Not understanding 2017 tax estimate

[Lisa99]

This is our first full year of retirement. I'm considering pulling some money out of investments and just ran Tax Caster to determine tax impact but I'm not understanding the result.

Income from pension and dividends = $24000 No taxes paid this year.
If we stop there we owe zero taxes in 2017.

Looking at pulling money out of after-tax Vanguard fund. Long-term capital gain is $25,000 ish.

Tax Caster is saying that we would owe $2900 in federal income tax based on the new "income". I thought that as long as you were below the 15% threshold that long-term capital gains were not taxed.

Sorry for such a simple question. I feel like I'm back in 2010 and trying to figure out whether I should leave Ameriprise (total noob).

What am I not understanding?

[catotx]

Quote:

Originally Posted by Lisa99 This is our first full year of retirement. I'm considering pulling some money out of investments and just ran Tax Caster to determine tax impact but I'm not understanding the result. Income from pension and dividends = $24000 No taxes paid this year. If we stop there we owe zero taxes in 2017. Looking at pulling money out of after-tax Vanguard fund. Long-term capital gain is $25,000 ish. Tax Caster is saying that we would owe $2900 in federal income tax based on the new "income". I thought that as long as you were below the 15% threshold that long-term capital gains were not taxed. Sorry for such a simple question. I feel like I'm back in 2010 and trying to figure out whether I should leave Ameriprise (total noob). What am I not understanding?

Did you make sure your filing status is set to MFJ (married filing jointly)?

[pb4uski]

+1 I would agree that for MFJ what you describe should result in $0 tax.

In fact, if you have that much headroom you should also consider some LTCG gains trading to increase your basis and reduce future gains at $0 cost.

[Lisa99]

Rerunning TaxCaster to make sure filing info was right. What do you mean by gains trading?

We have to be careful with total income. We get a BIG subsidy for health insurance in the marketplace.

[pb4uski]

Gains trading is selling an investment at a gain and then buying back the same investment.

So let's say you want to keep your income under $64k and already have $24k of pension and dividend income and $25k of LTCG.

You can sell investments sufficient to realize $14k of realized gains and then buy back the investments the same day, brining your income to $63k. Your tax on that extra $14k of gain is $0 but your basis in the investment is $14k higher so if you later sell it your gain will be $14k lower... so you can get some $14k more cash out with no tax (or ACA income) implications.

So for example, if you did that at year end 2017 and wanted $14k of cash in early 2018 you could sell that lot and have $0 gain, $0 tax and $0 income counted towards your 2018 ACA income).

Make sense?

[Lisa99]

I figured out the tax estimate problem. I put in our quarterly dividends as "dividends" rather than "qualified dividends".

I need to read your example and think on it. Not understanding after first read, but will re-read until I do.

Bottom line is we need $85,000 per year to live. $24,000 of that comes from quarterly dividends and pension. Balance will come from investments with taxable being sold first.

Our taxable account has grown by 50% so when I pull out $50k, about $25k of it is long-term capital gains. We also have to stay below $64k per year in "income" to get the subsidy. Now I just have to figure out what all of that means. My head hurts right now... we have plenty of investments, just have to use it smartly so that taxes don't eat it up.

[catotx]

Because you are getting ACA subsidies, tax gain harvesting without financial consequence does not work for you.

At your level of income, for every dollar of LTCG you realize, you will get about $0.10 less in ACA subsidy. This is an effective tax rate of 10% on the LTCG.

You need to decide if this is worth it or not.

If you decide to do it, make sure you don't get too close to the ACA cliff, otherwise you risk falling off the cliff and getting no ACA subsidy at all.

[Lisa99]

DING, DING, DING... I get it.

Money Needed = $84,000 ($85k really, but for easy example, $84k)

Pension + Dividends = $24,000

Delta is $60k, however, I can withdraw $80k since 50% of it is return of investment and 50% is LTCG. Put $60k in the bank for spending and reinvest $20k into the same fund at the higher per share amt raising the basis.

