Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Interesting Tax "Opportunity" LTCG and 0%
Old 01-14-2010, 10:39 AM   #1
Recycles dryer sheets
 
Join Date: Sep 2009
Location: Two Harbors
Posts: 54
Interesting Tax "Opportunity" LTCG and 0%

Good Morning...I was just working on my 2009 taxes via Turbo Tax and noticed something I was not aware of/did not understand.

First...I was unaware of the ZERO % tax on LTCG for 2008 and 2009 when in the 5% or 15% tax brackets...sorry for the earlier post regarding tax harvesting of Capital Losses...I now see why it may nothave made sense for me to do so in either 2008 or 2009...water over the dam

However, I now see another impact of the 0% bracket...

1) Both my wife and I are self employed and had pretty good (part time) income in 2009. Clearly into the 28% Fed bracket.

2) We also both have Individual 401(k)s which allow for a post 12/31 deductible contribution...our max for 2009 is about $70,000.

3) I usually work with Turbo Tax to compute at what contribution level my tax savings starts to decline...and pick a level where I save let's say...around 25% Fed + whatever Minnesota I save.

4) When working TT this year I discover that as I contribute say $10,000 when well into the 28% bracket I save about 28%...obviously.

5) However, when I contribute enough to drop into the 15% bracket ($67,900)...let's say to reduce Taxable Income from $65,000 to $55,000 I find I save a greater amount than when in the 28% bracket...about 30%.

6) After first thinking TT had a computation error...I discovered that I saved both the 15% LTCG (by going to zero as I moved into the 15% bracket...AND I saved the 15% by reducing my taxable income by the same $10,000 extra 401(k) deduction...thus the roughly 30% Fed saving.

In my case...I will likely contribute the full amount as long as the Fed savings is close to the incremental 30%...+ Minnesota savings which is 7-8%.

QUESTION...by contributing nearly $70K to 401(k) from my "after-tax" accounts...along with prior years contributions...I am essentially saving 30%-35% NOW...but have nearly ended up with 100% of my reasonably substantial investment account...ALL in Pre-Tax accounts!

I am OK with this...as the alternative would be to pay 35% tax on it now. We are 62-63 years old and do not plan on either taking SS or drawing "much" out of investment accounts for maybe 3-4 years??

My "plan" is to control taxable timing to the extent I can when our earned income drops. I also assume taxable rates will not go down but will rise...but believe I will be OK if we eventually draw about $100K per year...ie; tax rates should not exceed the 35% Fed?

Any thoughts? Do I see this 30% tax benefit/deferral incorrectly?

Thanks...TomCat
TomCat is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-14-2010, 01:47 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 17,203
For me, I will always put money aside to save 30% in taxes if I do not need the money any time soon... even back when I did not have any savings... I put all money in 401(k)...

Since you are older than 59 1/2, you can draw it out anytime you want and then pay the tax... so in effect, you can take the money out of your 401(k) and pay the tax next year if you wish... not many people in that boat!!!
Texas Proud is offline   Reply With Quote
Old 01-15-2010, 08:09 AM   #3
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 4,172
Quote:
Originally Posted by TomCat View Post
5) However, when I contribute enough to drop into the 15% bracket ($67,900)...let's say to reduce Taxable Income from $65,000 to $55,000 I find I save a greater amount than when in the 28% bracket...about 30%.

6) After first thinking TT had a computation error...I discovered that I saved both the 15% LTCG (by going to zero as I moved into the 15% bracket...AND I saved the 15% by reducing my taxable income by the same $10,000 extra 401(k) deduction...thus the roughly 30% Fed saving.
TomCat........no problem w/ your findings and conclusions.........I'm a bit confused tho by the numbers in item 5) above. When your taxable income moves from 65K to 55K, you stay within the 15% (MFJ) bracket (<67.9K), so you shouldn't see that 30% marginal bracket effect?
kaneohe is offline   Reply With Quote
Old 01-15-2010, 10:01 AM   #4
Recycles dryer sheets
 
Join Date: Sep 2009
Location: Two Harbors
Posts: 54
Quote:
Originally Posted by kaneohe View Post
TomCat........no problem w/ your findings and conclusions.........I'm a bit confused tho by the numbers in item 5) above. When your taxable income moves from 65K to 55K, you stay within the 15% (MFJ) bracket (<67.9K), so you shouldn't see that 30% marginal bracket effect?

kaneohe...your observation is the primary point of my post. As I contribute $10,000 additional to my individual 401(k) and move my taxable income from say $65K to $55K I get BOTH the 15% reduction due to lower taxable income at 15% effective rate...PLUS it moves $10K of my LTCGs into the zero % category...thus my total effective savings from an incremetal $10K contribution is essentially 30% + MN savings.

