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Question about Capital Gains
Old 02-28-2014, 02:27 PM   #1
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Question about Capital Gains

Consider the following variables-

$48,000 needed unearned income in first year in early retirement
$10,000 qualified dividend gain
$26,000 in long term capital gain
$12,000 in post-tax savings

Is this the best way to minimize federal tax liability, by keeping my dividend and capital gain income within the 15% tax bracket? I believe that by doing that, I do not pay tax on that long term capital gain. I believe the top end of the 15% tax bracket for a single filer is approximately $36,250.

What do you think?
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Old 02-28-2014, 03:04 PM   #2
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You also have to figure in deductions and personal exemptions. For 2014, the 15% bracket extends to income up to $36,900, the standard deduction for single filers is $6,200, and the personal exemption is $3,950. So if your first year of early retirement is 2014, you could realize any combination of long term capital gains and qualified dividends totaling $36,900 + $6,200 + $3,950 = $47,050 and have it fall in the 0% tax rate. You would need to withdraw less than $1,000 in post-tax savings to achieve your income target and avoid all Federal tax.

IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More - Forbes
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Old 02-28-2014, 03:15 PM   #3
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+1 and if you itemize deductions it could be even more.

The original post is confusing but if the $48k of funding was comprised of the elements in the OP, then the federal tax should be 0.

OP can do a pro forma return in Taxcaster to verify.
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Old 02-28-2014, 03:17 PM   #4
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> I believe that by doing that, I do not pay tax on that long term capital gain.

As karluk mentions, this is 0% federal tax. Most states tax capital gains as regular income. A few don't like Nevada, Texas, Florida, and others.
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Old 02-28-2014, 04:58 PM   #5
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Nico, I agree with the previous posters. Even if some of your income is taxable as ordinary income (i.e. taxable interest and ordinary, non-qualified dividends), you will not be heavily taxed on it. Maybe you fill up the 10% bracket and some of the 15% bracket, after excluding the first ~$10k for personal exemption and standard/itemized deductions.

My total income for 2013 is around $48k, just like in your example. But because nearly half of it is not subject to federal income taxes (it is LTCG, Qualified Divdends, or muni bond fund income), I pay federal income taxes at an average rate of 4%. Oddly (for me), for 2013 I will be paying slightly more in state income taxes for the first time because nearly all of my income is taxable at the state level.
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