So here is what the math looks like:

Pension + Dividend = $24k
Investment withdrawal = $80k of which $40k is LTCG
Total money in hand = $104k / Total taxable income = $64k
Money needed = $84k
Reinvest balance ($20k) into same after-tax Vanguard fund

Did I get it right?

Thank you so much for your guidance. Retirement is AWESOME!

We had cash stockpiled so just now having to learn this part of the retirement equation.

[Lisa99]

Quote:

Originally Posted by catotx If you decide to do it, make sure you don't get too close to the ACA cliff, otherwise you risk falling off the cliff and getting no ACA subsidy at all.

Very good advice. When I ran the numbers I saw that at $64k there was an $1100 per month subsidy, at $65k it was zero. That is quite a cliff!

[VanWinkle]

Quote:

Originally Posted by Lisa99 Very good advice. When I ran the numbers I saw that at $64k there was an $1100 per month subsidy, at $65k it was zero. That is quite a cliff!

It appears your state does not tax capital gains as income, so you are good there. Some states, like Illinois tax cap gains at 3 to 5%. I was going to harvest some gains to reset the cost, but I don't want to pay 5% of 30,000 gain just to reset the cost. Don't forget to consider the state tax in the formula for your state.

[catotx]

Quote:

Originally Posted by Lisa99 Pension + Dividend = $24k Investment withdrawal = $80k of which $40k is LTCG Total money in hand = $104k / Total taxable income = $64k Money needed = $84k Reinvest balance ($20k) into same after-tax Vanguard fund

That's about it. Just to re-iterate

1) You will pay a 10% "tax" on the extra $20k of LTCG you realize due to the way ACA subsidies are calculated.

2) Do not get too near the cliff. Sometimes the dividend distributions could be corrected in the following year in a revised 1099DIV. This could make you fall off the cliff. I would leave a margin of a few thousand dollars just to be safe.

[Lisa99]

Quote:

Originally Posted by VanWinkle Don't forget to consider the state tax in the formula for your state.

We’ve recently moved to Florida so we continue to have no state income tax.

[Lisa99]

Quote:

Originally Posted by catotx I would leave a margin of a few thousand dollars just to be safe.

Very good advice.

[pb4uski]

Quote:

Originally Posted by catotx That's about it. Just to re-iterate 1) You will pay a 10% "tax" on the extra $20k of LTCG you realize due to the way ACA subsidies are calculated. 2) Do not get too near the cliff. Sometimes the dividend distributions could be corrected in the following year in a revised 1099DIV. This could make you fall off the cliff. I would leave a margin of a few thousand dollars just to be safe.

+1 In making the decision to harvest some extra you need to consider the impact on your ACA subsidy and definitely do get anywhere near the cliff... as they say, it's not the fall that hurts, its the sudden stop at the bottom.

[Lisa99]

I need to run some scenarios to see if we’re better off taking the ACA hit with gains harvesting or not.

Based on I-ORP our taxes are going to skyrocket with SS combined with RMDs, but that is 15 years away so have time to figure out best strategy.

Now if I just knew how to model it...

[cathy63]

Quote:

Originally Posted by Lisa99 I figured out the tax estimate problem. I put in our quarterly dividends as "dividends" rather than "qualified dividends".

Are you sure that all your dividends are qualified? In a subsequent post, you mentioned dividends coming from a Vanguard fund. You may find that some portion of the dividends that the fund pays out to you are nonqualified and are therefore taxable at your ordinary tax rate along with the $24K pension income. If the fund receives nonqualified divs from its underlying investments, then it can pass them along to you as nonqualified even if you've held the fund long term.

Also, if you do as pb4uski recommends and repurchase shares in the same fund, I think any divs paid out on the new shares in the next 61 days after you do that would be nonqualified and would affect your taxable income for the year. If the divs are paid quarterly, you want to make that repurchase near the beginning of a quarter.

[pb4uski]

+1 if you gains trade you want to wait until after year-end dividends and capital gains have been distributed.