Long term capital gains, dividends, and wash sales in taxable accounts

[frugalnacho]

I have some money in taxable accounts at vanguard.   I make around 60k/yr, and anticipate (nearly) maxing out my 401k, tIRA, and my wifes tIRA, so our AGI is going to be low for the next several years (this years AGI was 36k - achieved a $0 tax liability this way so started to fund a roth IRA too).
 
I believe I should be selling (and rebuying) my taxable investments (as long as they remain higher than I purchased them) in order to take advantage of the 0% long term capital gains rate.  If they drop below my cost basis I see no advantage to sell and rebuy at a lower price as the capital loss does me no good when i'm already at or near a 0% tax rate.

Anything wrong with that logic?

What counts as a substantially identical asset to VTSAX and VFINX as far as wash sales go?  Is there an exact definition, or is it up to interpretation?  Are VTSAX and VFINX different enough that I could liquidate the VTSAX for a gain and immediately purchase VFINX?  And then wait more than a month and liquidate my initial VFINX and purchase VTSAX with it?

If I have an AGI of exactly 36k, and I sell VTSAX for a $2k profit, do those long term capital gains up my AGI to 38k?

[MDM]

If they drop below my cost basis I see no advantage to sell and rebuy at a lower price as the capital loss does me no good when i'm already at or near a 0% tax rate.

Anything wrong with that logic?

No.

If I have an AGI of exactly 36k, and I sell VTSAX for a $2k profit, do those long term capital gains up my AGI to 38k?

Yes.

Per Cathy's point, doing some what-if? calculations with your tax software (whether purchased commercial or roll-your-own spreadsheet) will help clarify the effects of different actions.

[frugalnacho]

The wash sale rule has no application to realising capital gains. You can realise capital gains whenever you want with no restrictions.

Make sure you understand the taxation of qualified dividends and long-term capital gains before you engage in your planned transactions though. Many users on this forum misunderstand how it works and think that being in a certain bracket makes you get unlimited tax-free long-term capital gains and qualified dividends. That is not correct. It's only tax-free to the extent that the income is within the 0% bracket.

Do I have to sell my VTSAX, then get the money, then repurchase VTSAX?  Or is there a way I can accomplish the entire transaction in a single step?

I was under the impression I was able to get long term gains tax free to the extent that AGI didn't exceed the 15% bracket.  For 2015 the 15% bracket is $74,900 at the upper end, so with my expected AGI (not including long term capital gains) is going to be less than $36,500, I could potentially have realized long-term gains of $38,400 (all of which would be taxed at the long-term capital gains and qualified dividends rate of 0% since my overall income is still within the 15% marginal bracket).   Of course such huge capital gains would adjust my AGI above the thresshold to take full advantage of the tax savers credit though, but since I am only looking to realize less than 4k in gains (most optimistic guess - probably less) I should be ok.

Is my understanding correct?

My expectations for this year are:

Income       60,000
401k          18,000
IRA            11,000
AGI            31,000 (Tax savers credit cut off between 0.2 and 0.5 multiplier is $36,500)
standard    12,600
2 exemp      8,000
Taxable       10,400 (all 10% bracket)
Tax             1,040
Savers Cred 2,000

Actual tax due: $0

This leaves me $5,500 to have long term capitals (or perhaps a bonus or over time) and still be able to take advantage of the tax savers credit to get to $0 tax due.   If I (or my wife) earns an additional $5,500 this year I guess we won't be able to tax advantage of it and will owe some tax.

Follow up questions:

If I sell my VTSAX at a loss I can use that to reduce my AGI? Like in my example above, if I earned an additional $6,000 that would raise my AGI to $37,000 and I would miss getting the full tax savers credit.  If I sold my VTSAX at a $500 loss that would reduce AGI to $36,500 and I could qualify for the credit?

Do I have to exceed the loss limit of $3,000 in order to carry over losses to following years?  If I sold at a loss of $30,000 could I carry those and use $3,000/yr until it runs out or do they expire at some point?

