0 percent bracket a no-brainer?

[Montecfo]

We have large traditional IRA's at about 60 percent of our portfolio. In our early 60s so we do not really have time to make a big dent in those.

But we also have large capital gains in the taxable account that im going to need to recognize soon. Holding these until my passing and avoiding the tax altogether is not an option for these particular stock holdings.

My view is that that the tax margin on capital gains (0 versus 15 pct) represents the greatest tax benefit available to me for any income. It is meaningfully better than say a 12 versus 22 pct rate on Roth conversions. And there is the added benefit that the gain in terms of lower taxes om LTCGs is realized right now, not beginning 10 years from now and over my lifetime as is the case with Roth conversions.

I'm sure many folks have confronted this and I am curious if there are differing views and reasoning.

Thanks in advance.

 

[pb4uski]

Hard to say since you don't indicate what your income is before any Roth conversions or LTCG.

If your income before Roth conversions and LTCG is less than the standard deduction (or itemized deductions if you itemize), I would do Roth conversions to bring your total ordinary income up to the standard deduction (so 0% tax on those Roth conversions) then LTCG to the top of the 0% preferenced income tax bracket.

Probably not going to be much for Roth conversions but anything at 0% is ok because it is 0% vs 22% and the capital gains are 0% vs 15%.

 

[VanWinkle]

Per Pb, get the Roth money at 0% up to 25,900 couple standard deduction and then Cap Gains up to 105,000 total income which would put the Cap Gains in the 0% also. ACA would suffer if you are in that for medical.

 

[Montecfo]

Will have div/interest income of about 30-35k.

Not relying on ACA this year.

 

[VanWinkle]

Will have div/interest income of about 30-35k.

Not relying on ACA this year.

Interest is the one that counts as ordinary income for the standard deduction. Divedends just reduce the amount of Cap Gains you can take as Qualified Dividends are taxed the same as Long term Cap Gains

 

[Montecfo]

^^^ yes, I get that.

 

[pb4uski]

So Roth convert for deductions minus interest and LTCG to fill the 0% preferenced income tax bracket.

If interest is greater than deductions then no Roth conversions and just fill the 0% preferenced income tax bracket.

 

[npage]

How do you have $0 income, no dividends, interest, truly $0? I am planning on managing mine low before age 59.5 but with bond fund interest, some dividends I can't see how one gets to zero? I am genuinely curious?

 

[Montecfo]

Outside of the strategy, it sounds like you both agree with my view.

 

[SecondCor521]

Holding these until my passing and avoiding the tax altogether is not an option for these particular stock holdings.

I'm trying to come up with a scenario where this would be the case. Since your heirs could presumably sell immediately after your death, I'm having trouble identifying a scenario.

It sounds like you might not want to disclose, but I'm still curious. If you're willing to share more about this I'd appreciate it. (If not, understood.)

 

[Montecfo]

How do you have $0 income, no dividends, interest, truly $0? I am planning on managing mine low before age 59.5 but with bond fund interest, some dividends I can't see how one gets to zero? I am genuinely curious?

It is the 0 percent capital gain bracket, which extends to $83,350 for 2022. Not zero income.

There are separate brackets for ordinary income.

 

[npage]

Got it, I misread. Roth conversions fall under the LTCG tax if below that threshold?

 

[pb4uski]

It is the 0 percent capital gain bracket, which extends to $83,350 for 2022. Not zero income.

There are separate brackets for ordinary income.

Yes, so a MFJ couple could have ordinary income (interest, unqualified dividends, Roth conversions or tax deferred withdrawals) up to $25,900 and preferenced income (qualified dividends and LTCG) of $83,350.... $109,250 of total income... and they would pay $0 tax. I love America!

 

[Montecfo]

I'm trying to come up with a scenario where this would be the case. Since your heirs could presumably sell immediately after your death, I'm having trouble identifying a scenario.

It sounds like you might not want to disclose, but I'm still curious. If you're willing to share more about this I'd appreciate it. (If not, understood.)

They are oil and gas stocks which do not meet my criteria to be core holdings or even longterm holdings. They were bought as a mid-term trade.

I have mentioned the specific names on a couple of the o&g threads here. Not really a secret, but the specifics were not really needed here.

I only said what I did to save people time spent giving me that idea.

 

[Montecfo]

Got it, I misread. Roth conversions fall under the LTCG tax if below that threshold?

No they are always ordinary income. But if I do say $110k of Roth conversions, that will be at ordinary rates, and any capital gains I recognized would be at 15 percent rate, not at zero.

So you have to limit your ordinary income if you want the zero percent LTCG bracket.

See post 13 above for an example.

