ER tax accuracy

[makemakeyourfuture]

Is this accurate?



We intend to use our built-up brokerage account to fund life from ER to 65. Long term gains no wash sales.

Let’s say we need $140,000 a year to live our desired lifestyle. Now let’s say we withdraw that $140,000 from the brokerage account. Yes, let’s ignore dividends or income producing assets in the brokerage portfolio for a moment.



If the cost basis was 30% ( $42,000), is it correct we could possible pay no taxes as the $140,000 has a cost basis of $98,000 ( 140K-42K).

MFJ standard deduction $27,700

This would leave $70,300 of income that is capital gains but the married filing joint 0-$80,000, 0% capital gains fit this number nicely.

 

[FREE866]

Is this accurate?



We intend to use our built-up brokerage account to fund life from ER to 65. Long term gains no wash sales.

Let’s say we need $140,000 a year to live our desired lifestyle. Now let’s say we withdraw that $140,000 from the brokerage account. Yes, let’s ignore dividends or income producing assets in the brokerage portfolio for a moment.



If the cost basis was 30% ( $42,000), is it correct we could possible pay no taxes as the $140,000 has a cost basis of $98,000 ( 140K-42K).

MFJ standard deduction $27,700

This would leave $70,300 of income that is capital gains but the married filing joint 0-$80,000, 0% capital gains fit this number nicely.

Just run the numbers through this calculator....and you can put in your state too to see state tax




https://www.irscalculators.com/tax-calculator

 

[oldtimer]

Are you assuming 100% of the gains are long term gains? Then yes.
However, if there are more than the standard deduction amount are short term gains, then there will be some tax for 2023.

 

[pb4uski]

Is this accurate?



We intend to use our built-up brokerage account to fund life from ER to 65. Long term gains no wash sales.

Let’s say we need $140,000 a year to live our desired lifestyle. Now let’s say we withdraw that $140,000 from the brokerage account. Yes, let’s ignore dividends or income producing assets in the brokerage portfolio for a moment.



If the cost basis was 30% ( $42,000), is it correct we could possible pay no taxes as the $140,000 has a cost basis of $98,000 ( 140K-42K).

MFJ standard deduction $27,700

This would leave $70,300 of income that is capital gains but the married filing joint 0-$80,000, 0% capital gains fit this number nicely.

Accurate, but suboptimal.

If your only income was qualified dividends and LTCG it would be foolish to manage your income to anything less than $116,850 since your federal income tax at that level of income for MFJ both under 65 would be $0. (Ignoring the impact of state income taxes).

So let's say you needed $140k to live on and your basis was 30%...your inco would be $98k, your taxable income would be $70,300 and your tax would be zero as you observe.

However, you would be leaving $18,550 of 0% tax bracket wasted. So you could sell $26,928 of shares which would result in $18,850 of additional income which would be taxed at 0%. The one second later rebuy the same shares for $26,928. Your basis in the shares would be $8,378 higher and save you taxes when you sell those shares later in life and save you on taxes then.

What I just described is called gains trading. Also, no need to worry about wash sales because the wash sale rules only apply to transactions that result in a capital loss and do not apply to transactions that result in a capital gain.

Alternatively, you could have a combination of up to $27,700 of interest or other ordinary income and the remainder qualified dividends and LTCG up to $116,850 and still pay zero tax... so for example $27,700 of interest and $89,150 of qualified dividends and LTCG would also result in $0 tax.

Ain't America great!

 

[N02L84ER]

It is also suboptimal to waste the standard deduction. If you have tIRA or 401K money, it is better to Roth convert or withdraw enough to equal the standard deduction before playing around with filling up the 12% tax bracket with long term capital gains.

 

[pb4uski]

^^^ Spot on... I have a friend in that situation. We have a plan where he can drain his IRA systematically over the next 10 years and pay $0 in tax.

 

[VanWinkle]

it feels different as a retired person taking Social Security as the capital gains increase the amount of SS taxable to a point where taxes become punitive. There is a bill in the house
to eliminate taxes on SS but the chances are nil for that to pass. Another reason to delay SS for those that are able to delay.

 

[USGrant1962]

+1 on drain the IRA.

OP doesn't mention tax deferred balances. If relatively large, one should probably take a more balanced approach of drawing down or converting some of that (taxable) money sooner. That will take advantage of the low 10%/12% brackets and reduce future RMD tax bombs. Usually levelizing taxes in a low bracket over time is the most tax-efficient approach. But OP didn't provide enough info to go there (IRA/401(k) balances, pensions, SS?).

 

[G-Man]

^^^ Spot on... I have a friend in that situation. We have a plan where he can drain his IRA systematically over the next 10 years and pay $0 in tax.

Wow. I wish I could do that. Having 2 strong pensions and 2 strong SS benefits puts me in the 22% marginal tax bracket easily. Not complaining at all, but it does make tax planning challenging especially if most of your retirement portfolio is tax-deferred (401k).

 

[karen1972]

A couple additional notes:

As another mentioned no wash sales to worry about if you sell at a gain; however some funds won't let you re-buy without waiting 30 days as they don't want a ton of trading, so you may have to buy "similar" and not the same fund and that is dictated by the broker and type of fund.

Cap Gains are stacked on top of any other income, so while yes if you only had long term cap gains, you would pay zero, that is typically not the case since one usually has some dividends and interest, which lowers the amount of Cap Gains that fit in the 0% bracket.