Who says there is no Tax Haven in US?

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Cpadave

Recycles dryer sheets
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John and Sarah are married couple who live in Austin, TX. John is a 55 yrs old recently retired from his own dental practice. Sarah is 50 yrs old tax accountant who also recently retired. They bought their house 20 yrs ago at 200K which is currently worth $1.5Million. The mortgage was recently paid off. John and Sarah were savvy investors and had invested in few growth stocks (like amazon) at 200K which is worth $2Million. These individual stocks are not paying and dividends. John had contributed the maximum amount to his Keogh plan and Sarah did the same in her 401K at her old firm. The assets within the retirement accounts have nicely grown to $2Million. In addition, they had invested all their after tax savings in S&P fund worth about 2.6Million with a cost basis of 700K. They have a son who has moved out few years ago and has a successful career. Their net worth including their house is $8.1 Million. Since they don’t qualify for Medicare, they applied for ACA coverage with a nice subsidy as their only taxable income is dividend from the S&P fund at about 50K . There is no Federal income tax as they falls in to zero capital gain bracket. There is no state income tax since they live in TX. At 65, they will take out the minimum required distribution which would be somewhat offset by a nice standard deduction and maybe some direct charitable contribution out of the retirement funds. When they pass away, their son will inherit all the assets. There would be no Estate tax since they are under the limit. The son will get a step up basis for all the assets and will sell them with zero tax due.
 
The topic is really tax policy so the thread was moved to the Public Policy forum where it's a better fit.
 
Cpadave said:
John and Sarah are married couple who live in Austin, TX. John is a 55 yrs old recently retired from his own dental practice. Sarah is 50 yrs old tax accountant who also recently retired. They bought their house 20 yrs ago at 200K which is currently worth $1.5Million. The mortgage was recently paid off. John and Sarah were savvy investors and had invested in few growth stocks (like amazon) at 200K which is worth $2Million. These individual stocks are not paying and dividends. John had contributed the maximum amount to his Keogh plan and Sarah did the same in her 401K at her old firm. The assets within the retirement accounts have nicely grown to $2Million. In addition, they had invested all their after tax savings in S&P fund worth about 2.6Million with a cost basis of 700K. They have a son who has moved out few years ago and has a successful career. Their net worth including their house is $8.1 Million. Since they don’t qualify for Medicare, they applied for ACA coverage with a nice subsidy as their only taxable income is dividend from the S&P fund at about 50K . There is no Federal income tax as they falls in to zero capital gain bracket. There is no state income tax since they live in TX. At 65, they will take out the minimum required distribution which would be somewhat offset by a nice standard deduction and maybe some direct charitable contribution out of the retirement funds. When they pass away, their son will inherit all the assets. There would be no Estate tax since they are under the limit. The son will get a step up basis for all the assets and will sell them with zero tax due.
Click to expand...

But..... in order to stay in zero capital gains bracket they need to limit their income to $103,150 in 2019 ($78,750 top of zero LTCG bracket + $24,400 standard deduction)... a whopping 1.6% WR.... plus if their house is worth $1.5m their property taxes are probably $25k or so a year so if they intend to avoid taxes entirely they won't be living like they have $6.6 million of investments.

Sounds to me like the scenario that you described is great for the son but not so great for the parents. Plus if they live long the will ultimately get whacked with taxes on RMDs.

Don't let the tax-tail wag the enjoyment-of-your-retirement dog. (But I get your point).
 
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pb4uski said:
But..... in order to stay in zero capital gains bracket they need to limit their income to $103,150 in 2019 ($78,750 top of zero LTCG bracket + $24,400 standard deduction)... a whopping 1.6% WR.... plus if their house is worth $1.5m their property taxes are probably $25k or so a year so if they intend to avoid taxes entirely they won't be living like they have $6.6 million of investments.

Sounds to me like the scenario that you described is great for the son but not so great for the parents. Plus if they live long the will ultimately get whacked with taxes on RMDs.

Don't let the tax-tail wag the enjoyment-of-your-retirement dog. (But I get your point).
Click to expand...

Then they can move to a low RE tax state and pay a little of state income tax. Since they have no mortgage, expensive medical insurance, college tuition, the cashflow amount is decent for two people to have a nice life.
Maybe the son who getting all the assets tax free (income and Estate) can give them some tax free gift as well.
 
OP what point are you trying to make here?

For one you assigned them 1.2 million dollars of phantom net worth to real estate. They pay real estate and sales taxes. They paid plenty of taxes during their prime earning years.

Their son will not get the retirement account tax free, he'll be paying taxes on them.

What exactly are you getting at here?
 
ivinsfan said:
OP what point are you trying to make here?

For one you assigned them 1.2 million dollars of phantom net worth to real estate. They pay real estate and sales taxes. They paid plenty of taxes during their prime earning years.

Their son will not get the retirement account tax free, he'll be paying taxes on them.

What exactly are you getting at here?
Click to expand...

That all the unrealized appreciation outside of tax deferred accounts will go untaxed. That there is no asset test for ACA, when the couple has a networth of over $8m.
 
T for Texas, T for Tennessee

Too bad they'd have to pay such taxes if the house was sold so they could move. Real Estate taxes are low in Tennessee--where they also have virtually no state income taxes.
 
Cpadave said:
Then they can move to a low RE tax state and pay a little of state income tax. Since they have no mortgage, expensive medical insurance, college tuition, the cashflow amount is decent for two people to have a nice life.
Maybe the son who getting all the assets tax free (income and Estate) can give them some tax free gift as well.
Click to expand...

