Simple 0% Fed income tax question

[rmcelwee]

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?

 

[pb4uski]

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

 

[rmcelwee]

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.

 

[audreyh1]

It’s not a cliff. You’ll just pay the tax on the extra $27.35.

 

[pb4uski]

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.

 

[ERD50]

...I have some risky investments that I would like to sell. ...

... 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...

-ERD50

 

[rmcelwee]

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.

 

[rmcelwee]

a volatile stock could easily drop far more than that at any time.
-ERD50

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...

 

[RobbieB]

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.

 

[pb4uski]

+1 if it were me I just get out of it and pay the 15%. Alternatively, buy some put options to protect yourself.

 

[ncbill]

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...

Marry me?

 

[rmcelwee]

So, seven months later and I get to wrap up the thread.

TQQQ opened on 6/21/21 after my post @ $112.41

I sold it on 1/3/22 @ market open for $169.64 (my cost basis is $6.03). I sold $85,000 for a profit of $81,966 and will wait until later in the year to sell some more to get towards the upper limit of the 0% tax thing. I will probably use the continued sale of this stock up to the 0% limit as my sole source of income for a few years until it is all gone.

My lower limit for a sale was $154 and would have used my 401K or something else for income if the stock had been below that. It had fallen to $146 on 12/20/21 so I was sweating bullets for a bit. It has done nothing but drop straight down ($144 yesterday) 30 minutes after we sold so at least on the short term we picked the right time to do it. FWIW, it split 2:1 today so if you try to look at a chart for this it is a little confusing.

 

[Drewjd]

Your plan sounds very similar to mine. Retire early in 2022 at age 49 and use up the rest of the 0% LTCG to soak up some stock sales. In my case, I’m going to have around $85K after 2022 salary. I plan to use around $65K for a stock sale and the rest for a Roth conversion.

Going forward after 2022, I’ll probably use most of the low tax brackets for Roth conversions rather than the 0% LTCG, but it’s going to be a wait and see game each year.

You still going to retire early in 2022?

 

[rmcelwee]

You still going to retire early in 2022?

Actually, my "last day" was two days ago. I was going to make a post about it but did not get around to it. I will go in to work for 4 hours about a month from now and another 4 hours about 6 weeks from now to tie up some loose ends. The March 3rd in my signature ended up being March 1st with 21 days of vacation starting Jan 11th.

 

[SecondCor521]

As I usually say on threads like this, the 0% capital gains tax rate is for federal income tax. The gain still affects AGI and thus anything that is AGI-related, like ACA subsidies, FAFSA EFC, state income taxes, college tax benefits, EIP3, etc.