Capital Gains / Sabbatical / Planning Contributions

[mcjuggerton21]

I’m currently in the middle of taking six months off from work. I’m living off cash savings and investments in a taxable brokerage account. I sold most investments with a loss last year (2017) as I had earned enough money to have to pay capital gains taxes.

In 2018 I plan to go back to work but I would like to sell assets in my brokerage account and pay 0%  in capital gains tax. I think this requires my taxable income to be less than $38,600.

Now, if I have 20,000 in capital gains on sale of 40,000 in assets - or some percent of this

And

Contribute max/some amount to:

HSA

IRA

401k

Can I reduce my taxable income below the threshold to take advantage of only working part of the year? I know this depends on income - I’ll probably be making 6400$ pretax, and start work in April.

Thanks everyone, trying to figure out how to save a couple thousand dollars.

[terran]

401k, IRA and HSA contributions will reduce taxable income. You can only contribute to 401k and IRA to the extent that you have earned income, so if you're saying you'll have $6400 of total income for the year then you won't be able to max both, but if that's per month starting in April then you should be fine.

Capital gains stack on top of earned income, and anything under $38,600 for a single filer will be taxed at 0%

So, if you're saying you'll be earning $6400/month with the first paycheck in april (so 9 months of earnings), that could look like this:

$57600 earnings
-$18500 401k contribution
-$3450 HSA contribution
-$5500 IRA contribtion
-$12000 standard deduction
=$18,150 taxable earned income

Which would leave you with $38600 - $18150 = $20450 of in capital gains you could realize in in the 0% bracket. If 50% of your taxable holdings are  gains (20k gains on 40k assets) then you could sell 20450/0.5 = $40900 worth of assets.

Remember to also subtract other deductions like health insurance from, and add other income like interest and dividends to your earned income.

Also note that you're within range of the Saver's Tax Credit, which could be worth as much as $1000 (non refundable, so might be less if your tax due is less), which you would give up if your capital gains push you over the limit, in which case your capital gains rate wouldn't really be 0% since it would be causing you to pay the amount you would otherwise get from the credit.

[mcjuggerton21]

Thanks Terran, that’s what I thought and wanted to confirm. The smart thing to do appears to be to sell and take advantage of the lull in income.

Thanks again for the help with the math!