Author Topic: Strategy for incurring capital gains on stock sales post-FIRE  (Read 2998 times)

mikescepaniak

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Strategy for incurring capital gains on stock sales post-FIRE
« on: January 24, 2019, 05:16:20 PM »
I'm struggling to settle on a strategy or a personal rule of thumb to help me decide whether or not to incur capital gains through sales of stock in my taxable account. I'm hoping I can get some input to help me clarify an approach.

I've been FIRE'd for a little more than a year. My income is comprised of dividends realized from individual stock holdings in my taxable account. I am not looking to capital gains as income. They are simply a by-product of portfolio balancing and "selling high".

Pre-FIRE, I didn't pay much heed to capital gains incurred from selling stocks. Post-FIRE, though, I'm much more sensitive to those gains because I don't want them to be high enough that I a) have to pay the 15% long-term capital gains (LTCG) tax and/or b) chip away at or eliminate my ACA subsidy.

The ideal scenario for me would be to time my stock sales so that the capital gains stay fairly level year after year, never building to the point where I hit the 15% LTCG tax threshold. But, sometimes the stock market behaves in such a way that I feel the need to sell a largish number of appreciated holdings in one year. How would you recommend I approach this decision?

  • Is the ACA subsidy valuable enough that it should give me pause when considering a sale that would incur a sizable LTCG?
  • Should I do all that I can to avoid incurring any LTCG that would be subject to the 15% LTCG tax, regardless of the possible opportunity cost?
  • Should I not worry about "opportunity cost" and, instead, let the 0% LTCG threshold guide my hand? After all, opportunity cost isn't a concern for index fund investors and they do fine.
  • Is it ridiculous to risk losing (not capturing) profits now, even if they'll be subject to the 15% LTCG tax, by holding the position until the start of another calendar year (by which point the gain may have disappeared)?
  • Given that my expenses are covered 100% by dividends only, should I not even worry about losing 0.1% of my stash to LTCG taxes?

I'd really appreciate some wisdom and guidance. Thanks in advance.

Financial.Velociraptor

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #1 on: January 24, 2019, 05:37:22 PM »
My short answer is to never let the tax tail wag the investing dog.  For sure, you want to take advantage of tax opportunities.  But you don't want to make irrational decisions in an attempt to optimize your tax return.

Do you have an investing policy statement?  Follow that.

mikescepaniak

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #2 on: January 24, 2019, 06:03:24 PM »
Thanks, Financial.Velociraptor! This is the sort of response I'm hoping for.

Do you have an investing policy statement?  Follow that.

I don't have anything written down. Even if I did, it would have been skewed toward pre-FIRE concerns, which I'm finding is different than post-FIRE concerns. And that makes sense, because my finances are so different now. Pre-FIRE, taxes wouldn't have gotten much mention in my investing policy statement. Pre-FIRE, I never had any hope of realizing any tax-free LTCG or an ACA subsidy. Now, I do.

Hopefully, I'm able to put together an investing policy statement using the input I'm hoping to get here.

seattlecyclone

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #3 on: January 24, 2019, 06:06:33 PM »
  • Is the ACA subsidy valuable enough that it should give me pause when considering a sale that would incur a sizable LTCG?

Should it give you pause? Yes, absolutely. The premium subsidies phase out pretty gradually until you hit the cliff at 400% of the poverty level. As long as you stay under that threshold I wouldn't worry too much about a few extra dollars of gains here or there, where the premium subsidies are concerned.

There's another pretty significant cliff at 200% of the poverty level for cost-sharing subsidies (and smaller cliffs at 150% and 250%). Take a look at this Kaiser Permanente brochure for Washington (pages 9-11) to see an example of how much of a difference these cost-sharing subsidies can make. The "VisitsPlus Silver HD" plan, as offered to people over 250% of the poverty level, has a $7,150 deductible for most services, but primary care visits are a flat $30 co-pay and specialty office visits are $55. If your income is between 200%-250% of the poverty level, you get the "VisitsPlus Silver 73 HD," bringing these numbers down a bit ($6,250, $20, and $45). Below 200% is where you get really subsidized ($1,900, $10, and $20). Go below 150% and you get subsidized a little bit more ($775, $5, and $10), but I see 200% as the real cliff to consider.

