trying to understand capital gains calculations

[UpQuark]

Could someone please explain to me the math of capital gains tax costs versus the amount received from selling the stock. My problem is that I've used up 2/3s of my second year of my 2-year-cash-bucket (I forgot about needing a cash bucket and did a Roth rollover that used up the cash). And I want to figure out, if paying 15% gains tax (and for me also paying extra for the effect on taxable portion of Social Security) is equal or more or less than just risking selling taxable positions in a down market.

I tried to Google it and have only found a sort of opposite situation of calculating when a person achieves their desired returns goal: "For example, if you want to receive a 20% return on your stock purchase, you should consider an after-tax return rate. With a 15% tax rate on capital gains, you can sell when your shares rise by 23%, which will earn you a 20% return on your investment plus 3%, 15% of your capital gain income."

I don't really comprehend the math variables here, why is 3% equal to 15% of the capital gains. And how can I do it in reverse to decide if the savings in taxes equals the loss in value in a down market. Basically, how much % of capital gains would a position need to have to offset LTCG taxes in a down market? Or does that just not happen?

I'm thinking it is not cost effective to refill my cash bucket during this tax year since I already did a rollover, IRA withdrawal, and what I hope was capital gains harvesting to the top of my 12% tax rate. I wonder how anyone refills their cash bucket after a few down years used it up?

 

[GrayHare]

I suspect they are saying 3 percentage points beyond a 20% gain pays for the tax because 3/20 = 15%.

 

[UpQuark]

Is there some way to determine something like "each 100% of capital gains nullifies $x of tax for each percentage drop in share price"?

 

[Gotadimple]

So you have two issues you want to resolve - determining the capital gains tax on a sale of an investment, and determining the impact to IRMAA and whether it's worth it.

You can calculate a gain or a loss using this calculator. NOTE it doesn't ask about the commissions (the cost to buy the investment and the cost to sell the investment).

2024 Capital Gains Tax Calculator - Long-Term & Short-Term Gains

You may owe capital gains taxes if you sold stocks, real estate or other investments. Use SmartAsset's capital gains tax calculator to figure out what you owe.

smartasset.com

To make the calculator work so it includes commissions, take your initial investment and increase it by the commission charge (if any), and decrease the proceeds from the sale by the commission charge (if any).

You can offset the gains tax with tax losses - if you also sold an investment for a loss (your down year scenario) in the same year. Assuming they are both either long-term or short-term. Just combine the total invested and the total received for all sales.

See this link for a discussion of the IRMAA calculation. The tables are for this tax year which means the sale of investments took place in 2022. Harry Sit is forecasting the rates out to 2026 which would cover a sale you make this year and it's impact on your 2026 Medicare premiums. He does this every year, you might want to add your email to get his blog. He writes periodically on several topics.

2024 2025 2026 Medicare Part B IRMAA Premium MAGI Brackets

You pay higher Medicare Part B and Part D premiums if your income exceeds certain thresholds. Here are the IRMAA income brackets for 2024, 2025, and 2026.

thefinancebuff.com

HTH,
Rita

 

[Sunset]

Seems like extra complications.

What is in your IRA ? , why not simply make sure you have a few years worth of totally safe investments (ie Treasury bonds in a multiyear ladder) inside the IRA.

You can sell the stocks now and buy the bonds now inside the IRA and it's tax free. Then you are safe and set should the market fall 30% tomorrow.

 

[Gotadimple]

Seems like extra complications.

What is in your IRA ? , why not simply make sure you have a few years worth of totally safe investments (ie Treasury bonds in a multiyear ladder) inside the IRA.

You can sell the stocks now and buy the bonds now inside the IRA and it's tax free. Then you are safe and set should the market fall 30% tomorrow.

That's true, until you need the cash. Then any distribution is taxed at your regular rate. On the entire distribution. And it may impact IRMAA.

If you're in the 12% bracket like the OP that's still 12% of the total amount distributed vs. 15% of the amount taken from taxable on the difference between the investment and the sale.

And yes, depending on the OPs total income it may affect IRMAA.

 

[Sunset]

OP does have a Roth for emergency extra cash withdrawals if needed.

I simply mentioned the IRA treasuries as a way to preserve $$ in a down market.

OP could do the IRA move if needed, and then replenish the taxable account money over a few years to spread out any tax hit.

Although really if the money is coming from an IRA, rather than take it out into taxable. Just covert it to Roth where it sits untaxed until maybe needed. And could pay the taxes from the IRA since the effect is the same in spendable cash.

