How to lower my investment income

[Packman]

Unfortunately, my wife and I have to try to decrease our investment income in taxable accounts for 2017 to qualify for a health insurance premium tax credit. Currently, we are very close to the $64,000 upper limit. I know some standard ways to do this - use index funds, low turnover mutual funds, tax managed funds, etc. Are there other good investment options that would produce non-taxable gains? I can get a pretty good estimate for dividends but unknown capital gain distributions are a killer. If I go over the income limit by $1, I will lose an $18,000 tax credit (subsidy).

 

[Big_Hitter]

harvest some losses

 

[LOL!]

Other than realizing losses -- which can only help you to the tune of $3,000 reduction this year -- I don't see a way without changing your investments which will increase your income.

I think even tax-exempt muni income is counted against you, right?

But look on the bright side: If you have $64,000 in investment income, then you probably have a $3 million dollar taxable portfolio and can easily afford the $18K hit without batting an eyelash. But then again, you did not say what your investment income is and what your other income (pensions, SS, job) is.

So … if you do go over, then go over big and use this chance to make your portfolio more tax efficient.

 

[Er3184]

Depending on your age, need for income, etc a simple deferred annuity could work here. Theyre out there for as little as 0.10% fee if you have $1mil plus.

There are trade offs and it would be situational but what you describe is a huge cliff u could fall off. Check these out. All gains, divs, etc deferred as long as you want.

 

[Packman]

OP here.

Not all of the $64K is investment income, but the majority is.

Not much in the way of losses in the taxable accounts right now, unless the market dives.

Muni bond income is counted toward the MAGI for ACA subsidy.

I'll look into the deferred annuity. I have one now with Fidelity that I could add to. They charge .25% plus the management fees. I would not need the money until after age 65.

Thanks

 

[Er3184]

The one you have with Fidelity drops to 0.10% at 1mil. Also it has index funds inside of it so you control expense ratios based on your selected funds

 

[calmloki]

You could subscribe to my newsletter. Kinda a pro at reducing income and assets.

 

[LOL!]

One would have to come up with the money to put in a deferred annuity. That's problematic because it would increase your income since you would probably be selling tax-inefficient funds at a gain.

If you are going to take the hit by selling, then you could just use the money to invest tax-efficiently say in BerkshireHathaway stock or tax-efficient index funds that do not pay capital gains and have minimal dividend income (tax-managed equity funds).

 

[GrayHare]

see BRKB - no dividends, all growth, take the tax hit only when you decide to sell some shares

 

[Packman]

One would have to come up with the money to put in a deferred annuity. That's problematic because it would increase your income since you would probably be selling tax-inefficient funds at a gain.

If you are going to take the hit by selling, then you could just use the money to invest tax-efficiently say in BerkshireHathaway stock or tax-efficient index funds that do not pay capital gains and have minimal dividend income (tax-managed equity funds).

Correct in that I would have to sell assets at a gain to invest large sums elsewhere (like the annuity). That is partially why I am looking at this in 2016. I do not get an ACA subsidy this year and could afford to take some gains and pay the tax in 2016.

 

[Packman]

see BRKB - no dividends, all growth, take the tax hit only when you decide to sell some shares

I could use Berkshire for some of my investments, but I still want to diversify. Are there funds or ETF's that do not pay dividends or cap gains? I suppose that is what the tax efficient funds do - right?

 

[LOL!]

Many index funds (particularly from Vanguard) do not pay capital gains.

But to not pay dividends is virtually impossible. I haven't found a fund that I would want to own that does not pay dividends. I would not mind reducing my dividend income myself, but I want diversification, too.

Also note that with the deferred annuity, you will pay ordinary income taxes on the gains and not the lower long-term capital gains taxes. That could be costly. Nor will your heirs avoid those taxes like they would the LTCG taxes.

 

[Refresher]

Buy a rental property and take a loss

 

[ivinsfan]

The other options are an HSA or if you have any w-2 income a IRA contribution....

If you can't get under for this year try to make sure you have an HSA up and running for your 2017 income.

Are you saying that your health insurance will cost around 24.000 a year? At 64K incomes wouldn't your part of the payment be around 5800...

 

[Packman]

The other options are an HSA or if you have any w-2 income a IRA contribution....

If you can't get under for this year try to make sure you have an HSA up and running for your 2017 income.

Are you saying that your health insurance will cost around 24.000 a year? At 64K incomes wouldn't your part of the payment be around 5800...

In AZ there are only 4 plans on the ACA and none are HSA compliant. The Bronze plan has too high of a deductible to qualify for a HDHP! I wonder what intelligent lawmaker figured out that rule.

If I can keep my MAGI under $64K, I'll get the subsidy. If not, I pay the full cost of about $22,000.

 

[COcheesehead]

Donate appreciated shares.
Overfund a whole life policy
Buy a DEFERRED annuity

 

[daylatedollarshort]

Do you have a small business? Might be a good time to buy a new PC and a Persian rug for the home office or find seminars in London and Las Vegas to attend.

 

[pjigar]

Buy a rental property and take a loss

I second that! Easiest way to have negative income, at least on the paper. I am in my 3rd year and still negative income on paper. Positive cashflow every year nevertheless. 30K cash flow and -5K income!

 

[pb4uski]

Flip equities in 2016 to cash or fixed income and make corresponding changes to non-taxable accounts to maintain your desired AA?

 

[Sunset]

see BRKB - no dividends, all growth, take the tax hit only when you decide to sell some shares

+1

 

[catotx]

I could use Berkshire for some of my investments, but I still want to diversify. Are there funds or ETF's that do not pay dividends or cap gains? I suppose that is what the tax efficient funds do - right?

LargeCap Growth index funds in general have lower dividends than broad market funds. For example: SCHG, VUG, IUSG.
Similarly, SmallCap Growth index funds like VBK, IJT also have lower dividends.

If you are into sector investing, look at healthcare index funds like VHT, FXH, XLV. Biotech funds (e.g. IBB, BBH, XBI) also have very low dividend yields (appreciation is mostly in undistributed capital gains) but these are very volatile.

 

[jim584672]

Consider QQQ which has a dividend of about 1% vs. VTI which is about 2%.

 

[gcgang]

What a pathetic situation, expending time and effort to reduce income so one can qualify for government subsidies. A great example of how perverse incentives send our economy down the crapper and turn otherwise good people into welfare queens.

 

[panacea]

What a pathetic situation, expending time and effort to reduce income so one can qualify for government subsidies. A great example of how perverse incentives send our economy down the crapper and turn otherwise good people into welfare queens.

Really?? I don't have a need for this yet but I see this is fair play. We didn't make the rules but I'll sure take advantage of any lawful financial break our system provides, from tax deductions to ACA subsidy.

 

[MichaelB]

We can disagree without being disagreeable. This is a thread topic discussed many times and many find it useful, so let's keep it friendly, please.