. Instead, whatever stocks you replaced the loser stocks with got the gains.

So the money is not quite burned, but is used to save on taxes because of the differences between ordinary income tax rates, long-term capital gains tax rates, and shifting of income from high-tax years into later low-tax years further providing tax savings. You might say the business is not phony.

 

[M Paquette]

Unless I am misunderstanding something, isn't being pleased by huge losses that seems to stretch on forever similar to being pleased about buying an expensive car to depreciate in your real or phony business?

In any case, the tax effect represents money you have already burned.

Ha

Yup. The only thing to be pleased about is being sufficiently aware of the goofy tax code to know that converting the loss from virtual to 'real' (or what passes for real in the tax code) has some advantage going forward.

This is not a small thing, as it can save us much money that would otherwise go to taxes in many cases.

Given lemons, we might as well make lemonade.

 

[sengsational]

Thanks, all, for the enlightenment. Except I'm not quite enlightened yet.

Say I have -10K carry over loss (certainly would have liked to avoid this and not proud of it!!). Then I sell something and get a 5K gain. Schedule D has me put -5K on line 15 and then on line 21 I put -3K (the smaller of -5K and -3K).

So where does the 0% LTGC rate come in?

Sorry if this is a "dumb question"!

 

[aim-high]

Thanks, all, for the enlightenment. Except I'm not quite enlightened yet.

Say I have -10K carry over loss (certainly would have liked to avoid this and not proud of it!!). Then I sell something and get a 5K gain. Schedule D has me put -5K on line 15 and then on line 21 I put -3K (the smaller of -5K and -3K).

So where does the 0% LTGC rate come in?

Sorry if this is a "dumb question"!

In the particular case you mentioned, you don't have any LTGC. Your 10K loss will offset your 5K gain. It will leave you with 5K loss. Of that, 3K can be deducted against ordinary income. However you'll have a 2K carryover loss to be used the following year.

0% LTGC rate comes in play when you're in the 10% or 15% tax bracket for ordinary income and the gains you harvest don't bump you over the 15% tax bracket.

The OP article is fairly complex, but it's well written. I suggest reading it again slowly and looking up the terms in a glossary of tax terms so that you understand what they mean.

 

[sengsational]

The OP article is fairly complex, but it's well written. I suggest reading it again slowly and looking up the terms in a glossary of tax terms so that you understand what they mean.

You caught me! Were you looking over my shoulder as I skimmed over the article and was flummoxed by the terminology.

Thanks for the clarification. The bottom line is that I need to burn through my carry-over losses in order to see the "0% LTCG" rate. Thats sort of what I meant by "not interesting", in my earlier post. But it could become interesting if I could create gains larger than my carry-over. But most of my investable assets are in "tax advantaged" accounts, so not a whole lot of CG harvesting to be done in my case.

 

[Chuckanut]

Interesting.

 

[gauss]

Thanks for the clarification. The bottom line is that I need to burn through my carry-over losses in order to see the "0% LTCG" rate. Thats sort of what I meant by "not interesting", in my earlier post. But it could become interesting if I could create gains larger than my carry-over. But most of my investable assets are in "tax advantaged" accounts, so not a whole lot of CG harvesting to be done in my case.

I had the same reaction when I began reading this thread. I have a large carry-over loss that I thought would prevent me from exploiting any maneuvers when I am in a 0% LTCG bracket. I had done pro-forma returns with my tax software to look at this and it always went to the carry-over loss first rather than exploit the 0% LTCG bracket. Perhaps this is just a programming decision on the part of the software I used, but I assumed that it was actually a requirement of the tax law.

If anyone believe that you can execute sales of securities with LTCG gains while you are in the 0% bracket without first consuming your carry-over losses I would like to know more about this.

-gauss

p.s. My carry-over loss was not necessarily the result of bad investments such as Ha suggests with his car depreciation example.

In my case I bought high, then the market corrected. I sold before the end of the year to book the loss than repurchased the shares after 30 days to reestablish my position in the security.

 

[karluk]

I had done pro-forma returns with my tax software to look at this and it always went to the carry-over loss first rather than exploit the 0% LTCG bracket. Perhaps this is just a programming decision on the part of the software I used, but I assumed that it was actually a requirement of the tax law.

Your assumption is correct - newly realized gains are subtracted from carryover losses before taxes are assessed. That makes it downright counterproductive to realize new gains before the carryover loss is exhausted. You end up worse off than if you let the unrealized gains sit untouched - you have used up a portion of your carryover losses and can expect to have fewer years of the $3,000 deduction from ordinary income.

That is the reason I recommended in my earlier post that taxpayers with carryover losses make Roth conversions their top priority. Doing Roth conversions allows one to make full use of the 15% tax bracket without wasting future tax deductions.

I was in this very situation after 2008. I had roughly nine years of carryover losses and tried as hard as I could to stretch it as long as I could, but it only took three years to completely use up the carryover losses because of all the gains in my taxable accounts. The quick stock market recovery helped me in a lot of ways, but it really screwed up my tax planning because I wasn't able to get enough money into my Roth IRA quickly enough. Instead of getting about $27,000 in tax deductions, I had to be satisfied with $9,000.