0% LTCG/div tax question

[steelyman]

I think there is a preponderance of IT types here on this forum, but there seem to also be some accountant/tax types who may be able to help.

We are at a point in the year where we can get a good feel for what our 2012 capital gains/dividend income will be. It has been an unusual year for me in that I had literally no income for 3/4 of the year, and that's just a happy coincidence of when I stopped working and when I retired. So I am in a position to take advantage of the expiring 0% tax rate on LTCG and dividends.

I am single, so I think my goal is to keep my 2012 taxable income at $35,350 or less. I am starting to go about selling stuff in taxable accounts on which I have unrealized gains.

My question is: if I screw up and happen to boost my income to $35,351, do I completely lose the 0% tax break (or just on the income above the 15% bracket)? My guess is that the answer is no, I still get 0% for the portion under the bracket, but I am not sure and have never been able to understand that @#$*&^! qualified dividends and capital gains worksheet.

Thanks in advance for any advice!

 

[RockyMtn]

Only on the amount you exceed the 0% gain limit or in your case on $1. It does not go back to dollar 1. Income is actually taxed progressively, a different percentage at each marginal income level.

 

[steelyman]

Only on the amount you exceed the 0% gain limit or in your case on $1. It does not go back to dollar 1. Income is actually taxed progressively, a different percentage at each marginal income level.

That's great news, thanks RockyMtn!

 

[pb4uski]

I'm doing the same thing. Keep state tax in mind - mine will be 3% of gain even though federal will be 0%.

 

[LOL!]

Since you do your own taxes with TurboTax, what does TurboTax tell you when you have too many LTCGains? TT will do that worksheet for you, so you don't have to really understand it.

 

[steelyman]

Since you do your own taxes with TurboTax, what does TurboTax tell you when you have too many LTCGains? TT will do that worksheet for you, so you don't have to really understand it.

I guess you're talking to me? I use Quicken, but not TurboTax. I worked up a little Excel sheet to translate that stuff, and I think it's OK, but wasn't sure about my original question.

 

[steelyman]

I'm doing the same thing. Keep state tax in mind - mine will be 3% of gain even though federal will be 0%.

Well, you can't control everything. My stupid state needs my money so they can throw it away and not honor their commitments

 

[kaneohe]

the chart (Dec 11 5:26 pm about the middle?? of this long thread) by tfb may help to visualize the workings of that CG/QDIV worksheet in kinder terms than @#$%^&......... and will give you an intuitive feel about how things work.

Bogleheads • View topic - qualified divds taxation question

 

[bondi688]

For planning purpose later on: would the income bracket you use to compute the LTCG tax rate includes income from Social Security? I presume the answer is yes. That may be an incentive to dealy starting collection of SS benefits and just cash in the LTCG at zero % rate.

Also will the new tax laws from 2013 as proposed affect the computation for next year?

 

[scrabbler1]

Steelyman, remembr that even though you may have some LTCG and QD income taxed at 0%, it will still count toward certain itemized deductions such as medical expense and miscellaneous expense. So an additional dollar of LTCG taxed at 0% may still boost your federal income taxes due, albeit slightly. (This happened to me a few years ago.)

 

[kramer]

With your standard deduction as a single, you can actually gross about $44000 and pay no tax. This is what I did last year. I also had an HSA contribution to deduct so I was able to gross even more.

It sounds like last year you were working and paid plenty of taxes. This year, because you are paying no taxes you will get no benefit from the Foreign Tax Credit (I am assuming you own some ETFs and mutual funds that own foreign stocks). BUT you are allowed to look backward one year for the foreign tax credit. So you can actually get a refund for this year's foreign taxes paid by your ETFs and mutual funds by filing an amendment to last year's taxes, assuming you had "headroom" that year.

I retired in 2007 and I paid a fairly high rate of tax that year. I was able to carry back the foreign taxes I paid in 2008, even though I paid no income taxes that year, and I got a 4 figure check from the IRS when I later sent in my modified taxes for 2007. Many people are not aware of this.

 

[Free To Canoe]

I did not know that. I will have to learn how it is done.

 

[steelyman]

For planning purpose later on: would the income bracket you use to compute the LTCG tax rate includes income from Social Security? I presume the answer is yes. That may be an incentive to dealy starting collection of SS benefits and just cash in the LTCG at zero % rate.

Also will the new tax laws from 2013 as proposed affect the computation for next year?

SS isn't in the picture, as I am not eligible. Regarding the 2013 tax laws, I am sure not a member of the 1 or 2%, so any changes will not affect me. I will, however, have to make sure that enough is withheld throughout the year to avoid penalties in 2014. It's weird having this one year with the income of a bunny.

 

[steelyman]

Steelyman, remembr that even though you may have some LTCG and QD income taxed at 0%, it will still count toward certain itemized deductions such as medical expense and miscellaneous expense. So an additional dollar of LTCG taxed at 0% may still boost your federal income taxes due, albeit slightly. (This happened to me a few years ago.)

