ACA Advice Mutual Fund capital gains spiked for 2022

[waynezo]

Even though I did not take money out of my Mutual funds, I will get hit with over 40k in capital gains. After I claim this on my taxes I will have to pay back some of my ACA tax credits. Next year I will be required to predict more income when I apply for ACA. Since I have not taken this money out I did not receive this income.
Is there any loophole to not have to claim these internal mutual fund capital gains.
I am 61 and without tax credits my insurance is $1000 a month.

Any advice is appreciated.

 

[audreyh1]

No way to avoid claiming mutual fund distributions from taxable accounts. It’s taxable income regardless of whether it’s reinvested.

 

[RunningBum]

Unfortunately those capital gains distributions are a part of your income, and income is what the ACA subsidy is based on.

If you think this was a one-time CG distribution, you can estimate a lower income for 2023 than what you had in 2022. You may have to provide an explanation for it.

I dumped my managed fund for an S&P 500 index fund in2017 because the distributions were too high and too unpredictable. I dumped my foreign index fund too. It cost me the subsidy for that year but I should be able to manage my income better for the final few years of subsidy. If your unrealized gains aren't too high you might consider this.

 

[waynezo]

Unfortunately those capital gains distributions are a part of your income, and income is what the ACA subsidy is based on.

If you think this was a one-time CG distribution, you can estimate a lower income for 2023 than what you had in 2022. You may have to provide an explanation for it.

I dumped my managed fund for an S&P 500 index fund in2017 because the distributions were too high and too unpredictable. I dumped my foreign index fund too. It cost me the subsidy for that year but I should be able to manage my income better for the final few years of subsidy. If your unrealized gains aren't too high you might consider this.

Yes I have my 401k/IRA in S&P 500 index fund of course that one isn't the problem. My taxable fund is TRowe Price Communications and technology. Had it since 1996 I can't move it to another fund without a huge tax bill. It was up 50% in 2021 then down 40% in 2022. I think they sold a lot of stocks within the fund to stop the bleeding. It usually has about 5k in cap gains.

I will try to predict lower income for next year and explain it was an anomaly.
I guess the worst they could do is turn me down and force me to claim more.

I remember after the crash of 2008 when I was still working my portfolio was down 40% and I got a big cap gains tax bill. I didn't sell and in a couple of years got it all back.

 

[VanWinkle]

invest in index funds inside your taxable accounts. If you like managed accouts with high cap gain distributions, keep them in your tax deferred accounts(IRA).

 

[RunningBum]

Yes I have my 401k/IRA in S&P 500 index fund of course that one isn't the problem. My taxable fund is TRowe Price Communications and technology. Had it since 1996 I can't move it to another fund without a huge tax bill. It was up 50% in 2021 then down 40% in 2022. I think they sold a lot of stocks within the fund to stop the bleeding. It usually has about 5k in cap gains.

It's also possible a lot of people bailed out of the fund, and they had to sell stocks to cover the withdrawals. It's easy to say that you should hold index funds in taxable now, but 27 years ago how could you know. I didn't.

When I sold off my managed fund I also stacked as many deductions as I could, including a large charitable donation to fund a DAF with some of those shares. This softened the blow and I've got many years of charity grants I can do. I may not have had as much in unrealized capital gains as you had, and I was only giving up a ~$2K subsidy that year. So it may not be a good solution for you, but I mention it in case it is.

 

[Sunset]

OP - that is the problem with funds, which is why we exited them in taxable accounts and bought ETF's (often of the same, similar collection of stocks).

Maybe you can sell 1/2 this year, and 1/2 next year to shift over. As the large amount declared may have already used up a lot of the declaration you would have to do from selling. Sometimes it could even be a loss when you sell.

Otherwise, be prepared to experience the "joy" of declared capital gains without anything in your pocket.

 

[audreyh1]

It’s also possible that the fund will have lower cap gains distributions this year after the nasty bear and people selling last year.

I do recommend that you not automatically reinvest your distributions in that fund anymore however. Not reinvesting distributions reduces future cap gain exposure and you can invest the distributions in something more tax efficient. Index funds are far more tax efficient, you don’t necessarily have to use ETFs.

I’ve been moving out of active funds to index as I can due to their occasional large cap gains distributions. And I never auto-reinvest. I try to let the unrealized gain get low enough to sell the fund outright.

I don’t have the ACA subsidy issue - never qualified, but we are now subject to IRMAA on Medicare premiums and large cap gains distributions can mess with that.

 

[scrabbler1]

Like RunningBum, I was in an actively managed stock fund since 1996. In late 2019, when it became apparent I would be going over the ACA subsidy cliff for the third straight year due to this fund generating high cap gain distributions, I decided to dump the fund and buy into a comparable index fund.

Doing this cost me an extra $10k in income taxes. But I have recovered the $10k in 2 years thanks to getting back on the ACA subsidy train. I got $4k back in 2020 and $6k in 2021, so starting in 2022 I am in the black again, with another $6k in subsidies.

