Author Topic: Magic Number for Income Tax?  (Read 4994 times)

tennisray

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Magic Number for Income Tax?
« on: August 24, 2014, 06:36:19 PM »
Hi,
My wife and I (39 and 38 years old in the US) would like to start scaling back our work schedules.  We are trying to figure out how much to work while being able to stay in the 15% income bracket.  I've read some posts at madfientist.com and gocurrycracker, but we are still confused at finding the "magic number" when it comes to staying below that threshold.  We are mostly concerned about selling stocks while being able to avoid long-term capital gains taxes. 

The 2014 15% bracket goes to $73,800 for married couples filing.  So, if we keep our income under this number, then we can sell stocks and harvest gains tax free?  Does this include 401k deductions (can we make $90k but max out our contributions to effectively make our income $65?)

Thank you, we are so happy we found this site!

Retired To Win

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Re: Magic Number for Income Tax?
« Reply #1 on: August 24, 2014, 07:41:21 PM »
I do not think so.

If you've held the stocks for a year, then you would be taxed at the long term rate -- which is 15%.  Not zero.

MDM

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Re: Magic Number for Income Tax?
« Reply #2 on: August 24, 2014, 07:42:52 PM »
The tax code has many "magic numbers".  Using some tax calculation software (either commercial or a spreadsheet of your own that you trust) is the best way to analyze your specific situation.

Note that tax brackets apply to "taxable" (not "adjusted gross") income.  So, yes you can deduct 401k contributions, traditional IRAs, and a variety of other things (see form 1040).  You also subtract your "deductible" (either the $12,400 standard for married filing jointly, or itemized, whichever is higher for you) and your "exemptions" ($3950/person in 2014).

Yes, if your income is low enough your dividend and long term capital gains will be taxed at 0%.

What have you used to calculate taxes in recent years?


sol

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Re: Magic Number for Income Tax?
« Reply #3 on: August 24, 2014, 07:49:37 PM »
I do not think so.

If you've held the stocks for a year, then you would be taxed at the long term rate -- which is 15%.  Not zero.

This is wrong.  The long term capital gains tax rate is 0% if your ordinary income maxes in the 15% tax bracket.  But I'm sure you already knew that.

tennisray

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Re: Magic Number for Income Tax?
« Reply #4 on: August 24, 2014, 08:02:02 PM »
I use Turbo Tax to do our taxes. 

I'm confused/concerned b/c going over the 15% tax bracket even by $1 disallows you from selling assets at the 0% rate (I think).  If we both decrease our workload, we will have about $80k in income plus dividends/interest.  We'd max the 401k's, and then sell/rebuy/rebalance stock portfolio to get the higher cost basis.  We aren't ready to sit with an accountant yet, but wanted to start thinking about tax implications. 

Thanks for the help.

fartface

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Re: Magic Number for Income Tax?
« Reply #5 on: August 24, 2014, 08:49:31 PM »
I think you pay 0% capital gains (long term) when you're in the 10 or 15% tax bracket.

Hypothetically, if your AGI is $72,000 and you sell a stock with a long term cap gain of $2000 you are now in the next tax bracket b/c that stock gain now goes into your income...SO make sure your capital gains PLUS your AGI all fall within that 15% bracket to avoid the tax on the gains.

Ramparts

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Re: Magic Number for Income Tax?
« Reply #6 on: August 24, 2014, 09:18:34 PM »
It sounds like you think that if you had $73,800 (or less) in taxable income, then you could add on an unlimited amount of long term capital gains and pay no tax, whereas if you had $73,801 in income then all your long term capital gains would be taxed at 15%. This is incorrect.

The qualified dividends & long term capital gains are effectively added on top of your regular income. The portion that is in the 10/15% regular income bracket is taxed at 0%. So let's say you and your spouse end up with $50k regular income (ignoring deductions and such for now). You could claim $23,800 in long term capital gains and pay no taxes on it. If you claimed $30,000 in long term capital gains, still only $23,800 would be taxed at 0% - the remainder of $6,200 would be taxed at 15%, since that portion is now in the 25% regular income bracket.

Even if you had no regular income, you could only get $73,800 in long term capital gains tax free - anything above that would be taxed at 15% (again ignoring deductions). So if you have a lot of stocks you want to sell and not pay any long term cap gains taxes, you might want to spread the selling over a few years.

Some things that might help:
More examples and definitions: https://www.wellsfargoadvisors.com/market-economy/financial-articles/investing/dividend-income-tax.htm

TurboTax quick calculator: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

But before you make any rash decisions from a forum posting or Internet calculator (like sell all of your stocks thinking the gains will be tax free), you should probably consult a tax professional.

Joel

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Re: Magic Number for Income Tax?
« Reply #7 on: August 24, 2014, 09:54:40 PM »
It sounds like you think that if you had $73,800 (or less) in taxable income, then you could add on an unlimited amount of long term capital gains and pay no tax, whereas if you had $73,801 in income then all your long term capital gains would be taxed at 15%. This is incorrect.

The qualified dividends & long term capital gains are effectively added on top of your regular income. The portion that is in the 10/15% regular income bracket is taxed at 0%. So let's say you and your spouse end up with $50k regular income (ignoring deductions and such for now). You could claim $23,800 in long term capital gains and pay no taxes on it. If you claimed $30,000 in long term capital gains, still only $23,800 would be taxed at 0% - the remainder of $6,200 would be taxed at 15%, since that portion is now in the 25% regular income bracket.

Even if you had no regular income, you could only get $73,800 in long term capital gains tax free - anything above that would be taxed at 15% (again ignoring deductions). So if you have a lot of stocks you want to sell and not pay any long term cap gains taxes, you might want to spread the selling over a few years.

Some things that might help:
More examples and definitions: https://www.wellsfargoadvisors.com/market-economy/financial-articles/investing/dividend-income-tax.htm

TurboTax quick calculator: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

But before you make any rash decisions from a forum posting or Internet calculator (like sell all of your stocks thinking the gains will be tax free), you should probably consult a tax professional.

This. Spot on. I was going to clarify this point of confusion. Also note that when you are bordering the 15% and 25% tax brackets. You can effectively have a 30% marginal tax rate when you receive an additional ordinary income dollar that is taxed at 15% plus bumping one qualified dividend dollar to be taxed at 15%.