Just to clarify, the $96k for a couple is from the standard deduction of $12k + exemptions of $7.6k + capital gains of $70k, which is the the top of 15% marginal tax bracket?
Do people living in states with income tax have to pay for capital gains if they are in the bottom two brackets? Does this vary a lot from state to state?
Thanks!
That's roughly correct - it's for a couple with 2 young kids. It also includes 2 more exemptions (2 kids) + $2,000 in child tax credits + some IRA to Roth IRA conversions + the 10% tax bracket (17,400 in 2012). It all depends on your personal situation and goals. I believe when I reach FI I will have far more in tax deferred accounts than taxable accounts, so my strategy would include a lot of Roth conversions as well.
Here's the breakdown of the scenario I ran, which isn't necessarily a maximum amount any particular situation might allow:
Roth IRA Conversion 46,500
Qualified Div/L-T Cap 50,000
Total AGI 96,500
Less:
Standard Deduction 11,900 (this is 2012 #, 2013 is 12,200)
Exemptions
15,200 (this is 2012 #, 2013 is 15,600)
Taxable Income 69,400
Tax 2,044 (The tax is from the Roth conversion, not the $50K QDiv/L-T Cap)
Child Tax Credit 2,000
Federal Tax Due 44
State Tax Due 4,227 (You are correct, state taxes are not part of this strategy)
In my post I specifically said federal taxes in one spot, but I should have clarified the state part. A few states (TX, NV, FL, WY) have no state income tax. Other states might follow the federal rules more closely and have a smaller tax. My particular state return would result in around 4.5% income tax due using this strategy. If you live in a state with income taxes, it's likely you would have to pay taxes on Roth conversions and capital gains, but luckily those rates are much lower than the federal ones so it still makes a lot of sense to do this.
The 10% bracket should be considered in any Roth conversion strategy. That portion of this strategy allows for up to $45,650 without paying any federal income tax if you are married with 2 kids (17,850 10% tax bracket + 12,200 std ded + 15,600 exemptions x4). These are 2013 amounts.
None of this factors in any other income you might have, so if you own rental real estate, receive social security, have interest from a bank or brokerage, work part time during FIRE, these would all affect this strategy. However, some of them could have a positive impact on this, like a rental real estate loss.