Capital gains taxation

[ripper1]

Hello everybody. I am planning on opening a taxable account with Vanguard from the proceeds of my old house. I have always been in tax deferred accounts and only small cd's and savings accounts. I want to open a diversified 50/50 account and make 4% withdrawals to supplement my retirement income. My question is about capital gains tax. Is it true that any gains I have from growth or dividends will not be taxed for the duration of 2011 and 2012? I am currently in the 15% tax bracket.

 

[LOL!]

Return of capital is tax-free.

Unrealized capital gains are tax-free as well and it doesn't matter what your tax bracket is. For example, I buy shares of Fund V for $10,000 and in two years those shares go up to $1,000,000. I owe no taxes until I sell some shares of Fund V.

I don't think one can predict the future tax rates in 2012 at this moment in time, but for 2011 the long-term capital gains tax rate is as low as 0% and the same goes for QUALIFIED dividends. Note that you must be careful that your dividends and realized capital gains do not put you in a higher tax bracket.

 

[kaneohe]

You should get independent confirmation that the changes talked about here actually did pass (I believe they did) 0% Capital Gains Tax Rate for 2011 and 2012 - The Finance Buff

http://tax.somersetblogs.com/2011/0...al-gains-and-dividend-tax-rates-through-2012/

Pls read the article carefully as it explains how this works.....the tax rate on LTCG and qualified dividends is 0 ......provided your taxable income (including this other income) remains in the 15% bracket. If the added income pushes your taxable income into higher brackets, the amount of LTCG and QDIV pushed into those brackets is taxed at 15%. Use the tax calculator in the article to confirm.

 

[Gone4Good]

Also be aware that distributions by mutual funds classified as Short Term Capital Gains are treated as ordinary income. You can't even offset losses against these gains. It's a real bummer, and a particularly nasty aspect of funds that engage in a lot of active trading.

 

[RunningBum]

What kaneohe said about any divs and LTCGs, when added to other income, that are above the 15% bracket being taxed at 15%. This calculation is done in the Qualified Dividends and Capital Gains Tax Worksheet.

Just for example, if you are single and $34K is the top of your 15% bracket, and you have 25K of income and 20K of divs+LTCG, you are taxed 15% on the 25K income, and 15% on 11K (25K+20K-34K) of the divs+LTCG. The other 9K of divs+LTCG is untaxed.

 

[KingB]

What kaneohe said about any divs and LTCGs, when added to other income, that are above the 15% bracket being taxed at 15%. This calculation is done in the Qualified Dividends and Capital Gains Tax Worksheet.

Just for example, if you are single and $34K is the top of your 15% bracket, and you have 25K of income and 20K of divs+LTCG, you are taxed 15% on the 25K income, and 15% on 11K (25K+20K-34K) of the divs+LTCG. The other 9K of divs+LTCG is untaxed.

So, if you only have 9K of divs and LTCG, none of this 9K is taxed, correct?

 

[LOL!]

If your AGI is $9K, then you should not pay any taxes. However, you may be leaving some things on the table if you do that. You could be tax-gain harvesting or doing conversions to Roth IRA while still paying no taxes.

If you have $9K of dividends and $100,000 in LTCG, then you will pay taxes. It is up to you whether you call your dividends taxed or not.

 

[kaneohe]

So, if you only have 9K of divs and LTCG, none of this 9K is taxed, correct?

not sure if you are referring to runningbum's example above....but if you were,
and assuming you meant you have 25K of (other income) and 9K of LTCG and
QUALIFIED dividends, then you are correct. Again suggest you doublecheck your results w/ a tax calculator as there is lots of room for misunderstanding.
The income we are talking about here is TAXABLE income (after deductions and exemptions) and we are assuming that the deductions and exemptions reduce the "other" income first and leave the LTCG and QDIVs for last........
imagine a bar of other income on the bottom and the LTCG/QDIVs bar stacked on top.........with deduction/exemptions eating away at the bar from the bottom.

 

[scrabbler1]

Also be aware that distributions by mutual funds classified as Short Term Capital Gains are treated as ordinary income. You can't even offset losses against these gains. It's a real bummer, and a particularly nasty aspect of funds that engage in a lot of active trading.

This happened to me last year with a bond fund I have a lot of money in. I was hoping for a LTCG distribution but instead got a huge STCG distribution which was treated as ordinary income and could not be offset with anything else from Schedule D. My tax bill more than doubled because of this, major bummer.

 

[KingB]

not sure if you are referring to runningbum's example above....but if you were,
and assuming you meant you have 25K of (other income) and 9K of LTCG and
QUALIFIED dividends, then you are correct.

Yes, I am referring to runningbum's example. Sorry for the confusion.

 

[omni550]

Just for example, if you are single and $34K is the top of your 15% bracket, and you have 25K of income and 20K of divs+LTCG, you are taxed 15% on the 25K income, and 15% on 11K (25K+20K-34K) of the divs+LTCG. The other 9K of divs+LTCG is untaxed.

Following this example, assume this single person is older than 59-1/2 and depleted his CD ladder in the recent economic downturn and is now holding most of his assets in various IRAs, would this would be a good time for him to start moving his dividends and assets out of the IRAs? If so, how much should he move to take advantage of the tax rates before they possibly change at the end of 2012?

 

[kaneohe]

Following this example, assume this single person is older than 59-1/2 and depleted his CD ladder in the recent economic downturn and is now holding most of his assets in various IRAs, would this would be a good time for him to start moving his dividends and assets out of the IRAs? If so, how much should he move to take advantage of the tax rates before they possibly change at the end of 2012?

It is not clear exactly what you are asking. Perhaps you could clarify your question.
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Originally Posted by RunningBum
Just for example, if you are single and $34K is the top of your 15% bracket, and you have 25K of income and 20K of divs+LTCG, you are taxed 15% on the 25K income, and 15% on 11K (25K+20K-34K) of the divs+LTCG. The other 9K of divs+LTCG is untaxed.
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Are you saying this person's 25K of income was reduced? to what ?
What do you mean by "moving assets out of IRAs".........do you mean doing a
Roth conversion from a traditional IRA (TIRA). Lots of folks do conversions up to the top of the 15% bracket which may or may not make sense for you.

 

[omni550]

It is not clear exactly what you are asking. Perhaps you could clarify your question.
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Originally Posted by RunningBum
Just for example, if you are single and $34K is the top of your 15% bracket, and you have 25K of income and 20K of divs+LTCG, you are taxed 15% on the 25K income, and 15% on 11K (25K+20K-34K) of the divs+LTCG. The other 9K of divs+LTCG is untaxed.
****************************************************************
Are you saying this person's 25K of income was reduced? to what ?
What do you mean by "moving assets out of IRAs".........do you mean doing a
Roth conversion from a traditional IRA (TIRA). Lots of folks do conversions up to the top of the 15% bracket which may or may not make sense for you.

Now that I've re-read it, even I'm not clear on what I was asking LOL. (I was getting ready to head out the door for Easter dinner.)

As Roseanne Rosanadana from Saturday Night Live used to say, "Never mind".

omni