Federal Taxes -- Specifically What Impacts You!

[chinaco]

This is a poll about Federal Taxes. It is not a political debate... so I did not place it in the sandbox.

What I would like to know is if you really benefit from lower capital gains taxes.

It is a complicated question. But for most of us it depends on a couple of factors... are most of you assets in tax deferred accounts that will require income tax be paid. Or are most of your assets in taxable accounts.

This is a complicated topic with many side issues.


Our assets are about 60/40 tax deferred/taxable. But even at that, we do not sell securities often... it is mainly done to rebalance.... when we retire we will sell securites as an income source. I know we will benefit to some degree in the future. But on balance... dollar for dollar of money we spend has income tax associated with it not capital gains tax.

In other words lower capital gains tax does not benefit us that much.

I have come to the conclusion that on average lower capital gains taxes mainly benefit very wealthy individuals that have large amounts of excess wealth outside of tax deferred accounts.

 

[calmloki]

We have the greatest majority of our assets in rental property - we are doing well due to self management, LWBOM, and paying off properties as early as we can. For our retirement i would like to sell the rentals so they don't require contant babysitting.
Any time we've sold a property there have been long term capital gains - but AMT lately kicks in and brings the taxes back up to pretty much normal income rates. I'm expecting to see about a 10-15% increase in taxes on sales over the next eight years. Luck of the draw, and well worth the grand experiment. Think we are probably in the top 5-6% in annual income for the US, but don't think we live like we are very wealthy and feel sale of our property would just finance our retirement without a reduction in current living standard.

 

[Rambler]

I'm still accumulating and engineering my allocation buckets. However, my plan is to have about 35-40% or so in muni bonds (no tax), 5% or so cash in muni mm fund (no tax), and 55% or so in equities. I was just running some numbers today, and figured that with this allocation, my nest egg, tithes and charitable contributions itemized along with property tax, and standard married filing jointly exemption, I won't have any tax to pay, fed or state, unless I make some major cap gains during an AA update. I think my AA adjustments will be minor in nature, a little at a time, so I don't think we'll be hit too hard. Virtually all our assets are in taxable accounts, and I don't think Obama's policies will impact us much in retirement, although my tax bite may go up for a year or so before FIRE.

Please someone tell me my plan is not crazy....

R

 

[freebird5825]

my assets are currently 50/50.
Bonds - combo of EE, I, and TE munis. all muni bond MFs are in taxable accounts.
Stocks - primarily indexed VG MFs, taxable accounts. Approx 20% in Roth (VGENX, VGSIX).

 

[audreyh1]

Even if most of your income are capital gains - you can get royally slapped by the AMT!

 

[W2R]

When I retire next year roughly 20% of my portfolio will be in my tax deferred retirement account (TSP). About 1%-2% will be in my teeny tiny Roth IRA.

I am still working, and my present salary is obviously subject to income tax.

 

[dex]

I don't think capital gains taxes are a major issue for the average person is. Dividend/Interest taxes have a greater effect.

 

[cashbalancetrouble]

With full retirement coming 1/1/10 for DW, we will keep being hit by AMT for 08 and 09. We will have control in 2010 and will start deferred tax withdrawals to lower tax bracket limits. We will delay SS until we can draw down pretax accounts. We are also looking at the lifting of Roth conversion limits.

Our after tax investments will become alot more conservative if the market comes back enough. Thats when we will be more able to take advantage of the lower capital gains rate if it still exists, but it means little to us now.

 

[FANOFJESUS]

99% taxable but still in the lower bracket Thank God.

 

[FinanceDude]

AMT is my problem, but I've done all I can to limit it. Those yearly patches aren't going to work forever.........

 

[JohnP]

With two pensions taxed at income levels, we have concentrated our taxable savings in low dividend funds, tax-exempt munis, and stocks with qualified dividends. In our case, low capital gains rates mean little in our case.

JohnP

 

[Zathras]

Virtually all of our accounts are taxable.
However, much of our income is dividend income.
We also have a lot of capital gains, but that is less and less each year, while at the same time we have more and more dividend income.
I didn't see that as an option in your poll, so I selected the 2nd option, unless you wrap capital gains and dividend income into the same option?

 

[FIREd]

Half of our assets are in tax-deferred, half in taxable. But our investment income (qualified dividends mostly) is currently a small fraction of our earned income. So for us, income tax rates have by far the biggest impact on our tax bill right now.

AMT hasn't been a concern yet for us (we are getting close though), but since we have very few deductions, AMT calculators show that it will only have a small negative impact on our tax bill when we get there.

 

[charlie]

I am 74 and far from rich. However I plan to sell a laundromat that I have owned for almost 40 years. Most of the proceeds will be long term capital gains. The proceeds will be invested to provide income to replace the cash flow I have been enjoying from the laundry.

There are a lot of middle income people like me already in retirement living off of capital gains. I hope President Elect Obama takes that into account!