Now, @Financial.Velociraptor's point about not letting the tax tail wag the dog is 100% valid. Don't make irrational choices just to get your taxes down. Selling a bunch of stock one year may well be in your best interest and the ACA hit is just the price you pay to make that worthwhile transaction. Do be aware of the tax thresholds involved and take that into account when making your decisions.


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  • Given that my expenses are covered 100% by dividends only, should I not even worry about losing 0.1% of my stash to LTCG taxes?

If you don't need to sell any shares to pay your bills, I wouldn't be in any hurry to sell shares. Even though the nominal federal tax rate is 0% for low-value capital gains, the ACA subsidies and state taxes (if you have those) will mean you do pay something in taxes for even selling a few shares. Deferring tax liability is generally the best course of action unless you have some real compelling reason to sell.

ysette9

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #4 on: January 24, 2019, 08:32:04 PM »
Following because this is important to me and I’m starting to learn how “income” is defined in retirement.

I’m not there yet but I was recently corrected in my assumptions I use for our estimations. I thought that if you spend $x yearly and you pull that from investments in whatever form (combo of dividends and selling stock, for example), then your income for ACA and federal tax bracket purposes is $x. Probably everyone here knows this already, but that assumption is wrong.

For ACA purposes it is the MAGI that matters. I can’t yet explain exactly what that means for us, but one important point is that your contributions you pull out don’t count towards what you get taxed on or what your income is for subsidies. Meaning, pay attention to your basis. We will be living off of our taxable account first in retirement. That account is mostly contributions because it isn’t that old. Which means that when we withdraw from it, the basis is low and our “income” will be low.

This blew my mind. By my rough calculations we should easily be able to spend $100k with no federal tax and stay eligible for ACA subsidies (as a married couple with two dependents).

I’m avidly interested in anyone smarter who can expand on this because I’m probably getting pieces wrong.

seattlecyclone

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #5 on: January 24, 2019, 09:48:57 PM »
This blew my mind. By my rough calculations we should easily be able to spend $100k with no federal tax and stay eligible for ACA subsidies (as a married couple with two dependents).

Starting out this is absolutely true. Selling shares you bought only a year or two ago, you'll have a pretty low amount of unrealized gains. If the shares have only gone up 10% since you bought them, you'll get only 10¢ of income per $1.10 you withdraw from shares sold.

The danger is that your total cost basis will be an ever-decreasing number as you sell shares, while the amount of unrealized gains per share will increase with the market. Any shares you still have left in ten years might double in value, which would imply that you get 50¢ of income per $1 you withdraw. Ten years later your remaining shares might have doubled in value again, which would net you 75¢ of income per dollar of spending. Over time you should then expect that your income from your taxable account will get closer and closer to the amount you withdraw.

Keep in mind that you'll be getting some income from taxable dividends (VTSAX tends to yield about 2% per year, as an example). That will set a baseline for your income. If you have a $1 million taxable balance that's $20k of AGI that you'll be getting no matter what you spend. As you spend down your taxable account you'll then see your dividend income go down a bit, which will offset some (but likely not all) of the increase in capital gains income.

ysette9

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #6 on: January 25, 2019, 01:24:45 AM »
Good point. Once I figure out how Year 1 will go for taxes then I will have to see how that evolves with time. I can always wishfully hope that my spending will go down over time as well.... ;)

Mr. Green

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #7 on: January 25, 2019, 09:49:53 AM »
The ACA variable in your equation hugely depends on whether you reasonably expect to need healthcare during the year and where you are on the subsidy spectrum. My wife and I are in the 150-199% bracket and, between the loss of Cost Sharing Reduction and increased insurance premium, our insurance costs would rise almost $8,000 for a $10,000 increase in income. Not worth it in our situation.

However, if you're not expecting to use care then having the extra income may well be worth small chance of an emergency causing you to Max out your out of pocket costs. If you're FIRE then you certainly have a big enough stash to weather one year of maximum healthcare costs due to an emergency.

Edit: For accuracy, corrected the CSR bracket my family is in.
« Last Edit: January 25, 2019, 11:39:12 AM by Mr. Green »

mikescepaniak

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #8 on: January 25, 2019, 11:07:51 AM »
My wife and I are in the 200-249% bracket and, between the loss of Cost Sharing Reduction and increased insurance premium, our insurance costs would rise almost $8,000 for a $10,000 increase in income. Not worth it in our situation.