The index fund generates a little less in dividends than the other stock fund. But it has generated zilch in cap gain distributions, making my income very consistent (and low), keeping me safely on the ACA subsidy train. Waynezo, it might take a few years to recover the added taxes you pay to liquidate the fund, but it will be well worth the effort.

 

[Which Roger]

If the fund sold enough to generate that much in capital gains, then bought other things, the cost basis should no be a lot higher than before. If that's true, the tax hit you would incur by switching to index funds might not be as bad as you think.

 

[audreyh1]

Definitely always keep an eye on the unrealized gains in your funds. Every time distributions are paid out, the NAV drops accordingly thus reducing your unrealized gain in the fund. If there is a fund you want to get rid of in taxable accounts, you definitely want to keep an eye on this.

 

[waynezo]

It’s also possible that the fund will have lower cap gains distributions this year after the nasty bear and people selling last year.

I do recommend that you not automatically reinvest your distributions in that fund anymore however. Not reinvesting distributions reduces future cap gain exposure and you can invest the distributions in something more tax efficient. Index funds are far more tax efficient, you don’t necessarily have to use ETFs.

I’ve been moving out of active funds to index as I can due to their occasional large cap gains distributions. And I never auto-reinvest. I try to let the unrealized gain get low enough to sell the fund outright.

I don’t have the ACA subsidy issue - never qualified, but we are now subject to IRMAA on Medicare premiums and large cap gains distributions can mess with that.

Yes but if I cash out the shares instead of reinvesting won't I incur the original internal cap gains+cap gains from the sale of shares.

 

[scrabbler1]

Waynezo, let me add that after I sold off all my shares of that stock fund in late 2019, I showed my state exchange a copy of the sale order and a 1099 for the year, marked up with adjustments which would show my greatly reduced 2020 (estimated) income so I could get the APTC every month instead of waiting until the end of 2020 to claim it. Someone at the state exchange knew how to read and understood what I had done and granted me the APTC.

 

[COcheesehead]

Managed funds in taxable accounts are usually not recommended. Unpredictable distributions are only one of the reasons.

 

[audreyh1]

Yes but if I cash out the shares instead of reinvesting won't I incur the original internal cap gains+cap gains from the sale of shares.

I did not say sell shares instead of reinvest. I said don’t reinvest back into the fund. You can invest the distribution in a more tax efficient fund instead.

There is no tax difference between reinvesting and not reinvesting a distribution. Taking a distribution in cash isn’t selling any shares you already owned. You are only taxed on the distribution amount.

 

[waynezo]

I did not say sell shares instead of reinvest. I said don’t reinvest back into the fund. You can invest the distribution in a more tax efficient fund instead.

There is no tax difference between reinvesting and not reinvesting a distribution. Taking a distribution in cash isn’t selling any shares you already owned. You are only taxed on the distribution amount.

I don't follow, if I don't reinvest and I don't cash out what other option do I have?
This is an individual taxable account. If I move shares to say an index fund it requires selling the shares and becomes a taxable event.

 

[RunningBum]

I don't follow, if I don't reinvest and I don't cash out what other option do I have?

One option is to invest in an index fund. It won't make that much of a difference but at least you aren't compounding the issue with your managed fund.

 

[waynezo]

I don't follow, if I don't reinvest and I don't cash out what other option do I have?
This is an individual taxable account. If I move shares to say an index fund it requires selling the shares and becomes a taxable event.

OK I think you are saying instead of reinvesting I can take the distribution in cash to spend or reinvest in a tax efficient fund and still only incur the cap gains I was going to incur anyway

Is that correct?

 

[audreyh1]

OK I think you are saying instead of reinvesting I can take the distribution in cash to spend or reinvest in a tax efficient fund and still only incur the cap gains I was going to incur anyway

Exactly!

 

[waynezo]

Exactly!

OK that is very good advice. Since in the past I have been selling shares of that fund and incurring an additional tax bill when I needed living expenses.

Going forward I will take distributions in cash and invest what I don't spend in tax efficient funds without changing my tax bill.

Thanks for the info

 

[Surewhitey]

Curious about rollover losses in this situation. If you have a large loss from years past continuing for future years, would this not help mitigate the surprise gains?

I had this happen last year when I purchased funds in October and got hit with the distribution of December...

 

[audreyh1]

So you mean carry forward losses? Yes, those will mitigate capital gains in following years.

 

[mrfeh]

OK that is very good advice. Since in the past I have been selling shares of that fund and incurring an additional tax bill when I needed living expenses.

Going forward I will take distributions in cash and invest what I don't spend in tax efficient funds without changing my tax bill.

Thanks for the info

Turn off reinvestment of dividends for everything you own in your taxable account. There is no advantage to reinvesting, only potential headaches.