The Money Mustache Community

Learning, Sharing, and Teaching => Taxes => Topic started by: Masstache on November 16, 2017, 07:22:46 AM

Title: ACA Premium Tax Credit vs. Tax-free Capital Gains
Post by: Masstache on November 16, 2017, 07:22:46 AM
Apologies if this has been covered, couldn't find it searching the archive.

I'm doing some end of the tax year planning.  With my current artificially-low FIRE income (a little from consulting plus some dividends and cap gains), I would get $5k in ACA premium tax credits back.  However, if I take advantage of the "harvest your capital gains and pay no tax if you stay in the 10% or 15% bracket" strategy, I can harvest $70k in tax-free capital gains from my investments.  Doing so would push my income above 400% FPL, and I would lose the $5k PTC.  But, on paper at least, the tax-free $70k gains would be worth more than $7k (assuming it were otherwise taxed in the 10% bracket when realized and taxed in the future, more because some of it would likely be in the 15%).

So my decision seems to be
1) $5k cash in hand now by claiming the PTC
2) $7k+ paper tax savings by cashing out gains instead

The math says it is worth $2k to forego the PTC and max out the harvested capital gains.  Am I missing something?
Title: Re: ACA Premium Tax Credit vs. Tax-free Capital Gains
Post by: bacchi on November 16, 2017, 11:03:17 AM
The 400% FPL is at $64k (for MFJ) and the tax-free exemption is at $76k. Couldn't you harvest up to $64k?

I'm facing the same issue and will run numbers through a tax program in early December.
Title: Re: ACA Premium Tax Credit vs. Tax-free Capital Gains
Post by: seattlecyclone on November 16, 2017, 02:35:16 PM
The 400% FPL is at $64k (for MFJ) and the tax-free exemption is at $76k. Couldn't you harvest up to $64k?

I'm facing the same issue and will run numbers through a tax program in early December.


Be aware that your premium credit will slowly decrease as your income increases, until that 400% line where the premium credit falls off a cliff to $0. That means the gains aren't truly free even if you stay under the 400% line, especially if you live in a state where you'll also pay state tax on the gains. Staying just under the 400% line may be optimal, or you might do better by simply not harvesting any gains until you need the money.