 

[pb4uski]

Could someone please explain to me the math of capital gains tax costs versus the amount received from selling the stock. My problem is that I've used up 2/3s of my second year of my 2-year-cash-bucket (I forgot about needing a cash bucket and did a Roth rollover that used up the cash). And I want to figure out, if paying 15% gains tax (and for me also paying extra for the effect on taxable portion of Social Security) is equal or more or less than just risking selling taxable positions in a down market.

I tried to Google it and have only found a sort of opposite situation of calculating when a person achieves their desired returns goal: "For example, if you want to receive a 20% return on your stock purchase, you should consider an after-tax return rate. With a 15% tax rate on capital gains, you can sell when your shares rise by 23%, which will earn you a 20% return on your investment plus 3%, 15% of your capital gain income."

I don't really comprehend the math variables here, why is 3% equal to 15% of the capital gains. And how can I do it in reverse to decide if the savings in taxes equals the loss in value in a down market. Basically, how much % of capital gains would a position need to have to offset LTCG taxes in a down market? Or does that just not happen?

I'm thinking it is not cost effective to refill my cash bucket during this tax year since I already did a rollover, IRA withdrawal, and what I hope was capital gains harvesting to the top of my 12% tax rate. I wonder how anyone refills their cash bucket after a few down years used it up?

The 3% is poorly framed, but I think it is 15% of the 23% gain. What they are saying is that if your basis is 100 and you sell for 123 then your gain will be 23 and your tax will be 3.45 (15% of 23). So really, if you want a 20% gain after paying 15% in capital gains taxes you need to sell at at 123.5% [100 + 20%/(1-15%)]

However, the 15% rate only applies to gains that are over the top of the 12% tax bracket (actually $125 or $250 less than the top of the 12% tax bracket).

If you use up part of your tax bracket for gains harvesting then you have less room for Roth conversions.

At this point if you want to refill your cash bucket without any tax cost you could sell the positions that you bought when you did your tax gains harvesting.

 

[UpQuark]

Thanks for all the replies. The decumulation period of retirement is a lot more complicated than I had expected.

I do have plenty of bonds in my IRA, so that is a good idea to consider it my cash bucket, but it would double my taxes if I had to use the IRA as my total cash bucket during a market downturn. Also I've now realized that my treasury ladder in my IRA that I consider to be the IRA portion of my cash bucket has increasingly been rolled forward using coupon-paying treasuries that I then mentally start considering fixed income (because the fixed income analysis page includes their upcoming coupons). I will, going forward, roll those ladder rungs using zero coupon treasuries so I don't muddle my buckets.

The idea of selling the positions I bought with gains harvesting is probably what I should do to start restoring the taxable cash bucket, at least with the portion that I didn't use to plump up dividends (those divs being the only cushion still available for future market downturns in my taxable account, and which I'd been unthinkingly eating away at in my decumulation choices). But gee I hate to sell my new equity babies. I guess this is the type of situation where a person finds out if they have the right amount of discipline/temperament in financial affairs.

I don't think the money in my Roth would be useful at all because there is no cash bucket in my Roth, it is all equity. I don't plan to touch it for another 5 years, but omg do I need to plan ahead when I will be using it and have it in cash in the Roth? I'm starting to think good financial planners earn their fees.

 

[SevenUp]

If you want to estimate your taxes for this year, see Tax estimation tools - Bogleheads.

In particular, if you are concerned about the interplay among capital gains, ordinary income, SS benefits, and IRMAA, see Roth Conversion with Social Security and Medicare IRMAA.

 

[TheWizard]

I don't do bucket schemes in retirement and don't recommend them to others.
When I infrequently sell investments from my taxable account to raise money, I sell the lots with losses or with the least gain percentage.

So when I sold $45k of stock funds last year to buy a new car, I was able to get a net loss which helps offset ordinary income taxed at 24%...

 

[pb4uski]

+1 The problem with busket strategies is that people get all wrpped up their underwear about how to refill the buckets.

I took a different, simpler approach. I usually keep a cash buffer of at least a year of "gap"... spending less pension less SS. It's a lot easier no with an inverted yield curve and 5%+ money market fund yields.

Then I replenish the cash buffer as part of my periodic rebalancing.

I don't consider Treasury bonds or TIPs to be cash, but more fixed income/bonds.

What are your percentages of taxable, tax-deferred and tax-free? What is your target AA... stocks/bonds/cash? It sounds like you might be overthinking things. Having all equities in your Roth makes sense to me..