[teen persuasion]

I have some money in taxable accounts at vanguard.   I make around 60k/yr, and anticipate (nearly) maxing out my 401k, tIRA, and my wifes tIRA, so our AGI is going to be low for the next several years (this years AGI was 36k - achieved a $0 tax liability this way so started to fund a roth IRA too).
 
I believe I should be selling (and rebuying) my taxable investments (as long as they remain higher than I purchased them) in order to take advantage of the 0% long term capital gains rate.  If they drop below my cost basis I see no advantage to sell and rebuy at a lower price as the capital loss does me no good when i'm already at or near a 0% tax rate.

Anything wrong with that logic?

What counts as a substantially identical asset to VTSAX and VFINX as far as wash sales go?  Is there an exact definition, or is it up to interpretation?  Are VTSAX and VFINX different enough that I could liquidate the VTSAX for a gain and immediately purchase VFINX?  And then wait more than a month and liquidate my initial VFINX and purchase VTSAX with it?

If I have an AGI of exactly 36k, and I sell VTSAX for a $2k profit, do those long term capital gains up my AGI to 38k?

Just to clarify, you are now partially funding tIRAs and putting the difference in a Roth IRA, for a max total of $5500 each, right?  Not putting $5500 each in a tIRA AND also something in a Roth IRA.

I'm guessing that the significance of $36k AGI is the 50% credit level for the retirement savers credit, leading to your 0 tax.  Will harvesting taxable gains affect that?  IDK, something to verify.

[frugalnacho]

I have some money in taxable accounts at vanguard.   I make around 60k/yr, and anticipate (nearly) maxing out my 401k, tIRA, and my wifes tIRA, so our AGI is going to be low for the next several years (this years AGI was 36k - achieved a $0 tax liability this way so started to fund a roth IRA too).
 
I believe I should be selling (and rebuying) my taxable investments (as long as they remain higher than I purchased them) in order to take advantage of the 0% long term capital gains rate.  If they drop below my cost basis I see no advantage to sell and rebuy at a lower price as the capital loss does me no good when i'm already at or near a 0% tax rate.

Anything wrong with that logic?

What counts as a substantially identical asset to VTSAX and VFINX as far as wash sales go?  Is there an exact definition, or is it up to interpretation?  Are VTSAX and VFINX different enough that I could liquidate the VTSAX for a gain and immediately purchase VFINX?  And then wait more than a month and liquidate my initial VFINX and purchase VTSAX with it?

If I have an AGI of exactly 36k, and I sell VTSAX for a $2k profit, do those long term capital gains up my AGI to 38k?

Just to clarify, you are now partially funding tIRAs and putting the difference in a Roth IRA, for a max total of $5500 each, right?  Not putting $5500 each in a tIRA AND also something in a Roth IRA.

I'm guessing that the significance of $36k AGI is the 50% credit level for the retirement savers credit, leading to your 0 tax.  Will harvesting taxable gains affect that?  IDK, something to verify.

Yes.  I put $5,500 into my tIRA, and something like $2300 into my wife's tIRA, and the remainder of her 5.5k contribution into a roth (haven't actually put it in wife's account yet - waiting for tax refund to come in so I can fund it).  The amount chosen to go towards tIRA was deliberate to get AGI to exactly $36,000 to qualify for full tax savers credit.

I think harvesting gains will affect that, but if I had done it this year the entire amount chosen to contribute to my wife's roth could have instead been put into the tIRA to offset that.  I am anticipating having a few thousand in leeway in 2015 so I could potentially lock in those long term capital gains for free.

I just want to make sure I don't have any misunderstandings on how this is all going to come together so I can fully optimize it.

[johnny847]

I have some money in taxable accounts at vanguard.   I make around 60k/yr, and anticipate (nearly) maxing out my 401k, tIRA, and my wifes tIRA, so our AGI is going to be low for the next several years (this years AGI was 36k - achieved a $0 tax liability this way so started to fund a roth IRA too).
 