Well, I don't (and never have) itemized - my taxes are as simple as they can be, despite the IRS' attempts to construct a maze worthy of The Shining.

 

[steelyman]

With your standard deduction as a single, you can actually gross about $44000 and pay no tax. This is what I did last year. I also had an HSA contribution to deduct so I was able to gross even more.

It sounds like last year you were working and paid plenty of taxes. This year, because you are paying no taxes you will get no benefit from the Foreign Tax Credit (I am assuming you own some ETFs and mutual funds that own foreign stocks). BUT you are allowed to look backward one year for the foreign tax credit. So you can actually get a refund for this year's foreign taxes paid by your ETFs and mutual funds by filing an amendment to last year's taxes, assuming you had "headroom" that year.

I retired in 2007 and I paid a fairly high rate of tax that year. I was able to carry back the foreign taxes I paid in 2008, even though I paid no income taxes that year, and I got a 4 figure check from the IRS when I later sent in my modified taxes for 2007. Many people are not aware of this.

In my taxable accounts, I actually have very little foreign investments (but plenty in employer plans), but this is good to keep in mind, thanks!

 

[pb4uski]

In my taxable accounts, I actually have very little foreign investments (but plenty in employer plans), but this is good to keep in mind, thanks!

I read somewhere that it is better to have international in your taxable accounts so you can utilize the credit (assuming that you can benefit from it) - if you put international in your tax deferred accounts your fund pays the foreign taxes but you never get to take the credit so it is tax inefficient.

 

[jebmke]

In my taxable accounts, I actually have very little foreign investments (but plenty in employer plans), but this is good to keep in mind, thanks!

If you have any flexibility to change this, you might consider moving your foreign holdings to taxable to take advantage of the FTC. You essentially lose the benefit of the credit by holding foreign securities in tax-deferred plans.

 

[pb4uski]

Good point!!!

 

[steelyman]

If you have any flexibility to change this, you might consider moving your foreign holdings to taxable to take advantage of the FTC. You essentially lose the benefit of the credit by holding foreign securities in tax-deferred plans.

Once again, I learn something by being a member at E-R.org

Sadly, I can't access any of that money for another 4-1/2 years, but I will certainly keep this in mind.

 

[pb4uski]

Once again, I learn something by being a member at E-R.org

Sadly, I can't access any of that money for another 4-1/2 years, but I will certainly keep this in mind.

You may still be able to do something about it. Let's say that you have $x international fund in your tax deferred account and at least $x of [whatever fund] in your taxable account and your tax deferred account has an investment choice that is substantially similar to [whatever fund]. Then in your tax deferred account you sell the $x of international fund and buy $x of [whatever fund]. In your taxable account you sell $x of [whatever fund] and buy $x of international fund.

The end result is your AA is not changed but your overall holdings are more tax efficient.

Just make sure of the tax implications of a sale of the shares in the taxable account before proceeding.

 

[steelyman]

You may still be able to do something about it. Let's say that you have $x international fund in your tax deferred account and at least $x of [whatever fund] in your taxable account and your tax deferred account has an investment choice that is substantially similar to [whatever fund]. Then in your tax deferred account you sell the $x of international fund and buy $x of [whatever fund]. In your taxable account you sell $x of [whatever fund] and buy $x of international fund.

The end result is your AA is not changed but your overall holdings are more tax efficient.

Just make sure of the tax implications of a sale of the shares in the taxable account before proceeding.

Thanks, man - I will look into this.

 

[pb4uski]

Actually, it is preferable to have your fixed income investments in your tax deferred accounts since they generate the most taxable income and have your equities in taxable accounts. Also see Principles of Tax-Efficient Fund Placement - Bogleheads

 

[ripper1]

I'm doing the same thing. Keep state tax in mind - mine will be 3% of gain even though federal will be 0%.

I don't think LTCG and dividends taxed at federal 0% becomes part of your AGI. So this shouldn't be taxed at the State level either. Can we have a discussion on that?

 

[scrabbler1]

I don't think LTCG and dividends taxed at federal 0% becomes part of your AGI. So this shouldn't be taxed at the State level either. Can we have a discussion on that?

LTCG and (Qualified) dividends are part of the AGI even if they end up getting taxed at 0%. It is the special worksheet which determines the tax rate of LTCG and QD, and you don't start that worksheet until you figure out your taxable income. Not sure if we can have a discussion about whether or not they should be taxed at the state level because you could have as many as 50 different discussions.

 

[jebmke]

I don't think LTCG and dividends taxed at federal 0% becomes part of your AGI. So this shouldn't be taxed at the State level either. Can we have a discussion on that?

In my state, which is a conforming state, AGI is carried over from the Federal return to the state. So divs and capital gains are included. Then they make adjustments for items that are not taxable by the state (like interest on US Treasury bonds).