 

[npage]

Yes, so a MFJ couple could have ordinary income (interest, unqualified dividends, Roth conversions or tax deferred withdrawals) up to $25,900 and preferenced income (qualified dividends and LTCG) of $83,350.... $109,250 of total income... and they would pay $0 tax. I love America!

Wow. I missed this in all my planning. I was planning on regular income tax at 12% on my roth conversions. I'll have about 10 years before we need to tap IRA's. Plan was to do roth conversions up to ACA levels. From what you describe we will in zero tax.

I figure about $25 in bond fund interest, $5 in VTi (qualified dividends)and the rest will simply be principal withdrawal from taxable account in bond fund so very little gain if any.

Assuming $109,250, I could convert $79,250 to Roth. This would mess up ACA subsidies though so I'll have to figure that out.

 

[Montecfo]

Npage you will want to become very familiar with those relationships for sure.

But just to be clear, in your example you would be using the regular tax brackets, not the capital gain rates.

 

[npage]

Npage you will want to become very familiar with those relationships for sure.

But just to be clear, in your example you would be using the regular tax brackets, not the capital gain rates.

I follow now and consistent with what I thought. I am slow. My only qualified income would be the dividends which I have in VTI and SCHD. Roth conversion is ordinary income.

Sorry to muck up convo.

 

[SecondCor521]

Yes, so a MFJ couple could have ordinary income (interest, unqualified dividends, Roth conversions or tax deferred withdrawals) up to $25,900 and preferenced income (qualified dividends and LTCG) of $83,350.... $109,250 of total income... and they would pay $0 tax. I love America!

I know you know this, but for others:

$0 federal income tax, true.

But possibly state income tax.

And possible loss of ACA subsidies.

And possible loss of FAFSA aid.

The latter three items (plus other things, like tax credits) would need to be taken into consideration in determining how much income to realize in a given year.

(I love America too.)

 

[Exchme]

You don't spend relative dollars, you spend absolute $. So if by large IRA's you mean that your RMDs + other income would make you subject to IRMAA, then attacking the IRA's hard in the years before IRMAA is likely your best strategy, even if that doesn't put a dent in them. Once IRMAA kicks in, it adds an additional 5+% to the marginal rate (applied in annoying steps of course). For instance, we converted to the top of the 24% last year and this and then will drop back to the top of the 2nd IRMAA tier (in the 22% bracket) next year when we turn 63.

Get some software and make a model, we can only guess.

 

[pb4uski]

Wow. I missed this in all my planning. I was planning on regular income tax at 12% on my roth conversions. I'll have about 10 years before we need to tap IRA's. Plan was to do roth conversions up to ACA levels. From what you describe we will in zero tax.

I figure about $25 in bond fund interest, $5 in VTi (qualified dividends)and the rest will simply be principal withdrawal from taxable account in bond fund so very little gain if any.

Assuming $109,250, I could convert $79,250 to Roth. This would mess up ACA subsidies though so I'll have to figure that out.

Yes, you will need to calculate the impact of lost ACA subsidies and include then as an additional economic cost of the Roth conversion.

 

[pb4uski]

I know you know this, but for others:

$0 federal income tax, true.

But possibly state income tax.

And possible loss of ACA subsidies.

And possible loss of FAFSA aid.

The latter three items (plus other things, like tax credits) would need to be taken into consideration in determining how much income to realize in a given year.

(I love America too.)

I never had the ACA or FAFSA impacts but I agree that they need to be considered... the old economic saying of marginal revenue compared to marginal costs.

I remember the first year that I was retired my state income tax exceeded my federal income tax for the first time ever and I was flabergasted.

 

[Montecfo]

I remember the first year that I was retired my state income tax exceeded my federal income tax for the first time ever and I was flabergasted.

I had that experience last year again with large LTCG and for the first time in decades we did not itemize.

Well the Va standard deduction is modest and there is no favorable LTCG rate. And you cant itemize for state if you did not for federal.

Net was that state was about the same as federal. Seems nutty.

 

[Montecfo]

A different tack

I guess another tack I could take is to transfer the shares to our DAF, and do a large Roth conversion offset by the charity.

Still no tax on LTCG. Could dial in the Roth conversion based on brackets and the total itemized.

 

[SecondCor521]

I guess another tack I could take is to transfer the shares to our DAF, and do a large Roth conversion offset by the charity.

Still no tax on LTCG. Could dial in the Roth conversion based on brackets and the total itemized.

Good idea. Be aware of the charitable contribution limits, which vary based on the type of charitable contribution but are in general a percentage of AGI. I don't know what they are offhand and they keep changing them, but in general if you make "too large" of a charitable contribution relative to your AGI, your deduction may be limited.