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Simple 0% Fed income tax question
Old 06-20-2021, 11:28 AM   #1
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Simple 0% Fed income tax question

This has probably been discussed to death here but humor me and answer it one more time (I'm second guessing myself). Numbers are rounded of course.

I will work two months next year then retire. My gross income will be $20K. I'll put $10K in my 401K so that will get me down to $10K. 12% tax bracket ends at $81K. Standard deduction for married is $25K. I have some risky investments that I would like to sell. Does this mean that I could make $96K in profit on those investments and pay 0% Federal tax?
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Old 06-20-2021, 11:43 AM   #2
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Yes, but with a slight hitch. Those profits on investments have to be long-term capital gains and the top of the 0% tax bracket for qualified dividends and long-term capital gains is $80,800... $250 lower than the $81,050 top of the 12% tax bracket.

So if you are MFJ with a standard deduction of $25,100 and had $10k of ordinary income you could have as much as $95,900 of qualified dividends and long-term capital gains and your tax would be $0.

Seems like cheating, doesn't it?

https://www.putnam.com/literature/pdf/II985.pdf
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Old 06-20-2021, 12:51 PM   #3
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Seems like cheating, doesn't it?
It is very sad to think that keeping MY MONEY is cheating. But yeah, it feels like it.

Wife and I sat down to discuss this and it will take me YEARS to sell all of this stock to stay at 0%. I guess that is a pretty good 1st world problem to have.

OH, I don't feel like pushing it and will be scared to death to go $27.35 over the limit and have a big tax bill so we will stay well below the $80,800.
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Old 06-20-2021, 01:23 PM   #4
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It’s not a cliff. You’ll just pay the tax on the extra $27.35.
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Old 06-20-2021, 03:33 PM   #5
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Yes, any preferenced income above the $80,800 is only 15%... about $4 on $27... unless you go crazy.

So if you are really concerned about the investment don't let the tax tail wag the investment dog for 15% LTCG tax.
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Old 06-20-2021, 03:42 PM   #6
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Quote:
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...I have some risky investments that I would like to sell. ...
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Originally Posted by rmcelwee View Post
... it will take me YEARS to sell all of this stock to stay at 0%. ...
Just be aware and don't fall into a trap of letting the "tax tail wag the dog". For risky investments, it could make very good sense to go up into the top of the next bracket. That's "only" 12% (or 15%?, I forget for LTCG?) on the portion that is gains - a volatile stock could easily drop far more than that at any time.

edit/add - cross-posted with pb4uski...

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Old 06-20-2021, 06:22 PM   #7
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So if you are really concerned about the investment don't let the tax tail wag the investment dog for 15% LTCG tax.
So, I do want to get out of the stock BUT I want to get out of it at 0%. I am fully confident that on a long enough timeline it will go up so that fits with my risk tolerance. I have a lot of this stuff so it will take me years to get out of it selling in $100K chunks. I have enough stable value fund in my 401K to make it where I don't have to sell if the market is trashed. Is a 10 year downturn going to hurt me (emotionally). Yes, but I think I can weather the market.

I let the tax wag my AOL stock back in the 90's when Time Warner bought them and they dropped in half. I definitely know what you are talking about.
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Old 06-20-2021, 06:28 PM   #8
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a volatile stock could easily drop far more than that at any time.
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This stuff dropped 75% in 30 days (Covid March). It is up 700% since then. Roller coaster for sure. I've been buying it and others like it for more than 10 years and I am aware of the risk. I would snap my fingers and swap it all for SPY if I could but it just isn't going to happen overnight. I have other stuff to fall back on if the market gets horrible. I think I can ride it out. Thanks again for the reminder. Gives me some food for thought...
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Old 06-20-2021, 06:36 PM   #9
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It's not a cliff, and how many years (years not YEARS) will it take? Is 15% off the next hundred grand more or less than what you think the swing in price will be?

Do you hate the government?

I wonder a lot about all who run their plan about minimizing taxes instead of maximizing net worth.
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Old 06-20-2021, 08:05 PM   #10
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+1 if it were me I just get out of it and pay the 15%. Alternatively, buy some put options to protect yourself.
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Old 06-22-2021, 06:25 AM   #11
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No long-term losses to offset?

I bought (was sold) some risky investments as well and by the time I unwound them years later I ended up with six figures in LTC losses...

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