Cheers,

charlie

 

[haha]

I am 74 and far from rich. However I plan to sell a laundromat that I have owned for almost 40 years. Most of the proceeds will be long term capital gains. The proceeds will be invested to provide income to replace the cash flow I have been enjoying from the laundry.

There are a lot of middle income people like me already in retirement living off of capital gains. I hope President Elect Obama takes that into account!

Cheers,

charlie

He won't.

Capital gains tax is the most unfair tax as it is levied on "gains" that are nothing more than inflation.

Don't expect anything other than stupidity and cupidity from a politician.

Ha

 

[old woman]

My money is mostly ROTH with about even amounts in Taxable and 401K. I pay taxes on the gains in mutual funds some capital some dividends and still have a job. When my 401K gets bigger I will quit putting money into it because it is all ordinary income when you take it out. I want to use up the tax free and 10% tax brackets so I want to take 10K a year from it after retirement.

 

[chinaco]

So far it looks like most people pay income tax and do not benefit from cap gains (so much).

I am not surprised since most of us are middle-class Americans that were employed. Yet we are probably a bit more wealthy than the average middle class American in terms of net-worth.

 

[whitestick]

So far it looks like most people pay income tax and do not benefit from cap gains (so much).

I am not surprised since most of us are middle-class Americans that were employed. Yet we are probably a bit more wealthy than the average middle class American in terms of net-worth.

You would need to have an addendum to the poll to make such an assumption. I'm retired and pay Short Term Capital Gains tax, equivalent to income tax rates, and have pension income and soon to be SS, all of which will be subject to the income tax rates, not capital gains. Others on here may be similar, IMHO, as I recall from previous polls.
Your last statement regarding the higher then average middle income class American, since Obama has implied that reaches to $250k per year, may or may not apply.

 

[Independent]

I have come to the conclusion that on average lower capital gains taxes mainly benefit very wealthy individuals that have large amounts of excess wealth outside of tax deferred accounts.

Your conclusion would be supported by research. Try this, for example:

http://www.ctj.org/pdf/cg0306.pdf This source is on the left, but their numbers seem "typical" of what I recall from other reading.

I'm not sure where you are going with this observation. Are you thinking that threads in the "Money" forum that relate to capital gains taxes have very limited audiences?

 

[FIRE'd@51]

We also have a lot of capital gains, but that is less and less each year, while at the same time we have more and more dividend income.
I didn't see that as an option in your poll, so I selected the 2nd option, unless you wrap capital gains and dividend income into the same option?

Yes, this was a major omission from the poll.

With regard to LT capital gains, another consideration should be the sale of a house. It is a very real possibility that, in some high-priced housing markets, the capital gain after the exclusion will put one in the above 250K AGI for the year in which the capital gain took place. For someone filing as a single (and this could be someone whose spouse has died), the exclusion is limited to 250K. To add salt to the wound, this one-time bulge in income can also result in a significantly higher Medicare part B premium, since it is now means-tested.

 

[HornedToad10]

I voted for the first option since I am young(26) and working and do not yet have substantial assets. I would imagine that the other options only become viable as you near retirement and begin withdrawing money for support.

 

[chinaco]

You would need to have an addendum to the poll to make such an assumption. I'm retired and pay Short Term Capital Gains tax, equivalent to income tax rates, and have pension income and soon to be SS, all of which will be subject to the income tax rates, not capital gains. Others on here may be similar, IMHO, as I recall from previous polls.
Your last statement regarding the higher then average middle income class American, since Obama has implied that reaches to $250k per year, may or may not apply.

Yes it is a complicated topic. The simple poll mechanism in the forum does not lend itself to a complex poll. Of course, I am not going to spend the time to create a complex survey. That is where comments on the thread occur.


What the poll was about in simple terms... do you really benefit from the lower LT cap gains on securities. It has been much ballyhooed. It has not benefited me in any meaningful way. When I ER, I will spend taxable assets and it might then... but so far it has not.

 

[Zathras]

What the poll was about in simple terms... do you really benefit from the lower LT cap gains on securities. It has been much ballyhooed. It has not benefited me in any meaningful way. When I ER, I will spend taxable assets and it might then... but so far it has not.

Well, in that case, yes, I would benefit quite a bit from lower capital gains taxes over the next 2-5 years. After that cap gains should be a very small part, but until then it would help a lot in my case.

 

[chinaco]

Looks like 75% have not really benefited from lower cap gains.

Based on the numbers I have seen for people that work in America and save... that probably means a very very small part of the middle class could have benefited from those tax breaks.

 

[FIRE'd@51]

Based on the numbers I have seen for people that work in America and save... that probably means a very very small part of the middle class could have benefited from those tax breaks.

I think the key word in the above sentence is work. For retired folks without pensions, the lower tax rates on dividends and capital gains can be very significant. For example, a middle-class couple filing a joint return with taxable income of 65K which is all dividends and long-term capital gains have zero Federal tax liability in 2008.