 

[Exchme]

I don't do bucket schemes in retirement and don't recommend them to others.
When I infrequently sell investments from my taxable account to raise money, I sell the lots with losses or with the least gain percentage.

So when I sold $45k of stock funds last year to buy a new car, I was able to get a net loss which helps offset ordinary income taxed at 24%...

I agree with this, a "cash bucket" is just pre-selling your investments, so I wouldn't worry about replenishing it, particularly if there was a high tax cost to doing so.

If OP really wants to replenish the bucket, then
a) wait until next year when the Roth Conversion complication doesn't exist, or
b) look through the cost basis of the various investments to see if there is something that has a loss in it or at least find the smallest gain.

As for the taxes, if I were in the income range where SS is taxed, I probably would not have done a Roth Conversion at all. The phase-in of income taxes on SS (50% or 85% higher than the stated bracket) often creates a marginal tax cost that is too high to be worthwhile.

 

[pb4uski]

... The phase-in of income taxes on SS (50% or 85% higher than the stated bracket) often creates a marginal tax cost that is too high to be worthwhile.

True, but usually only for a small range of income.

For us, if we no ordinary income other than my pension and DW's SS, we would pay $0 in tax and none of the SS would be taxed. Add ordinary income to the top of the 12% tax bracket and we pay $10,294 in taxes and 85% of DW's income is taxed. The $10,294 increase in tax is 11.2% of the added income.

There may be a small range where the increment tax rate is very high.... 185% of 12% or 22.2%... but it is a small range and has minimal impact on the overall cost of taxes on discretionary ordinary income like Roth conversions.

It is very situational and needs to be looked at on a case-by-case basis.

 

[CardsFan]

True, but usually only for a small range of income.

For us, if we no ordinary income other than my pension and DW's SS, we would pay $0 in tax and none of the SS would be taxed. Add ordinary income to the top of the 12% tax bracket and we pay $10,294 in taxes and 85% of DW's income is taxed. The $10,294 increase in tax is 11.2% of the added income.

There may be a small range where the increment tax rate is very high.... 185% of 12% or 22.2%... but it is a small range and has minimal impact on the overall cost of taxes on discretionary ordinary income like Roth conversions.

It is very situational and needs to be looked at on a case-by-case basis.

+1

I think one can get too wrapped up in the incremental rate. We have debated before about the use of "effective" tax rate, but I think this is a good example of where looking at that is more meaningful than looking at the short time in a high incremental rate.

JMHO

 

[SevenUp]

I think one can get too wrapped up in the incremental rate. We have debated before about the use of "effective" tax rate, but I think this is a good example of where looking at that is more meaningful than looking at the short time in a high incremental rate.

Sometimes "effective" is used to mean (total tax)/(total income). That is pretty much useless when it comes to deciding how much to Roth convert and other optional things.

(Change in tax)/(change in income) is useful. Whether that's called "marginal" or "effective" doesn't matter as much as doing the calculation that way.

 

[Joseph]

Could someone please explain to me the math of capital gains tax costs versus the amount received from selling the stock. My problem is that I've used up 2/3s of my second year of my 2-year-cash-bucket (I forgot about needing a cash bucket and did a Roth rollover that used up the cash). And I want to figure out, if paying 15% gains tax (and for me also paying extra for the effect on taxable portion of Social Security) is equal or more or less than just risking selling taxable positions in a down market.

I tried to Google it and have only found a sort of opposite situation of calculating when a person achieves their desired returns goal: "For example, if you want to receive a 20% return on your stock purchase, you should consider an after-tax return rate. With a 15% tax rate on capital gains, you can sell when your shares rise by 23%, which will earn you a 20% return on your investment plus 3%, 15% of your capital gain income."

I don't really comprehend the math variables here, why is 3% equal to 15% of the capital gains. And how can I do it in reverse to decide if the savings in taxes equals the loss in value in a down market. Basically, how much % of capital gains would a position need to have to offset LTCG taxes in a down market? Or does that just not happen?

I'm thinking it is not cost effective to refill my cash bucket during this tax year since I already did a rollover, IRA withdrawal, and what I hope was capital gains harvesting to the top of my 12% tax rate. I wonder how anyone refills their cash bucket after a few down years used it up?

 

[Joseph]

Capital gains have 3 different tax brackets, plus potential tax on NII income.
Lots depends on what your agi is for the yr.