There's another pretty significant cliff at 200% of the poverty level for cost-sharing subsidies (and smaller cliffs at 150% and 250%). Take a look at this Kaiser Permanente brochure for Washington (pages 9-11) to see an example of how much of a difference these cost-sharing subsidies can make.

This is a helpful way to look at it. Thank you, both. How are you guys so clearly calculating your poverty level brackets? I looked into this several months ago, and I don't feel like I got very far. If it matters, I'm in Maryland, which has its own state-specific exchange. With the Kaiser Permanente brochure that seattlecyclone linked to - how are you able to tell which plan correlates to which poverty level?

Mr. Green

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #9 on: January 25, 2019, 11:27:23 AM »
My wife and I are in the 200-249% bracket and, between the loss of Cost Sharing Reduction and increased insurance premium, our insurance costs would rise almost $8,000 for a $10,000 increase in income. Not worth it in our situation.

There's another pretty significant cliff at 200% of the poverty level for cost-sharing subsidies (and smaller cliffs at 150% and 250%). Take a look at this Kaiser Permanente brochure for Washington (pages 9-11) to see an example of how much of a difference these cost-sharing subsidies can make.

This is a helpful way to look at it. Thank you, both. How are you guys so clearly calculating your poverty level brackets? I looked into this several months ago, and I don't feel like I got very far. If it matters, I'm in Maryland, which has its own state-specific exchange. With the Kaiser Permanente brochure that seattlecyclone linked to - how are you able to tell which plan correlates to which poverty level?
The Cost Sharing Reductions (CSRs) only apply to Silver plans so you'll need to be looking at those. Really, the plan is the same, regardless of your CSR amount, but the deductible and max out of pocket amounts change. The best way to clearly see what those are is to use the Cost Estimator tool on the Maryland exchange and set your income to amounts within the various brackets to see what the different deductibles and max OOP amounts are.

Check out the 2019 CY (Calendar Year) tab on the spreadsheet I've uploaded. It's a tool I use in examining my ACA options for the year. On the right side I listed the deductible and max OOP amounts for the plan I was considering so that I could see what the total impact might be depending on what bracket I chose to be in. Other than the premium, deductible, and max OOP amounts for the plan I'd chosen in the state of North Carolina, all the other values are Federal so they would be applicable to you in Maryland as well.
« Last Edit: January 25, 2019, 11:32:42 AM by Mr. Green »

Mr. Green

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #10 on: January 25, 2019, 11:38:17 AM »
The ACA variable in your equation hugely depends on whether you reasonably expect to need healthcare during the year and where you are on the subsidy spectrum. My wife and I are in the 200-249% bracket and, between the loss of Cost Sharing Reduction and increased insurance premium, our insurance costs would rise almost $8,000 for a $10,000 increase in income. Not worth it in our situation.
Correction: My wife and I are in the 150-199% bracket. Now that I'm looking at my spreadsheet again, I see the huge cliff at the 200% level that the Kaiser Permanente brochure mentions. In my case the plan deductible jumps from $1,500 to $8,000 and the Max OOP jumps from $5,000 to $12,800. Huge increases, if you're expecting to use a lot of healthcare!

seattlecyclone

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #11 on: January 25, 2019, 03:31:52 PM »
My wife and I are in the 200-249% bracket and, between the loss of Cost Sharing Reduction and increased insurance premium, our insurance costs would rise almost $8,000 for a $10,000 increase in income. Not worth it in our situation.

There's another pretty significant cliff at 200% of the poverty level for cost-sharing subsidies (and smaller cliffs at 150% and 250%). Take a look at this Kaiser Permanente brochure for Washington (pages 9-11) to see an example of how much of a difference these cost-sharing subsidies can make.

This is a helpful way to look at it. Thank you, both. How are you guys so clearly calculating your poverty level brackets? I looked into this several months ago, and I don't feel like I got very far. If it matters, I'm in Maryland, which has its own state-specific exchange. With the Kaiser Permanente brochure that seattlecyclone linked to - how are you able to tell which plan correlates to which poverty level?

In this example the key is in the plan names, and in a number known as the "actuarial ratio." A platinum plan is required to have a 90% actuarial ratio, meaning the insurance company pays for 90% of the costs out of the collected premiums and customers pay for the other 10% in the form of copays, deductibles, etc. Gold plans have an 80% ratio, silver plans have 70%, and bronze plans have 60%.

