Long Term Capital Gains Harvesting (Math Check)

[jimbohoward69]

As I've stated in other threads, I'm single and I "retired" back in December of last year. I'm still going back and forth in my head whether to ever go back to work or not but we'll see. That said, hypothetically, if I were to not go back to work in 2020, this would be a perfect year to do some tax harvesting at a 0% LTCG rate (up to $40,000 taxable income for a single filer). I came up with the following numbers:

Ordinary Income (military pension and MM interest) - $31,479
Standard Deduction - ($12,400)
Total Taxable Income - $19,079
(I'll also receive $19,894 in a non-taxable VA pension)

STCG - ($2,425)
LTCG/Qualified Dividends - $24,512
Total CG - $22,087

Ordinary Income Tax @ 10% (up to $9,875) - $988
Ordinary Income Tax @ 12% (up to $40,125) - $1104 (of remaining $9,204 in taxable income)
0% LTCG/Qualified Dividends - $0 (on $20,921...which gets me to the $40K threshold)
15% LTCG/Qualified Dividends - $175 (on remaining $1,166)

Most of the LTCG would be from selling 400 of my 500 shares of ABT. However, I would immediately buy back the 400 shares...to not only keep my current position but raise my current cost basis as well.

So, with all that said, if I go ahead with the above scenario, I stand to pay $2,267 in total tax on $73,460 in income (taxable/non-taxable)...for an effective tax rate of 3.09%. If I exclude the VA pension in the calculation, it's still a 4.23% effective tax rate on $53,566 in income. Not too shabby IMHO.

I welcome all feedback/hole-poking regarding why this would/would not be a good road to go down. Thanks!

[pb4uski]

Spot on.

I get $2,092 in tax on $19,079 of ordinary income... $9,875 at 10% and remainder at 12%.... plus $175 in capital gains tax ($20,921 @ 0% and $1,166 excess over $40,000 @ 15%). Total tax of $2,267.

[SecondCor521]

If @pb4uski says you did the math right, then you did the math right.

A couple of other thoughts:

1. We're only halfway through 2020, so your qualified dividends may or may not be what you're projecting. May not be something you care about.

2. Do you have anything else you can realize cap gains on? 15% isn't too bad of a rate, as long as there are no other confounding factors (state income tax, FAFSA, ACA subsidies).

[jimbohoward69]

Quote:

Originally Posted by SecondCor521 A couple of other thoughts: 1. We're only halfway through 2020, so your qualified dividends may or may not be what you're projecting. May not be something you care about.

My qualified dividends projection is pretty solid since I currently only receive them from the ABT stock. I have some taxable qualified dividends from a Vanguard brokerage account but I recently liquidated those holdings (net capital loss)...so all proceeds of the sales are sitting in a settlement account (VMFXX) that pays a paltry monthly dividend.

Quote:

Originally Posted by SecondCor521 2. Do you have anything else you can realize cap gains on? 15% isn't too bad of a rate, as long as there are no other confounding factors (state income tax, FAFSA, ACA subsidies).

Other than the capital gain harvesting of my Abbott shares, I have no other taxable equity accounts...everything else is in a high-yield MM account. I guess at some point in the future (if I end up staying retired full time), I could look into Roth conversions but those still seem like an enigma to me.

[Animorph]

Sounds fine. If you have more than 10 years before you have to make Roth withdrawals I'd seriously consider a Roth conversion instead. Especially if the market continues down. That's what my calculations indicated in my case. I've been converting up to the $250k AGI "limit". I'm switching to small Roth conversions to the top of the 10% bracket and 0% capital gains, starting next year. I start Roth withdrawals in 2031 according to the plan.

Roth conversions are more valuable the longer they can sit in the Roth account, so now is the time to do them if you're going to.

[kskmfire]

I use Kitces (2 articles) each year before I fill my 12%/0% bracket. (Roth conversions or LTCG harvesting)

It's technical AND has pictures, two ways for me to understand it.

Mechanics Of The 0% Long-Term Capital Gains Tax Rate And Harvesting Capital Gains For A Free Step-Up In Basis!

Navigating The Capital Gains Bump Zone: When Ordinary Income Crowds Out Favorable Capital Gains Rates

[jimbohoward69]

Quote:

Originally Posted by kskmfire I use Kitces (2 articles) each year before I fill my 12%/0% bracket. (Roth conversions or LTCG harvesting) It's technical AND has pictures, two ways for me to understand it. Mechanics Of The 0% Long-Term Capital Gains Tax Rate And Harvesting Capital Gains For A Free Step-Up In Basis! Navigating The Capital Gains Bump Zone: When Ordinary Income Crowds Out Favorable Capital Gains Rates

Those two articles are what opened my eyes to 0% LTCG harvesting

At this point, I'm just not sure which scenario is currently the best for me (LTCG harvesting vs. Roth Conversions). Do they both fall under the 0% LTCG taxable income thresholds? Again, I consider myself pretty knowledgeable regarding investing but Roth conversions continue to dumbfound me.

