Capital gains question

[Scotland2016]

Hello, my husband is switching careers and for the next two years, we will be taking money out of our 'stache to cover some of our expenses until his business gets up and running. I am planning on posting a detailed tax case study after some more research, but first I have a basic question about capital gains. I've read that if you are in the 10-15% tax bracket, you pay 0% on long-term capital gains. I've also read about "free money" at The Millionaire Educator.

Let's say we keep our earned income to our free money limit ($40,000 for simple example purposes) and within the 15% tax bracket, and then withdraw money from our taxable accounts (another $40,000). Do we pay 0% in long-term capital gains on the second $40,000? Or does that second $40,000 bump our income up to the 25% tax bracket and therefore we pay 15% on it? I hope my question makes sense -- I'm new to these tax strategies.

Thank you in advance!

[sokoloff]

Your capital gains does count towards your overall income, so you can't have $15K in wages and $2MM in capital gains all be tax-free, of course.

The limit is also seemingly much higher than $40K for a married couple, per: https://www.thebalance.com/how-to-use-the-zero-percent-tax-rate-on-capital-gains-2388995

[Scotland2016]

Ah, that does make sense. I didn't think to extrapolate it like that. Of course it wouldn't work that way. Thank you!

[Scotland2016]

Okay, I've done some work on our tax buckets. If I am doing this correctly (and it's pretty likely I'm not), we can have a total income of $104,800, pay zero taxes, and get a $135 tax return. That seems incredible to me.

Bucket 1 - $12,700 - Standard Deduction
Bucket 2 - $16,200 - Personal Exemptions
Bucket 3 - $18,650 in income, with $1,865.00 tax liability
Bucket 4 - $57,250 ($75,900 - $18,650) in income from taxable account, with a 0% tax liability because we are in the 15% bracket

With child tax credits of $2,000.00, we would receive a refund check of $135.00.

This seems too good to be true.

[With This Herring]

You could run it through a tax program to double-check.  :)

I just wanted to remind you that, if you take $40,000 from investments, only part of that will be capital gain.  You will have some basis in these investments, right?  So the return of your cost basis will be free from taxes.

[MDM]

Okay, I've done some work on our tax buckets. If I am doing this correctly (and it's pretty likely I'm not), we can have a total income of $104,800, pay zero taxes, and get a $135 tax return. That seems incredible to me.

Bucket 1 - $12,700 - Standard Deduction
Bucket 2 - $16,200 - Personal Exemptions
Bucket 3 - $18,650 in income, with $1,865.00 tax liability
Bucket 4 - $57,250 ($75,900 - $18,650) in income from taxable account, with a 0% tax liability because we are in the 15% bracket

With child tax credits of $2,000.00, we would receive a refund check of $135.00.

This seems too good to be true.

If the case study spreadsheet is correct, it is exactly true.

[respond2u]

Okay, I've done some work on our tax buckets. If I am doing this correctly (and it's pretty likely I'm not), we can have a total income of $104,800, pay zero taxes, and get a $135 tax return. That seems incredible to me.

Bucket 1 - $12,700 - Standard Deduction
Bucket 2 - $16,200 - Personal Exemptions
Bucket 3 - $18,650 in income, with $1,865.00 tax liability
Bucket 4 - $57,250 ($75,900 - $18,650) in income from taxable account, with a 0% tax liability because we are in the 15% bracket

With child tax credits of $2,000.00, we would receive a refund check of $135.00.

This seems too good to be true.

The tax code is very kind to people living off dividends and capital gains.

Here's someone that's paying $0 taxes and using the heck out of capital gains:
http://www.gocurrycracker.com/never-pay-taxes-again/
http://www.gocurrycracker.com/go-curry-cracker-2016-taxes/

Here's a warning about how going over the limit causes a bigger than you think tax hit:
https://earlyretirementnow.com/2016/07/13/that-sneaky-30-federal-income-tax-bracket/

Also, every $ in income over the Federal Poverty Limit will reduce your ACA subsidy (IIRC, both current republican suggestions don't change that until 2020 or so).  For me, the marginal tax rate was 30% because of subsidy loss down near 200% of FPL, and it continued to have a big influence until it ran out at 400% of FPL.

Your case will be different, but it's probably worthwhile for you to read up on "capital gains harvesting".

GoCurryCracker has a nice graph on the ACA subsidy:
http://www.gocurrycracker.com/obamacare-optimization-early-retirement/

[Scotland2016]

Thank you all for your insight. This is fascinating and helpful.