I first thought that Turbo Tax had an error...but went back and did research and found that I was not aware of the 0% tax on the LTCGs if you are in the less than 15% tax rate.

I am believe this is correct AND it is the result as I input the extra $10K in Turbo Tax...any other confirmation or ? Thanks TomCat

P.S. Note that with an Individual 401(k) you are in control of both the amount and timing of the contribution...and the 2009 contribution can be made at anytime prior to filing the return (including extentions). Also, much of my $70K 2009 contribution comes out of the 28% bracket (above $67,900)...and I was using TT to determine where my benefit would fall to 15%...at which point I would not have contributed any more. But instead...I found that below $67,900 I get 30% savings instead of 28% (edit sb 25% bracket) savings (all + MN tax savings which have not yet been calulated). TMR
TomCat is offline   Reply With Quote
Old 01-15-2010, 01:33 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 10,252
Why are you paying any taxes at all?

When you retire, you convert some of your 401(k) or IRA money to a Roth IRA each year, but not enough to have to pay any taxes. You sell some of your taxable assets each year, but not enough to pay any taxes. Over the years, you end up converting all your 401(k) or IRA money to a Roth IRA without paying any taxes.

Later on when your taxable and tax-deferred money runs out, you start withdrawing from your Roth IRA without paying any taxes.

So that income that you didn't pay 30% taxes on when you working, you don't pay any taxes on when you are retired.
LOL! is offline   Reply With Quote
Old 01-15-2010, 02:13 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 4,172
Tomcat........you must be using a definition of taxable income different from IRS. IRS taxable income would already include LTCG in it so if you lowered taxable income from 65K to 55K, you would be within the 15% bracket the whole time (not lower CG into the 15% bracket ( w/ 0% CG rate). Perhaps you mean your ordinary taxable income lowering from 65K to 55K?
kaneohe is offline   Reply With Quote
Old 01-15-2010, 02:43 PM   #7
Recycles dryer sheets
 
Join Date: Sep 2009
Location: Two Harbors
Posts: 54
Quote:
Originally Posted by kaneohe View Post
Tomcat........you must be using a definition of taxable income different from IRS. IRS taxable income would already include LTCG in it so if you lowered taxable income from 65K to 55K, you would be within the 15% bracket the whole time (not lower CG into the 15% bracket ( w/ 0% CG rate). Perhaps you mean your ordinary taxable income lowering from 65K to 55K?
Good point kaneohe...I guess I am referring to the numbers on the Schedule D tax computation form where the LTCG is subtracted from "Taxable Income" and the two pieces dealt with separately and then added together toward the bottom of the form. Result is as I posted...terminology may be incorrect. Yes...the "ordinary" taxable income falls below $67.9K and some or all of the LTCG will/may drop to zero %...thus you save 30% incrementally.

Other than the terminology...do you follow (and agree) with my result?
TomCat is offline   Reply With Quote
Old 01-15-2010, 05:37 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 4,172
TomCat...........yes, we are in agreement. Over the yrs I have come to the conclusion that all bright ideas need to stand the test of TurboTax (or equiv).
......as in theory must be proven by experiment. Too many cases of intuition being surprised by reality. You have discovered an interesting and important effect which has some bearing on things like Roth conversions. If someone had the idea that they wanted to keep their taxable income in the 15% bracket and was thinking of the taxable ordinary income as you were (that's a made-up term.....don't think IRS uses that terminology), they would be doing the converse of what you are doing and, if they had LTCG or qualified DIV, could actually be converting at least in part at 30%.

And, as you mentioned in OP, there is the interaction w/ TLH which is interesting to know and understand.

Great discoveries........thanks for sharing.
kaneohe is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Interesting "Cash for Clunkers" facit. RonBoyd FIRE and Money 2 01-04-2010 12:12 PM
Interesting Short "Women in Film" haha Other topics 3 09-30-2007 01:48 PM
Interesting article on "Do what you love" Jay_Gatsby Other topics 4 01-21-2006 02:00 PM
Interesting article from "Money" HFWR Young Dreamers 4 06-02-2005 06:20 AM

» Quick Links

 
All times are GMT -6. The time now is 06:48 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.