I believe I should be selling (and rebuying) my taxable investments (as long as they remain higher than I purchased them) in order to take advantage of the 0% long term capital gains rate.  If they drop below my cost basis I see no advantage to sell and rebuy at a lower price as the capital loss does me no good when i'm already at or near a 0% tax rate.

Anything wrong with that logic?

This is all correct for federal taxes. If you live in a state subject to income tax, many states do not have favorable taxes on capital gains, so you may owe state taxes on this capital gain.

What counts as a substantially identical asset to VTSAX and VFINX as far as wash sales go?  Is there an exact definition, or is it up to interpretation?  Are VTSAX and VFINX different enough that I could liquidate the VTSAX for a gain and immediately purchase VFINX?  And then wait more than a month and liquidate my initial VFINX and purchase VTSAX with it?

There is no exact definition. Because VTSAX and VFINX track different indices, it is highly likely that the IRS would agree that these funds are not substantially identical.

If I have an AGI of exactly 36k, and I sell VTSAX for a $2k profit, do those long term capital gains up my AGI to 38k?

Yes.

Do I have to sell my VTSAX, then get the money, then repurchase VTSAX?  Or is there a way I can accomplish the entire transaction in a single step?

Yes, you must sell and repurchase. Note that Vanguard has a frequent trading policy that will prevent you from doing this directly online (if I remember correctly this only applies to accounts at Vanguard, not Vanguard funds held at other companies). However, there are two workarounds: place the order by mail, or set up a "one shot" automatic exchange: http://www.bogleheads.org/wiki/Frequent_trading_policy

I was under the impression I was able to get long term gains tax free to the extent that AGI didn't exceed the 15% bracket.  For 2015 the 15% bracket is $74,900 at the upper end, so with my expected AGI (not including long term capital gains) is going to be less than $36,500, I could potentially have realized long-term gains of $38,400 (all of which would be taxed at the long-term capital gains and qualified dividends rate of 0% since my overall income is still within the 15% marginal bracket).   Of course such huge capital gains would adjust my AGI above the thresshold to take full advantage of the tax savers credit though, but since I am only looking to realize less than 4k in gains (most optimistic guess - probably less) I should be ok.

Is my understanding correct?

Yes

If I sell my VTSAX at a loss I can use that to reduce my AGI? Like in my example above, if I earned an additional $6,000 that would raise my AGI to $37,000 and I would miss getting the full tax savers credit.  If I sold my VTSAX at a $500 loss that would reduce AGI to $36,500 and I could qualify for the credit?

Yes.

Do I have to exceed the loss limit of $3,000 in order to carry over losses to following years?  If I sold at a loss of $30,000 could I carry those and use $3,000/yr until it runs out or do they expire at some point?

Capital losses carry forward indefinitely (until your death).


Do you buy health insurance from the marketplace? Your tax credit for Obamacare is dependent on your (M)AGI.


It sounds like you understand everything that I cover in my blog about capital gains taxes, tax loss harvesting, and capital gain harvesting, but here's a link to it anyways: https://fiby40.wordpress.com/2015/01/13/capital-gains-taxes/
There's a couple more posts on general income taxes and other intricacies of capital gains taxes.

[frugalnacho]

I get insurance through my employer.

[johnny847]

Nice.

Oh one thing that is not immediately obvious - even though you cannot tax loss harvest in a retirement account, a purchase in a retirement account can incur a wash sale of something you're trying to tax loss harvest in a taxable account.

[forummm]

If you want to sell VTSAX at a profit and buy the same stocks again, you could get VFIAX and VEXAX to replace it. Then you could later do the reverse: sell your VFIAX and VEXAX to buy VTSAX.

If you open multiple Vanguard accounts (I have 4, so that it's easier to segregate and track capital gains on groups of purchases), I think you can also sell a fund in one of the accounts and still buy it in another account. Another frequent trading policy workaround.