And when they move they will have a $1.3 million gain on the sale of their principal residence of which $500k will be exempt but $800k will be taxed at 15% for $120k in taxes.
 
Cpadave said:
That all the unrealized appreciation outside of tax deferred accounts will go untaxed. That there is no asset test for ACA, when the couple has a networth of over $8m.
Click to expand...

Ok, let's try it again... what are you getting at that is new?
 
So "John and Sarah" have somehow managed to thread the tax needle, but in doing so, painted themselves into a corner of being rich on paper, but unable to really spend it. They can't cash in on their savings hence...income.

I don't think any of the painted picture here would surprise anyone on this forum. But I also don't think it's a position many of us strive to. If I had 8M I wouldn't hold myself to spending $50k a year or what would have been the point.

ETA:
What is the problem you are trying to solve? What is your solution?
Is this another "let's means test for the ACA!" again? Because if so, that train has long left the station.
 
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ivinsfan said:
OP what point are you trying to make here?

For one you assigned them 1.2 million dollars of phantom net worth to real estate. They pay real estate and sales taxes. They paid plenty of taxes during their prime earning years.

Their son will not get the retirement account tax free, he'll be paying taxes on them.

What exactly are you getting at here?
Click to expand...

Oh, And between standard deduction and zero tax bracket, they don't to pay tax on 103K of income.
 
pb4uski said:
And when they move they will have a $1.3 million gain on the sale of their principal residence of which $500k will be exempt but $800k will be taxed at 15% for $120k in taxes.
Click to expand...

I could have set them up in TN. This way they do not have high RE taxes and don't need to sell the house. Didn't realize TX has high RE taxes.
 
Cpadave said:
That all the unrealized appreciation outside of tax deferred accounts will go untaxed. That there is no asset test for ACA, when the couple has a networth of over $8m.
Click to expand...


That's your definition of "tax haven" ..you throw estate tax, ACA rules and such all together in one basket? Remember they haven't sold their house or cashed in their large pile of Amazon stock. On paper today, they could be worth 8 million. If you know what housing and Amazon stock will go for 30 years into the future you shouldn't be wasting your time posting here.:dance:

You've mentioned ACA at least twice in this thread.
 
Cpadave said:
.... Maybe the son who getting all the assets tax free (income and Estate) can give them some tax free gift as well.
Click to expand...

Most kids are barely able to support themselves, not to mention supporting their rich parents in retirement.... a very crazy idea.
 
pb4uski said:
Most kids are barely able to support themselves, not to mention supporting their rich parents in retirement.... a very crazy idea.
Click to expand...

Why would they need to support the parents. The cash flow is more than enough when you don't have much taxes to pay, no mortgage, and no high medical insurance?
 
ivinsfan said:
That's your definition of "tax haven" ..you throw estate tax, ACA rules and such all together in one basket? Remember they haven't sold their house or cashed in their large pile of Amazon stock. On paper today, they could be worth 8 million. If you know what housing and Amazon stock will go for 30 years into the future you shouldn't be wasting your time posting here.:dance:

You've mentioned ACA at least twice in this thread.
Click to expand...

Ah! Now I remember this guy. He's the one that had a hair across his a$$ about income in tax deferred accounts not counting as ACA income and was booed off the stage.

He's back for another bite at the rotten apple.

http://www.early-retirement.org/for...-deferred-accounts-for-aca-subsidy-96462.html
 
Aerides said:
I don't think any of the painted picture here would surprise anyone on this forum. But I also don't think it's a position many of us strive to. If I had 8M I wouldn't hold myself to spending $50k a year or what would have been the point.
Click to expand...


This paragraph makes a lot of sense to me. I’m sure I could find ways to reduce my tax payments and I admire the many members that do so while not depriving themselves of a life well-lived, whatever that means to them.
 
Well no... you included ACA too. So what's your preference... no tax-deferred savings? No estate tax exemption? No stepped-up basis?
 
They've carefully managed their investments to have low taxable income. There is nothing wrong in that.

They've already paid taxes on their after-tax savings, so they invested in something that pays low taxable income at the preferred capital gains rates. Again - smart move it they don't mind the volatility.

Eventually they will be pulling funds from their tax deferred accounts plus social security and be paying taxes on all of that.

If they don't need to sell any stocks and realize gains to finance their current living expenses, then that is their choice not to!

But just because they are in a zero tax bracket today, doesn't mean they will be in a zero tax bracket once their reach 70. They will probably be paying quite a bit.
 
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Aerides said:
So "John and Sarah" have somehow managed to thread the tax needle, but in doing so, painted themselves into a corner of being rich on paper, but unable to really spend it. They can't cash in on their savings hence...income.

I don't think any of the painted picture here would surprise anyone on this forum. But I also don't think it's a position many of us strive to. If I had 8M I wouldn't hold myself to spending $50k a year or what would have been the point.

ETA:
What is the problem you are trying to solve? What is your solution?
Is this another "let's means test for the ACA!" again? Because if so, that train has long left the station.
Click to expand...

First of the $8, $1.5 is in the home which they can enjoy fully to the rest of their life . The $2mi in retirement fund will be spend after 65, so they will enjoy that too. It is so unusual to have millions of it is assets that have appreciated and not taxed go to heirs. They can enjoy a nice lifestyle with amounts taken out with not much tax.
 
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