As Mr. Green points out, the cost-sharing subsidies are only available for the silver plans. What these subsidies do is modify the actuarial ratio based on what poverty level bucket you fall into. These modified plans will have the same premiums and general set of covered services as the regular silver plans, but the out-of-pocket costs will be tweaked to get to the required actuarial ratio.

Silver plans for people between 100%-150% of the poverty level have an actuarial ratio at 94% (better than a platinum plan for the price of a silver!), 150%-200% has 87% (almost as good as platinum!), and 200%-250% gets 73% (slightly better than regular silver, but not by a whole lot). These ratios are encoded in Kaiser Permanente's plan names; if your income is over 250% of the poverty level you'll get offered the regular silver plans, if you're between 200%-250% you'll get offered the ones with a "73" in their name, and so on. I'm sure other insurance carriers name the plans a bit differently, but the general principle will be the same for all.

Mr. Green

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #12 on: January 25, 2019, 04:22:18 PM »
My wife and I are in the 200-249% bracket and, between the loss of Cost Sharing Reduction and increased insurance premium, our insurance costs would rise almost $8,000 for a $10,000 increase in income. Not worth it in our situation.

There's another pretty significant cliff at 200% of the poverty level for cost-sharing subsidies (and smaller cliffs at 150% and 250%). Take a look at this Kaiser Permanente brochure for Washington (pages 9-11) to see an example of how much of a difference these cost-sharing subsidies can make.

This is a helpful way to look at it. Thank you, both. How are you guys so clearly calculating your poverty level brackets? I looked into this several months ago, and I don't feel like I got very far. If it matters, I'm in Maryland, which has its own state-specific exchange. With the Kaiser Permanente brochure that seattlecyclone linked to - how are you able to tell which plan correlates to which poverty level?

In this example the key is in the plan names, and in a number known as the "actuarial ratio." A platinum plan is required to have a 90% actuarial ratio, meaning the insurance company pays for 90% of the costs out of the collected premiums and customers pay for the other 10% in the form of copays, deductibles, etc. Gold plans have an 80% ratio, silver plans have 70%, and bronze plans have 60%.

As Mr. Green points out, the cost-sharing subsidies are only available for the silver plans. What these subsidies do is modify the actuarial ratio based on what poverty level bucket you fall into. These modified plans will have the same premiums and general set of covered services as the regular silver plans, but the out-of-pocket costs will be tweaked to get to the required actuarial ratio.

Silver plans for people between 100%-150% of the poverty level have an actuarial ratio at 94% (better than a platinum plan for the price of a silver!), 150%-200% has 87% (almost as good as platinum!), and 200%-250% gets 73% (slightly better than regular silver, but not by a whole lot). These ratios are encoded in Kaiser Permanente's plan names; if your income is over 250% of the poverty level you'll get offered the regular silver plans, if you're between 200%-250% you'll get offered the ones with a "73" in their name, and so on. I'm sure other insurance carriers name the plans a bit differently, but the general principle will be the same for all.
The numbers in the plan names can definitely get confusing. In North Carolina, Blue Cross Blue Shield uses the deductible for a single person so our plan is the Blue Value Silver Enhanced 750, even though we have a family plan so the total deductible is 1500. The enhanced label indicates a plan with Cost Sharing Subsidies.

mikescepaniak

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Re: Strategy for incurring capital gains on stock sales post-FIRE
« Reply #13 on: January 29, 2019, 03:22:48 PM »
Thank you for the explanations. While I've been familiar with the Advanced Premium Tax Credit (APTC), I was not familiar with the Cost-sharing Reduction Subsidy (CSRS). And that's fine, because my income isn't low enough to qualify for a CSRS, regardless of capital gains. But, the APTC is within reach for me, so seattlecyclone's advice is where I'm going to put my focus.

Should it give you pause? Yes, absolutely. The premium subsidies phase out pretty gradually until you hit the cliff at 400% of the poverty level. As long as you stay under that threshold I wouldn't worry too much about a few extra dollars of gains here or there, where the premium subsidies are concerned.

As soon as I breach the 400% poverty level, I lose out on $708 worth of tax credits (according to the KFF calculator):
https://www.kff.org/interactive/subsidy-calculator/

So, from an ACA perspective, that's my bottom line.

If anyone has any additional advice regarding my initial post, especially outside of ACA-related concerns, please share. Thank you.

 

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