If I choose to stay FIRE, my taxable income will more or less be the same until the RMD phase. Because my retirement pensions are so robust, my plan is to not tap into my TSP/401K or Roth IRA unless an emergency arises or my annual expenses ramp up during a particular year.

Ugg...decisions, decisions.

[ERD50]

Quote:

Originally Posted by jimbohoward69 Ugg...decisions, decisions.

Another consideration - if you expect you'll be leaving money to heirs, cost basis of cap gains is stepped up (unless they change that).

Based on that, I'm focusing on harvesting only as much LTCGs as I need for cash flow until RMDs and SS @ age 70.

So while heirs won't owe taxes on the Roth (not ROTH ) that I converted, their inheritance is reduced by the taxes I pay on the conversion. But no tax to anyone on inherited LTCG.

-ERD50

[jimbohoward69]

Quote:

Originally Posted by Animorph Sounds fine. If you have more than 10 years before you have to make Roth withdrawals I'd seriously consider a Roth conversion instead. Especially if the market continues down. That's what my calculations indicated in my case. I've been converting up to the $250k AGI "limit". I'm switching to small Roth conversions to the top of the 10% bracket and 0% capital gains, starting next year. I start Roth withdrawals in 2031 according to the plan. Roth conversions are more valuable the longer they can sit in the Roth account, so now is the time to do them if you're going to.

Thank you for the feedback! Maybe, at this point, I'm in "paralysis by analysis" mode. I have no clue when I would have the need to tap into my Roth IRA. Plus, my 401K is in the government TSP so I would have to convert some/all of that into a Traditional IRA before conversion, correct?

My pension income will roughly stay the same throughout my lifetime. I guess I first need to forecast that when RMD's start kicking in, how that will affect my tax bracket situation.

[jimbohoward69]

Quote:

Originally Posted by ERD50 Another consideration - if you expect you'll be leaving money to heirs, cost basis of cap gains is stepped up (unless they change that). Based on that, I'm focusing on harvesting only as much LTCGs as I need for cash flow until RMDs and SS @ age 70. So while heirs won't owe taxes on the Roth (not ROTH ) that I converted, their inheritance is reduced by the taxes I pay on the conversion. But no tax to anyone on inherited LTCG. -ERD50

Makes sense. However, I currently have no heirs to leave money to. I'm 50 and single. Unless I get hitched in the next few years, my plan is to keep roughly the same lifestyle and blow through my stash until I no longer can

[jimbohoward69]

I also plan on taking SS at the earliest age I can (62). My family's health "lineage" ain't the greatest...I don't plan on being around past 80 or so. But I guess you never know.

[ERD50]

Quote:

Originally Posted by jimbohoward69 Makes sense. However, I currently have no heirs to leave money to. I'm 50 and single. Unless I get hitched in the next few years, my plan is to keep roughly the same lifestyle and blow through my stash until I no longer can

Yep, it's always dependent on individual circumstances. Blow that dough!


-ERD50

[RetireBy90]

One idea that has been guiding me lately, I’ll pay taxes on Roth conversions today since I can afford them now. If I hit RMDs they will push us into higher bracket cause I have a couple income sources that will kick in at 70. There are several threads on Roth conversions that discuss pros and cons. I am firm believer that rates will go up so pay today before they go up.

[kskmfire]

I too have tried to figure out the long-term best option for filling the 12%/0% bracket. To Roth Convert or LTCG harvest?

I like the Roth conversion to lock in the low tax rate and have a tax free future for that money. It will also help avoiding RMDs/IRMAA, especially for a surviving spouse.

The other year there was a rollover glitch so instead we LTCG harvested and were surprised that state income taxes we required so they were not 0% at the state level. Just another learning experience.

I want to (should) do some side by side Roth conversion vs LTCG harvesting projections, but in my mind, doing either and filling the low brackets (some even fill the 22%, not me by a long shot) places me 10+% ahead on tax optimization than if I were lazy or worse(?) clueless.

[RetireBy90]

Quote:

Originally Posted by kskmfire I want to (should) do some side by side Roth conversion vs LTCG harvesting projections, but in my mind, doing either and filling the low brackets (some even fill the 22%, not me by a long shot) places me 10+% ahead on tax optimization than if I were lazy or worse(?) clueless.

I mapped out filling out 22% bracket but if current TIRA grows I would still be left with a sizable chunk left. So, looked at what I’d have to convert to move most of it to Roth by 70 and only 2% more in fed taxes. Virginia charges same 5.75% so if I move or do RMD same state tax hit. I’m currently executing plan to move most by end of 2025 and then smaller conversions depending on tax rate then. I may leave some and do RMD to charity QCD? so no tax hit after 72. Yep, planning for many years after that.
Just for those waiting to point out, there are several taxes that go up with AGI, mine is the Medicare IRMAA.